The Problems With Cap and Trade

Willem Buiter offers a great summary of the challenges  to the Cap and Trade solution to climate change favored by politicians everywhere in Carbon Offsets: Open House for Waste, Fraud and Corruption

Key takeways:

“Politicians, including Gordon Brown, prefer cap and trade, because it hides/obscures the fact that for it to work, it must be equivalent to a tax; however, it does not look like a tax and will not show up in conventional tax burden calculations. Also, you can hand out the credits free of charge to your friends (including the heavy historical polluters).”


“Offsets, the creation of credits that can be added to the (national, regional or global) CO2E quota under cap and trade schemes, require not only the (difficult) verification of how much CO2E is actually emitted in the real world, but also the impossible verification of how much CO2E would have been emitted in some counterfactual alternative universe. The quantity of offset credits earned by some activity is the net quantity of CO2E that has been saved as a result of this activity.

Just stating it makes one shout out: impossible! Fraud! Bribery! Corruption! Wasteful diversion of resources into pointless attempts at verification! And indeed this is what is happening before our eyes. Enterprises get paid for not cutting down trees and for installing filters and scrubbers they would have installed in any case. The new Verification of the Carbon Counterfactual industry is growing in leaps and bounds. The amounts of money involved are vast and the opportunities for graft, bribery and corruption limitless. The offset proposal has birthed a monster.”


“What was chosen was the most real resource-wasting and corruption- and rent-seeking inducing scheme anyone could think of. Masses of jobs for engineering consultants, environmental auditors, lawyers etc. All verifying the unverifiable and getting paid handsomely for it.”

He ends with:

“And God forbid that reducing CO2E emissions would have a visible price tag. Truth, courage and politics: three concepts almost never encountered in the same place.”

Buiter is a professor of European Political Economy at the London School of Economics and Political Science and former chief economist of the European Bank for Reconstruction and Development. Of course, like the vast majority of economists and anyone thinking rationally about this subject, Buiter comes down on the side of a straight forward tax on carbon, such as suggested here.

But expecting politicians to do something rational rather than politically expedient is probably idealism at its most unrealistic.



Filed under Climate Policy, Economic Policy, Energy Policy

7 responses to “The Problems With Cap and Trade

  1. Michael Barrow

    I’m a big fan of George Lakoff and was fortunate enough to see him speak in person in Denver last spring. For 0ne of his many examples on how the language that is used to frame a debate is so important, he brought up the the subject of selling environmental policy, specifically the “cap and trade” idea, as an example of why it will be hard to sell if you use the wrong language. The wrong language invokes the wrong frame, and that will get you nowhere. The Republicans have invested billions of dollars in their think tanks over the last 40 years, and fully understand the importance of language and the use of media in driving their ideas home. The Democrats are mostly still clueless in these areas. They have a wonderful resource in Lakoff, if only they’d use him more. This article describes well his key ideas on the subject of selling cap and trade:

  2. fredunger


    Taxing is about the only thing the government does really well. Unfortunately they usually tax the wrong things, like working and investing. There is a huge consensus across the political spectrum for shifting taxes from productive activity to carbon taxes.

    The problem is not one of how to better disguise a tax, but rather how to embrace a carbon tax for what it is. We need leaders willing to speak honestly to the American people about why we should tax wasteful use of fossil fuels rather than taxing people for investing their time and money productively.

    See, my earlier post – Who Else Supports Tax Shifting. It is really an amazingly diverse base of support.

    The only ones afraid of embracing an honest direct and effective carbon tax are politicians that consider honestly discussing tax policy too dangerous for their careers.

    Some day we will get a politician that offers real hope and change rather than just offering lip service.

  3. Michael Barrow

    I still think that Lakoff is 100% right. Language matters. It affects the frame that people invoke when thinking about an issue, and that, in turn, affects whether their gut will support it or reject it. Linguistics operates at a very deep level. Conservatives have figured this out, and they use it (against us).

    Personally, my rational mind has no problem thinking of a carbon tax as a tax. It is what it is, and I’m willing to invest in the environment as a necessary part of the whole sustainability paradigm. But many people aren’t. Their core processing of this “tax” frame is that a tax implies that you are taking something from me. I will resist you. I worked hard for what I have. Leave me alone.

    Why fight this?

    A whole different frame, invoked by slightly different language, is that we all own a piece of the environment, and that corporations and governments who pollute are the equivalent of my lousy neighbor down the street letting their dog shit in my yard, and not being decent enough to clean it up. They created the mess, but now it’s my problem to deal with. This latter frame gets invoked simply by changing the wording from a tax to a dividend on something I already own. In the end, it’s the same thing, but the latter approach is more likely to get the desired result from the average American because it invokes a totally different frame that is more accurate in describing what is actually going on, and that invokes my desire to make my actions (voting for a “tax”) align with my core value (respect for the environment).

    Politicians are nothing more than the reflection of their constituents. That’s mostly why we have such lousy politicians who have no spine and don’t think long-term. American’s are mostly self-centered and irrational. I think of them as adolescents. They will do what they want to do, and, yes, there will be repercussions later, but no matter. Those hard choices aren’t really going to affect them or motivate them right now.

    The right language invokes the right frame, and then there’s somewhat of a more decent chance that people will realize how a choice reflects their core values, and then they are more likely to do the right thing. Liberals too long have minimized this language factor. It’s MUCH more than language. It’s a whole different frame that gets invoked. That is all-important. That is Lakoff’s core message. He can back it up with a million examples.

    Liberals happen to be in the majority now because the Conservatives have fucked things up so royally, but Liberals still don’t get this important framing factor that Lakoff espouses so articulately. Because of their ignorance, Liberals will continue to be the underdogs on elections and on issues that should be no-brainers, but aren’t. The difference is that Conservatives know how important language is in choosing the right framing to appeal to peoples’ core values. Liberals have core values too, but are too in their heads when it comes to promoting them. They end up losing when they should hardly ever lose.

  4. fredunger


    I find the whole traditional-liberal conservative thing to be a very narrow and constrictive framework that limits rational and important debates. It really hides rather than clarifying the real issues which need to be discussed. My sense is that it is mostly artificial. For instance, despite their rhetoric, the important policies and expenditures of George Bush and Barak Obama are nearly identical (talk about disappointing)

    The supposed Republican-Democrat dichotomy seems to me to be a pretense and diversion, much like the recent uproar over AIG bonuses was really just a smoke screen to cover for the 1.2 trillion dollars that the Fed printed out of thin air the same day the AIG bonus story broke.

    My sense is they all know how to spin rhetoric just fine. Unfortunately it all seems to be focused around efforts intended to preserve the current power structure rather than around meaningful solutions.

    Personally, I generally find the unintended consequences of good intentions espoused by liberals to be generally more distasteful than the seemingly more intentional results of the conservative agenda. But as far as I can tell, lately almost all the politicians are either seriously deluding themselves or just outright lying to the rest of us.

  5. Michael Barrow

    I agree, the status quo, as we knew it, needs to go. And it won’t go without a lot of denial, followed by a lot of pain. The longer we wait, the more pain. Most people don’t change until they have to. It seems to be human nature and is not a very attractive quality from a Darwinian standpoint.

    The playbook of Karl Rove et al came largely from studying and refining what Frank Luntz has been espousing for years, and he developed his approach from the best of the German propagandists under Hitler. George Lakoff studied under Luntz, but George happens to be a liberal.

    There is very much an “us and them” mentality, especially coming from Lakoff. He feels his Liberal values very deeply and feels a sense of urgency that if we let Conservatives continue with their ways, there won’t be much left for anyone when they get done. I tend to agree with him on that. We are running out of time doing the business as usual thing. I also tend to agree with him that Liberals have missed the boat on how important language and framing is in the political arena. Hence, you get books like “What’s the Matter With Kansas” by Thomas Frank. Yes, why indeed do people consistently vote against their own self-interests? Could it be that one side (Liberals) is essentially competing with one hand tied behind their back? I think so. The Liberal mindset tends toward logic, rational thinking, Descartes, etc. But that’s not how people vote or make their decisions. That’s why Liberals don’t get people to see their ideas clearly enough to have them accepted to the degree that they merit.

    Right now Obama is a total disappointment. (I;m saying that as someone who is a big fan and who desperately wanted a leader in the truest sense of the word.) I don’t know whether he is ignorant (I doubt it), or has sold out to the oligarchs in a neat little agreement to get him elected (I hope not), or just paralyzed politically in being able to do what really needs to be done. You can accumulate only so much political capital, and it might take so much to solve some of the current problems that there isn’t enough in the whole planet. Kind of like where the global banking industry is right now. If he is paralyzed politically due to not enough political capital, it is primarily because the average American is ignorant and doesn’t even realize what has happened, or what is going to happen. In any case, we’re going to get a bad result with the current determination to revert to the status quo. The old paradigm died for a reason. Let nature take its course. It has ultimate wisdom and always wins in the end. You can fight it or go with it.

  6. fredunger


    Personally I find most liberal policies to be naive and ill founded in their faith in grandiose activist government solutions.

    Not to be rude, but I have to disagree with two of your fundamental premises:

    “The Liberal mindset tends toward logic, rational thinking” Personally I have found at least as many really logical and rational people who tend toward more conservative political and economic views.


    People voting against liberal idealism are “consistently vote against their own self-interests”

    My sense is that most people with real world experience recognize very clearly that activist government tends to have net detrimental impacts to their own self interest.

    There is that old saying, “if you aren’t a liberal when you are young, you don’t have a heart, and if you don’t become conservative as you grow older than you don’t have a brain”.

    I tend to trust in the good intentions of idealists on all sides of the spectrum. But as they say, “the road to hell is paved in good intentions”.

    As suggested on my “about” page, I believe strongly that:

    Stable, rational, restrained and fair rule of law is essential for society to prosper. (Stable and Restrained are very key words there.)


    Peace, freedom and liberty beat the alternatives


    Free Markets Work.

    Again, my sense is those old liberal-conservative labels are weighted with too much old baggage to help truly inform a discussion.

  7. Michael Barrow

    Not rude at all to disagree. You make some very good points. I agree that simply looking at everything through the liberal-conservative lens is limiting. But it helps as a starting point for discussion. If you haven’t read any of George Lakoff, check out “Don’t Think of an Elephant”. It’s a quick 144 pages, and I think his “strict father – nurturing mother” model goes a long way toward explaining the divide in this country.

    While I consider myself very much a liberal, I recognize that there are elements of conservative ideology are good and necessary for balance and pragmatic implementation of anything. I think that our country tends to skew much too far toward individualism and away from the commons. Taken to its extreme, it creates a toxic environment for all of us. We say we value community, but our actions don’t really support that. Corporations externalize many of their true costs, at the expense of our environment. Individuals mostly practice NIMBY. The village square and walkable downtowns have ben replaced by the desire for “good stuff cheap” and Walmarts. Europe may have its problems, but give me a sense of place and community like they have, complete with a so-called “lower standard of living”, and I’ll be quite content. Until we can devise a system of living together that supports and uplifts and connects all people, we won’t have a sustainable paradigm. We are so far from that on the national level, I have no expectations of it changing in my lifetime. But there are pockets of people living in the world and in our country that understand what community really is, and I want to surround and immerse myself in that. Free markets do work, but only when there are plenty of checks and balances. There will always be oligarchs who will press, if you let them, to attain “too big to fail”. They are a pox on a real and fair society. Right now they are running (and ruining) our country and our world. It will take Liberal ideals, not Conservative ones, to fix this.

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