Below is a first draft of an essay I’m formulating. I welcome comments and will post a revised draft after a while:

Why we must be more concerned about capping emissions than trading them

If there is one thing that the recent financial debacle should have taught us, it’s that risk cannot be managed by slicing it up, putting the pieces in a blender and reducing them to a fine purée, and then pouring the resulting mixture into a million little bowls that, supposedly, represent a finite amount of risk.

In fact, the meltdown gives us another chance to learn the ancient wisdom of the market: never invest in something you don’t understand.

All across the country, representatives of the same institutions that brought about the recession we’re enjoying now, the worst economic climate since the Great Depression, are peddling emissions trading schemes, popularly known as “cap and trade.”

The claim is that one of these trading schemes, applied to sulfur emissions from power plants that caused acid rain, solved the problem. That’s debatable, but there is evidence that the sulfur emissions trading system did work to bring emissions down quickly and with the minimum of fuss from power utilities.

If we stipulate that the emissions trading scheme worked with sulfur emissions, does it not follow them that we have the right model to use for getting carbon emissions under control?

Absolutely not.

In fact, it’s the differences between the sulfur trading schemes and the proposed carbon emissions trading systems that tell the tale.

First, there are a finite universe of emitters covered under the sulfur emissions trading systems.  Essentially all acid rain problems are the result of coal burning utilities in the Midwest. So there were a finite number of sources, and they were large, fixed sources.

Second, sulfur emissions are not part of everyday life for millions of people, the way carbon emissions are. The whole sulfur trading system relied on a handful of professionals in a handful of utilities, all operating in background, invisible to the everyday person.

Third, the cap for sulfur was a hard cap, in that non-participant (non-emitters) couldn’t monkey around with the system and earn sulfur emission allowances that they could sell  to utilities that had were intended to exceed their emissions limit.

But with carbon trading, the proposed “cap” is a more like porous thatch than a hard cap.  With carbon trading, the ideas that utilities in large industrial emitters will be able to purchase additional allowances — in other words, to produce more emissions than allowed or than the world can afford — from non-industrial and nonutility emitters. This requires the creation of an elaborate (baroque even) system for estimating the carbon reduction potential of a bewildering variety of methods for either reducing emissions or trapping carbon and keeping it from entering the atmosphere.

In the acid rain program, offsets would be like utilities in Ohio earning the right to emit extra sulfur by paying Boy Scouts to dump alkali minerals into lakes in Vermont and upstate New York because the net pH in the lake wouldn’t drop so much.

The only way to carbon emissions trading system can work to actually limit and then reduce greenhouse gas emissions is by restricting the universe of potential trading partners to similar entities, with a special emphasis on coal.

In other words, coal users (such as electric power plants and coal-burning facilities such as ethanol refineries) would only be able to buy and burn coal above their own limit by buying coal emissions allowances from other coal users.

This is critical, because coal is the make or break for climate.

There is little doubt that all of the world’s oil and natural gas that can be economically recovered and delivered — meaning those reserves that can be exploited at an energy profit, which translates into a monetary profit — will be. However, climate models based on reserve estimates suggest that there is simply not enough carbon in these fluid fossil fuels to send our climate into a runaway greenhouse state.

Alas, there is more than enough carbon in more than enough places with more than enough coal to blast past the climate tipping points multiple times over, sending our climate into a chaotic new state the likes of which we have never encountered during the periods of human habitation and beyond.

Ultimately, that means that the Earth can only afford a carbon trading system that distinguishes between otherwise identical emissions, and that creates a special sub-system for coal emissions.  All other greenhouse gas sources can be lumped together and traded if we wish or, more simply, efficiently, and elegantly, taxed on their carbon content.  But coal is different.  With coal, we must be much more concerned about the cap on carbon than on the trading scheme.

The lesson from the sulfur training program is that when a hard cap is applied to a fixed, limited universe of emitters, those emitters will operate to stay beneath the limit at the lowest total cost, letting those emitters that can make the greatest reductions at the lowest cost to do so.

But there are no phony offsets in sulfur trading: the only way to get allowances is to reduce emissions, either by removing sulfur from the smokestack or by burning coal with less sulfur to begin with. That is the strength of the system — there is no way to have total omissions to exceed the cap thanks to offsets that are justified on paper by a calculation showing that Action A in India or South America would have the same acid rain reducing effect as a reduction in sulfur emissions in Ohio.

The world has very little time. If we want any hope for a stable climate in the future, we must reduce emissions radically, such that greenhouse gas concentrations no longer increase at an increasing rate, as they do today. (Or at least as they did before the economic meltdown reduced energy consumption globally.)

Today, we are rapidly approaching 400 ppm equivalent carbon dioxide concentration, increasing at 2-3 ppm per year. James Hansen of NASA, probably the leading climate change expert in the country and possibly the world, warns that we must get a house gas concentrations to less than 350 ppm carbon dioxide equivalent as rapidly as possible. The only way this can be accomplished is through aggressive, strict, airtight limits — a hard cap — on global coal emissions.

What we cannot do — what the world cannot afford — is to permit coal emissions to continue or to increase under the fig leaf of emissions offsets provided by non-coal users. If coal emissions continue, we don’t stand a chance of stabilizing climate in anything like its present state.