Cut out the carbon middleman

June 26, 2009

The opposition by the Republicans to the idea of carbon trading is a bit baffling, given that it is a classic Wall Street-driven solution for dealing with a serious problem.

Sure, carbon trading, which is the centerpiece of the Obama administration-backed American Clean Energy and Security Act, would carry a cost for consumers and companies that emit too much in greenhouse gases. But the economic impact of the bill’s so-called cap-and-trade scheme would be modest — costing the average household $175 a year in added expenses, according to the Congressional Budget Office.

What’s actually more baffling is President Obama’s infatuation with this trading scheme, which will benefit the global environment, but will also fatten the wallets of Wall Street traders. A simple tax on polluters and carbon producers would get the job done without the kind of wealth transfer to the gilded class that Republicans generally support.

It’s easy to see why Wall Street, which has been waiting for carbon trading to ignite in the United States, favors the measure.

The bill would impose a hard cap on carbon emissions for all U.S. companies. But it would permit businesses that produce less carbon emissions to sell “credits” to companies that exceed the cap — hence the name cap-and-trade. The legislation calls for the carbon credits to be traded on regulated exchanges and that, of course, is where Wall Street comes in.

Wall Street trading desks will make money from handling both ends of the cap-and-trade transactions. Yet it’s not too hard to imagine that there are some Wall Street bankers already dreaming up some newfangled “green-friendly” investment product that will capitalize on this trade, which can then be peddled to retail investors.

Cap-and-trade just might be the shot in the arm that the ailing structured finance market needs. Is that the kind of “green jobs” we really want?

Another obvious winner from the passage of a cap-and-trade bill will be the Chicago Climate Exchange, which has struggled to find a market since it opened for business in 2003. The Green Exchange, a soon-to-launch trading platform being built by CME Group’s NYMEX division also should get at jolt.

The hedge fund industry is looking to catch the green wave, as well. Da Vinci Invest Ltd. of Switzerland, for instance, recently began raising money for its carbon-trading Green Falcon Fund.

But a so-called carbon tax on companies based on the level of greenhouse gases their products produce would cut out the Wall Street middleman altogether. A carbon tax also would make greenhouse gas pariahs, like gas-guzzling cars, cost a lot more. And that’s something that would immediately impact consumer behavior.

Selling a carbon tax, however, would take political courage because of that dreaded three-letter word. And sadly that kind of courage is in short supply in Washington.

Update: The House narrowly passed the Obama-backed bill with the cap and trade provision by a seven-vote margin. Passing the bill was better than defeating it and having nothing on the table–the option seemingly preferred by the Republicans. It’s wishful thinking that in the Senate the cap and trade could be converted into a straight carbon tax, but you never know.


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