Murdering cap-and-trade

April 30, 2012
If US President Barack Obama wins reelection he will try to revive cap-and-trade regulation.

If US President Barack Obama wins reelection he will try to revive cap-and-trade regulation. He made fighting global warming and rushing exotic energy forms to market twin priorities of his first term. But a legislative push to make cap-and-trade the core mechanism for pursuing his goals failed. Now a fallback administrative strategy faces legal challenges. Given a second term, therefore, the president would renew his quest for a legislative program to cap greenhouse gas emissions and allow trading in allowances for the right to exceed the limits. He would try even though he murdered the program intellectually in his last campaign for political office.

Obama foreswore legitimacy of a recidivous cap-and-trade campaign on Apr. 17 when he called for a crackdown on "speculators" who "hurt consumers by illegally manipulating or rigging the energy markets for their own gain." The president's words imply manipulation of the oil market is rampant. Beyond coincident increases in oil prices and trading activity, however, no reason exists to think that's so.

More cops?

The oil market is global, fluid, and transparent. It has millions of participants, all watching price. Manipulating such a market isn't easy. Would-be manipulators must elude aggressive oversight of the market. A relatively few miscreants might try anyway. But they don't trade oil in numbers or volumes sufficient to move prices meaningfully. Putting "more cops on the beat," as the president asked Congress to do, would be as wasteful as proposing to do so is unabashedly political. Already, the proposed toughening of market regulation is all but forgotten amid other campaign bluster. But the oil and gas industry shouldn't forget its implications for cap-and-trade.

If mere suspicion about market manipulation justifies an enforcement crackdown, the government should have a large posse ready if cap-and-trade ever becomes law. Markets for emission allowances are structurally suspicious. They're not global. Their trading occurs among a relatively few specialists. They exist for political rather than economic reasons. Indeed, they're not really markets. Real markets lose legitimacy when manipulation occurs. Markets created by cap-and-trade systems are instruments of manipulation.

The showcase European Union Emissions Trading System illustrates the problem. The cap in that system worked; the trade didn't. Total emissions have fallen from targeted facilities. Yet the market for emission credits is near collapse. European officials have been meeting to decide how to make prices adhere to official desires. That's manipulation.

Inevitably, official manipulation of markets breeds shenanigans. When Congressional Democrats introduced a cap-and-trade scheme early in the Obama presidency, they offered cost-free allowances to select industries in order to garner support for the program. The system thus fell victim to political corruption before it could begin—which, to the great good fortune of the US economy it never did.

If manipulation is wrong for the oil market—and it is—it should be wrong for all markets. And if manipulation that raises prices in the oil market is wrong—to whatever extent it exists and has that effect on prices—then it should be wrong in all markets as well. Yet the very purpose of markets for emissions allowances under cap-and-trade schemes is to raise the cost of emissions. Doing so raises prices of hydrocarbon fuels—as a matter of official intent, no less.

The price aim

If Obama wins the chance to put cap-and-trade back on the US political agenda, he should have to answer this question: Why is it not hypocritical for a government to fight oil price increases that occur for market reasons having little, if anything, to do with manipulation yet to pursue oil price increases with deliberate manipulation of its own?

Raising the question at least would make clear that a priority aim of cap-and-trade systems is to raise prices of politically scorned but economically preferable fuels. Supporters of those systems wouldn't welcome such bold exposure of politically touchy motive, of course. Deception is as much a part of cap-and-trade as manipulation—and even more revolting.

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