The wrong road to reducing emissions

by Peter DeFazio, guest opinion

Monday January 26, 2009, 6:00 PM

Peter DeFazio

Deregulation brought a meltdown in our electricity markets with market manipulation, profiteering and higher costs to consumers without benefits. Remember Enron? Deregulation was also a major contributor to the recent Wall Street-led financial crisis. Now powerful forces in Washington, D.C., and Salem are pushing a market-based (read unregulated) cap-and-trade system to address the problem of climate change.

A cap-and-trade system works by setting a cap on greenhouse gas emissions and then giving participants credits to pollute up to the established cap. Participants may buy, trade and sell credits in an unregulated market to meet their emission targets. In theory, emissions will drop as the number of credits available each year is reduced. It's a good idea on paper.

But like deregulated U.S. energy and financial markets, a cap-and-trade system is prone to market manipulation.

Alarmingly, cap-and-trade proposals being considered in Washington, D.C., and Salem would allow unregulated entities -- such as investment banks and hedge funds -- to participate in the market. These entities -- really, speculators -- don't have emissions to cut. Their goal is to make profits.

Speculation has been ruinous in Europe where a cap-and-trade system was implemented in 2005. Unregulated entities are profiting at the expense of regulated businesses by buying up credits to pollute, hoarding them until the price increases, and then selling them for inflated returns. The result? greenhouse gas emissions continue to rise despite $60 billion worth of credits being traded in the lucrative European market each year. The cost of business is rising and consumers are paying the premium.

Apply this to a U.S. market, expected to be three times the size of Europe's. The opportunities for economic competitors with large reserves of dollars (think China and Saudi Arabia) to manipulate and abuse the market would be enormous. Similarly, the possibilities are ripe for a few powerful speculators to bring Oregon's small market to its knees.

To add insult to injury, proposals in Washington, D.C., and Oregon would give a large portion of the pollution credits to the energy industry based on historical emission levels free of charge. The idea is to cushion the fall in profits for regulated entities when they start to cut emissions. This works out to a potential $100 billion giveaway to the oil, gas and coal industries in the first year alone of a nationwide system. Total giveaways to industry through the life of the market would be mind-numbing, making the Wall Street bailout seem like pocket change.

Despite these obvious problems, federal and state lawmakers are poised to move forward with a cap-and-trade system. I'm working in Washington to oppose this proposal and to find an alternative. One option that needs further exploration is to establish a emissions cap and to direct polluters to either reduce emissions or to purchase certified offsets (reductions from other entities) to meet emission targets.

But given the devastating impact of past deregulation on U.S. energy and financial markets, I have serious concerns about using a "market-based approach" to solve serious problems. My colleagues in Congress, and Oregon legislators, would be wise to do their homework on a cap-and-trade system before moving forward with more deregulation.

Peter DeFazio, a Democrat, represents Oregon's 4th District in the U.S. House of Representatives.

It seems that I am not alone in my thinking about the cap and trade market doing little to move to energy independence or reduce the GHG emissions. All it will do is create yet another way for the financial sector to profit and the consumers get squat.