The Carbon Oligopoly
Originally published in It’s Getting Hot In Here.
It seems like the United States, to be followed by the rest of the world, is about to create a new oligopoly. Today, there are many existing oligopolies for commodities that are very difficult to produce because of technological and ownership issues. These include such industries as the automakers, the media, oil, beer, tobacco, etc. An oligopoly is a market form where a few companies are largely in control. Some are inevitable because the cost of market entry is too high and therefore only a few can survive. Others, like some monopolies, can be government-granted to ensure a certain standard that is of high interest to the public. In general, we hate having monopolies, duopolies, and oligopolies when we don’t really need them. This is because these are generally less efficient in terms of distributing resources than truly competitive markets, like those of grocery stores in cities. Yet this may be changing soon as the world, led by the United States, embraces the creation of a new, non-competitive market: The Carbon Oligopoly.
It seems like the entire world is not pretty sure that global warming is about to cook us alive this century if we don’t bring greenhouse gas emissions down seriously (to zero). Current events, like the tornadoes sweeping through the United States, the pine beetle range extending further through North America, signs of a very thin Arctic ice, and the cyclone that hit Myanmar recently, confirm to us that we’re in for a really big show. However, the world is not yet convinced, of course, that we actually need to bring the atmospheric concentration of carbon dioxide (now 385 parts per million) down to 350 ppm, but it seems likely that new efforts (350.org and We Can Do It, for example) are poised to convince the world that we’ll have to take CO2 out of the atmosphere as soon as possible (and certainly much earlier than mid-century). So, everybody is waiting for 2009, when a new White House declares that it is ready to engage in an international treaty to try to keep humanity from being fried alive by global warming. But what exactly are they, as of now, likely to agree to do?
The answer is, given today’s discussions and the lack of support behind other ideas, a Carbon Oligopoly. Yes, you know that I refer to cap-and-trade (a.k.a. “carbon trading”) when I say “oligopoly.” And you know that I’ll be told that it is an inaccurate description of the system. But I’m going to ask you this: can you tell me how cap-and-trade is a competitive market? Can you show me how anybody can join the cap-and-trade “market”? Are you planning to join it? You know, I was planning to figure out how to produce $0.50 per installed watt solar PV systems (in my dreams) so that I could benefit from the carbon “market,” but… cap-and-trade, unfortunately, won’t let me. “Why not?” you may ask.
Cap-and-trade programs are designed so that specific industries, most of which already are oligopolized, have to reduce their greenhouse gas emissions. Allowances to emit are given free or at a cost, and those that can reduce emissions most cheaply get to sell (or trade) some of their allowances to companies that cannot reduce their greenhouse gas emissions cheaply. In this way, emissions are clearly reduced as the cap gets lower and the lowest-hanging fruits are taken so that it is “economically efficient.” In addition, cap-and-trade programs allow cheaper emissions reductions outside of the program to be purchased by companies within the program to a certain limit (30% in the Lieberman-Warner bill, for example).
Clearly, this may seem then that market entry isn’t impossible, as people outside the program can sell their emission reductions inside the program. But what do we call that in general? “Carbon offsets,” upon which many of us frown upon. Regardless of our concerns, we can probably figure out how to make them real through strict regulations (hasn’t happened under the EU emissions trading scheme because of corruption, loopholes, and exaggeration, but let’s assume it’s possible even though it’s not really). But the fact is that our target requires a massive amount of carbon dioxide (and other GHGs) many times the current amount of reductions being made, and so the opportunities for easy market entry become much more limited, in fact competitive. This is on top of the fact that due to popular support for emissions to be made by the companies selected, only a very small percentage of emission reductions will be allowed to come from outside the cap-and-trade program (in the EU, this is less than 10%, and may be reduced more as it becomes increasingly popular to drive domestic industries to create new jobs and specializations).
In this way, the big companies today largely responsible for greenhouse gas emissions will be able to cash in on carbon, which will now have a value. We can decide to auction allowances, but in the end carbon will have value that will be paid for by consumers and will go to the pockets of big companies. In all likelihood, any new businesses that will make real carbon offsets will be bought out by the large companies to make it easier on themselves to meet their targets. In the end, the new carbon “market” will be an oligopoly controlled by today’s big carbon players, who will likely put their money in lobby efforts in Washington to make sure they remain in control of their well-designed oligopoly. Equity will be placed on the line as policymakers fight over how the auction revenues will be used to subsidize impacted low-income people, renewable energy technologies, nuclear energy, biofuels, and “clean coal” (now being supported strongly by our presidential hopefuls). And, as we all know, the paperwork and bureaucracy behind the system will cost a lot, involve little public say, and be dominated by the oligopolists.
It seems that, in this year’s Presidential campaign, candidates are mentioning over and over the fact that the truth must be told to the people of the United States. If truth were to be told, then candidates would mention that cap-and-trade wouldn’t be different from a carbon tax in terms of raising costs to consumers. According to cap-and-trade supporters, “carbon tax” is political suicide. In a time of higher energy prices like today, people are not happy to have energy prices go up, but the fact is that either strategy will push prices up, and probably by very close magnitudes. Both systems, if allowances are auctioned, would also generate revenues that can alleviate low-income people, although cap-and-trade would have artificially varying prices. The oligopolists are doing whatever they can, forming partnerships and calling on government to do something now, to ensure that they can reap the benefits of pricing carbon while “ensuring their political survival.” In my opinion, an energy price hike is an energy price hike whichever way it comes, and consumers will clearly notice it anyways and blame it on those in charge.
Moving the world towards sustainability will require that we start doing things that are actually necessary rather than doing things that don’t do the job effectively in the name of special interests. The reality is that a carbon tax, now being supported by a majority of economists, will be much more equitable and cost-effective than cap-and-trade. The reason why there can’t be a “carbon market” is because carbon dioxide is an externality, not a normal good that consumers want to consume. It’s something society wants to value because we know that global warming, a consequence of CO2 and other gases, will cook us if we don’t reduce greenhouse gas emissions. A real market would createitself with little government intervention. Most externalities are best addressed through direct taxes that bring them into market directly, not complicated systems subject to lobbying, loopholes, and cheating. Germany, like many other countries with a feed-in tariff, know that directly incorporating externalities into markets is equitable and cost-effective (its renewable electricity production went from 2% to over 12% in less than 10 years, with over 40% of all generation being locally owned). As Congress enters discussions about Lieberman-Warner and continues being well behind the actual science on global warming, we ought to be seriously thinking about what these proposals will do in a world where equity, truth, and change are popular topics.