Thought #24                                                              April 2009
Author: Bill Thurston

What is Cap and Trade?

Cap and Trade is a policing system applied to businesses with the goal of lowering pollutions. The policing entity in our case is the Environmental Protection Agency. http://www.epa.gov/captrade/

We will hear a lot more about it in the next few months. Our president is interested in passing a Cap and Trade law. The framework for this law is The America's Climate Security Act of 2007 (S. 2191) http://www.govtrack.us/congress/bill.xpd?bill=s110-2191

The first part of Cap and Trade is to set an upper limit for pollution called the cap. This would apply to a certain area or specific source of pollution such as a power plant, or manufacturing facility.

Next, each area or facility is given an allowance, based on past performance, for the maximum amount of various pollutants that they can emitted.

If an area or facility exceeds their "cap", they will have their hands slapped usually by a fine.

Facilities that come in under their allowable limit can then sell their leftover allowances to other facilities and organizations. This is the trade part.

This allows the facilities that buy up such allowances (pollution credits) to pollute more, because other facilities are polluting less.

Each year the cap is lowered and the process repeats. After a period of time you reach the overall goal.

That's it.

In reality there are many variation to the Cap and Trade system. The bill being written in Congress requires a ten year investment of $15 billion. This cost is to be paid for by auctioning off the emission credits to those that need them.  The auctioning of these emission credits could generate about $80 billion by 2012. Doesn't this sound something like a tax?

Will Wall Street get involved in this new industry like they did with the mortgage industry (Thought #14)?

You bet they will. You can buy "Climate Futures" from the Chicago Climate Exchange today (http://www.chicagoclimatex.com/).

If you want to reduce your personal "carbon footprint" to zero while still maintaining your present activities, you can buy carbon credits equal to the amount of your footprint.

Here is a good one. Why would JPMorgan (the giant investment company) have an interest in a poor woman on the streets of Uganda? JPMorgan is presently subsidizing the distribution of efficient cooking stoves in poor countries.  Because the new, improved stoves save fuel and produce less carbon dioxide than traditional stoves, they generate carbon credits.  JPMorgan plans to expand its support for cook stoves from Uganda into Kenya, Ghana, Cambodia and beyond. If you do the math, you can see, with little costs, you can create close to $500 million of revenue a year. http://money.cnn.com/2008/08/11/technology/jpmorgan_carbon.fortune/index.htm

Let's not take this one too far. Remember you and I are made of carbon and create pollution. Maybe in the near future, we could be paid to not have kids.

Final Thought

Many very caring and concerned citizen and businesses focus on saving our environment. But you must be aware that there are also businesses that care less about the environment and see the emerging environmental protection market as a way to pillage money for themselves. Keep your eye out for these guys.

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