YouTube video

James Boyce: Offsets turn the cap into a sieve and trading-in permits creates a speculators’ market

Story Transcript

PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I’m Paul Jay in Washington, and joining us again now is James Boyce. He’s a professor at the University of Massachusetts Amherst. He’s associated with the PERI institute, the Political Economy Research Institute. And you’re working on climate change policy. Thanks for joining us again.


JAY: Okay. So we’ve done, I think, two, three segments so far. Now we’re going to dig into sort of one of the more controversial pieces of the different climate change legislation, and that’s the whole issue of trades and offsets. We’ve talked about caps, we’ve talked about permits, give away, purchased, who gets the money, but the other big issue of whether any of this is really going to work, I think, is this whole question of whether you have trade in offsets. And once you introduce, especially, these kinds of offshore offsets, is any of this actually going to be meaningful? So talk about the two pieces of legislation and this whole question.

BOYCE: Yeah, really good question. And let me separate out the trading issue from offset issue, because although they’re linked, they’re not the same thing. The trading piece of it involves the status of these permits to bring carbon into the economy—and, ultimately, blow the carbon into the atmosphere—whether those permits should be tradable or not. When you get a driving permit, when you get a building permit, when you get a hunting or fishing permit, when you get a permit to dump things in the landfill, which is the closest analogy to what we’re talking about here, those permits aren’t tradable. There’s no inherent reason why permits have to be tradable. The only reason why cap and trade has become joined together in the political discourse like a horse and carriage is that when the first such permits were introduced on a big scale in the United States, these were the sulfur dioxide permits for electric utilities introduced in the ’90s, and those were given away, almost all of them were given away for free to electric utilities, based on the historic emissions. It was a formula. If you’re going to give them away, you need a formula to decide how much goes to you and how much goes to the next guy, right? So once you give them away, then you have to be able to trade them, because some people are going to get more than they need, other people are going to need more than they get, and you need to have market so that the people who will want to blow this stuff into the sky are able to obtain the permits to do so. Right? That’s because it was a cap-and-giveaway program. Those necessarily are cap-and-trade programs. If you’re going to give away, you’ve got to trade. However, if instead of giving away permits you auction off, right, and every month or every three months you release a certain number of permits for a certain number of tons of carbon to go out into the atmosphere, right, there’s no inherent reason why those permits have to be traded, because whoever needs them can go get them, just like if you want a fishing license or a dump permit you go get it, you get as many as you want. You have some time to use them. If you need more, you go to the next auction and you get some more.

JAY: But wouldn’t that also create a market? Like, let’s say you bought 50, you only use 30, you could then go sell 20.

BOYCE: Well, that’s an open question, you know, just like when you buy permits to dump trash in the dump, you don’t necessarily have a market in selling them. You just hold them until you use them. If you don’t use them, you lose them. I mean, that can happen, right? So there’s a big difference in the two main bills now in Congress.

JAY: And let me just add that one of the fears people have of this kind of market is you could wind up having, say, coal-fired electrical generating plants, which are amongst the worst carbon emitters, going around and still doing all the same amount of carbon emission, ’cause they go and pick up everybody else’s permits.

BOYCE: Well, they’d have to buy those permits, right? And if they did, it would raise the price of coal-fired electricity, and it would give people an incentive not to use that kind of electricity anymore, right? But the critical issue here is that if you have a trading system, if you allow these permits to be traded, right, then what limits, if any, are there going to be on who can buy and sell those permits? What limits are there going to be on the ability to speculate in these markets in carbon dioxide, right? If you’ve got a cap-and-giveaway plan like Waxman-Markey (which passed the House in June) largely is, in the initial years at least, you’re going to have trading and you’re going to have firms involved who are trying to make money off those trades, right?

JAY: ‘Cause what would stop a Goldman Sachs, for example, going out and buying a bunch of carbon permits and then just trying to resell them for more [inaudible]

BOYCE: If you have free tradability and anybody can hold the permits, that’s exactly what you expect to happen, right? Under the Cantwell-Collins bill, by contrast, because they auction 100 percent of the permits, they don’t need to have those permits be tradable. And so what that bill includes are very, very strict limits on tradablility of the permits. Only the firms that are bringing fossil fuels into the country are eligible to buy those permits, to hold those permits. They can’t be held by Wall Street speculators, right? And moreover, the amount of permits that firms are able to buy is limited, so that it eliminates the ability of firms to take a speculative position, corner a market. The amount they can buy is limited to roughly what they’re going to need, and there’s very, very limited room for selling the excess or buying a little more if you need some extras between auctions. But it’s strictly curtailed. And that’s one of the features of the Cantwell-Collins bill that attracts a fair amount of political support across the spectrum. People were worried about that. So that’s the trading side.

JAY: And just to say “across the political spectrum,” you were saying that the spectrum is pretty wide. Everybody from Exxon, American Enterprise Institute, to MoveOn, you suggested, are supporting this bill.

BOYCE: Well, it commands a pretty wide swath of support, partly because of the limits on trading. A lot of people are nervous about creating another sandbox for Wall Street to play in, right? And that’s a bipartisan concern [inaudible]

JAY: Even the fossil fuel industry must be concerned about that.

BOYCE: Yeah, and they should be. A further reason that some in the industrial side prefer Cantwell-Collins is, as we talked about earlier, it treats all the carbon the same, it doesn’t pick favorites, it doesn’t say, “We’re going to give away a lot to the coal-fired electricity, and therefore oil and natural gas are going to be the ones that have to be compressed more, because that’s where the cap is going to bind.” It creates a level playing field. It doesn’t pick winners. And so that also helps to account for some of the appeal, right? A third thing that accounts for some of the bipartisan appeal in Cantwell-Collins is where the money goes, right? Because it goes back to the public, it means that legislators can vote for this knowing that instead of being blamed by their constituents for having helped to rob—you know, pick their pockets still further at a time when they’re already down because of the economy, they will be applauded by their constituents for passing legislation that’s fair, that’s transparent, and that recycles the money back to households on a democratic, fair basis, where everybody gets the same, because we all—in the end what we’re talking about here is we’re talking about paying for the use of the sky. And who owns that sky, right? The principle behind cap-and-dividend in the Cantwell-Collins bill is that we all own it in common, equal measure.

JAY: Okay. So now talk about the other big issue of offsets, particularly offshore assets.

BOYCE: Yeah, yeah. So offsets are a little bit different. It’s not involving exactly whether the permits are tradable, but whether, instead of having a permit, either getting it for free or buying it at an auction or buying it from somebody else, right, instead of having that permit, I, the firm, the polluter who’s bringing the carbon into the economy and into the atmosphere, instead of getting a permit for that that is set, the number of permits being limited by the cap, I can instead pay for something called an offset, right? And the offset is in stead of having a permit: it’s not a permit; it’s in stead of having a permit. And the offset is for doing something that ostensibly means that that ton of carbon I’m putting in the atmosphere, without a permit, it’s being taken out of the atmosphere somewhere else. Somebody’s planting trees, and that’s pulling carbon out. Somebody’s not cutting trees that they would have otherwise cut, and that’s reducing net carbon emissions. Somebody’s building a more efficient power plant in some other part of the world than they otherwise would have, and that’s reducing carbon emissions. So that’s [inaudible]

JAY: So what’s wrong with it?

BOYCE: Well, I’d say there are two major—there are several problems, but there are two big ones from the standpoint of the efficacy of the policy and actually limiting carbon emissions. The first is that it’s very, very difficult to actually verify that these are bona fide reductions in carbon emissions. You know, if I pay someone not to cut down some trees, who’s to know whether they would have cut those trees anyway? If I pay someone to plant some trees, who’s to know whether they wouldn’t have planted them anyway? If I [inaudible]

JAY: And there’s [inaudible] on this.

BOYCE: Yeah [inaudible] it’s a very mixed scenario. It’s basically you’ve got to have a counterfactual that says, “This would have happened if I hadn’t paid the offset.” And you don’t know, right? So whether these are really additional, verifiable reductions in emissions or not is an open question. That’s one problem. The second big problem is that because you’re doing these offsets, you’re not actually limiting your own use of fossil fuels, right? You’re not actually cutting your own emissions. You’re doing something else that supposedly makes up for it. What does that mean? It means you’re not sending signals about the scarce carbon absorptive capacity of the atmosphere to your consumers. You know, you don’t have to raise the prices or raise the prices as much; you don’t have to cut back your consumption. Right? Instead, you avail yourself of these supposedly cheap opportunities to do something offsetting somewhere else, somewhere else in the world, right?

JAY: Now, does the Cantwell bill allow offsets?

BOYCE: No, the Cantwell bills has zero offsets.

JAY: [inaudible] offsets.

BOYCE: Exactly. Yup. Yup. Whereas the Waxman-Markey bill, which is now in the Senate in Barbara Boxer’s committee, is riddled with offsets and it allows trading. Right? So, basically—here’s a simple way to think about it, Paul. Offsets take the cap and convert it into a sieve; they shoot that cap through of holes, and those holes allow the fossil-fuel burning to continue much less abated than would be the case under a cap that hasn’t been riddled with these loopholes.

JAY: Okay. In the next segment of our interview, let’s talk about the politics of Washington and climate change, what the Massachusetts victory is going to mean for all this, and what bill seems to have support and what doesn’t. Please join us for the next segment of our interview on The Real News Network.


Please note that TRNN transcripts are typed from a recording of the program; The Real News Network cannot guarantee complete accuracy.

Creative Commons License

Republish our articles for free, online or in print, under a Creative Commons license.

James K. Boyce is a Professor at University of Massachusetts, Amherst. He is the Director of the Program on Development, Peacebuilding, and the Environment at PERI - The Political Economy Research Institute.