Carbon Cap and Trade: Banking On Invisible Gas

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Are you having fun trading complex securities backed by overpriced foreclosed homes? Do you sleep better at night knowing that Uncle Sam is flooding the planet with fiat currency, desperately trying to drown out downward-adjusting price signals? Do you delight in accounting rule changes that whipsaw the stock market? Then you’ll love the new green economy Congress is cooking up. Watch as the Carbon Cap and Trade Contraption comes to life, animated by billions in freshly minted financial instruments backed not by real assets but by promises to corral an invisible gas.

Whether you are a climate change zealot or a global warming denier, it’s hard to ignore the tons of carbon dioxide we costlessly dump into the atmosphere. A textbook case of negative externalities, a price has to be set on this ubiquitous byproduct of civilization if we hope to harness the ingenuity of man to efficiently reduce it. While economists can endlessly debate what the “right” price is, who should pay it, and how it should be phased in lest we crater an already weakened economy, zero is no longer a supportable answer.

The solution that is simplest to administer, hardest to game, easiest to adjust, and smoothest to introduce is a broad-based carbon tax. So, of course, that solution is completely off the table. Why should Congress give up the opportunity to entangle itself in every business in the land, reward friends, punish enemies, and empower alternative energy charlatans all while collecting campaign “contributions” that allow “advocates” to gain “access” to the allocators of this new license to stay in business?

So brace yourself for Cap and Trade, a bonanza for both Washington and Wall Street - as if anyone can tell the difference any more.

Congress plans to sell permission slips to businesses whose carbon footprint has attracted its attention. Some of these permission slips might be auctioned off and others might be given away to favored industries. Who gets what and who needs what will be based on “baseline” estimates of past carbon emissions, an interesting accounting challenge given that most tail pipes and smokestacks don’t come equipped with carbon dioxide meters. Sorting out the starting parameters using the scientific process of Congressional log rolling is just the beginning. Wait until the new federal carbon police begin tracking demon molecules upstream to assess the total emissions impact of production at whatever random point in the supply chain Congress decides to erect a toll booth.

If you think it’s challenging figuring out the FAS 157 fair market value for your illiquid assets, try calculating the total carbon emissions of your business. Or arguing with a carbon auditor who disagrees. Or putting a carbon footprint label on your product, which will surely be mandated as the green economy grows. “6.9 pounds of carbon dioxide was released in the manufacturing of these cornflakes.” Not counting the heavy breathing of all the audit committee members trying to stay out of Sarbanes Oxley prison.

At least our unemployment problem will disappear when armies of carbon accountants and certified greenhouse gas auditors fan out to monitor the invisible gasses that leak from the growing number of industries captured by Congress once it starts lapping up the revenue flow from this unbounded intrusion. Got Milk? Not without a cow fart permit, you don’t.

But wait, there’s more! Congress is going to reward favored companies and institutions that promise to soak up invisible gasses, or not emit them to begin with. Carbon Offsets, they’re called, yet another financial instrument that can be introduced into the mix. Al Gore buys them to assuage his guilt for burning up all that electricity he needs to warm his heated swimming pool.

How long do you think it take for the Wizards of Wall Street to cook up derivative contracts that slice, dice, and securitize these permission slips into incomprehensible combinations designed to generate fees that can be used to reignite the bonus engine? How much would you pay to short the middle tranche of the Midwest Power Producers Promise to emit less invisible gas November permissions contracts? Only your broker knows for sure.

This is much more fun than simply taxing a barrel of oil or a ton of coal, huh?

At least we’ll be in familiar territory. Remember when Congress “solved” the homeownership crisis by creating giant fishy mortgage cesspools at Fannie Mae and Freddie Mac? And then those long-term thinkers on Wall Street rushed in to build casinos on top of the mess so hedge fund speculators could bet on when the whole thing would collapse around their ears? Well yeeha, we’re going to do it again. Only this time we’re not just saving the less credit worthy from the indignity of renting. We’re saving the planet from thermal annihilation!

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