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Let's make some money off this fool: Trade carbon credits

by: Clyde Middleton   posted: 2009-01-09 21:09:00
Viewed 1528 times. 17 Comments.

Remember Bambi saying he'd destroy the coal industry? That he'd have a cap and trade system for carbon credits covering all of industry? "Cap" meaning a company will only be allowed to produce so much CO2 (or other regulated emission) before they have to purchase ("trade" for) someone else's available credit (because they ran less than the maximum).

There must be a way to follow this fool's swath through the economy and profit off it. Let's figure out how to trade carbon credits.

First, OK, is this whole thing just a joke - I mean, it won't actually save the environment, right? Of course it won't. It is an accounting ledger. Nature doesn't run based on GAAP. Someone cranking out CO2 in Pennsylvania doesn't change the impact to the local environment because they bought some carbon credits from a company in Denver. Don't work that way. But fortunately for us, dem don't understand capitalism. If they did, this entire boondoggle would not exist.

How can you trade carbon credits? You can't. The New York Merchantile Exchange is going to start trading carbon and similar credits on the "Green Exchange" in 2009. Right now, most American trading is on the Chicago Climate Exchange, but that's a funky exclusive club us street folk ain't allowed into. It's the same with the European Climate Exchange. Another worldwide outfit is Carbon Trading dot com. Guess you have to have an Oscar, a Nobel Peace Prize, and yacht to be able to trade in these things.

I just can't tell from the above writings if we are ever going to get to trade directly as we do with other commodities like corn and pork bellies (a product I refuse to research and understand). We can't now, and that is all that matters.

Before we go off figuring a way to trade indirectly in this new-wave crap, let's figure out what it is. How are credits created? Here's an example using a forest:

The market for carbon is one just developing and forestry is even at an earlier stage than some others, since forest sinks were specifically excluded from Kyoto. This was/is a serious oversight (although it was not really an oversight but rather a political ploy, IMO, aimed at the U.S.) which is being addressed. This is how it would probably work.

You have to start with a certified forest, so that you can measure the carbon input and carbon output AND a third party can audit it. The landowner must provide proof of ownership, including timber rights, location maps, acreage and management plan. An audit establishes a baseline of all the carbon that is currently stored above ground in stems and branches as well as below ground in roots and soils. The landowner signs a contract, usually for fifteen years, where he agrees to abide by practices that will enhance the forest’s absorption of CO2 so that at the end of the contract there is more carbon stored in the forest at the end of the contract. He is really selling the difference between the baseline carbon levels and the ending levels. Carbon is sold by the ton.

These trades take place on the Chicago Carbon Exchange. Carbon trading is still VOLUNTARY. Buyers are firms interested in good public relations and individuals, many celebrities, who want to shrink their carbon footprints. A mandated cap & trade program would enhance this trading and probably raise prices.

Individual landowners cannot participate in the program, since they would be selling too little carbon to make a profitable sale. Instead they would have to work through an aggregator, who would collect carbon contracts from many landowners and sell them as a unit. Of course, at every step of the way various people like aggregators and brokers are taking their slice, so landowners should not look at the carbon price and think they will get anything like the posted amounts.

Each year the landowner would be paid for the estimated carbon sequestration, with 20% withheld as insurance against a catastrophe that might destroy the forest.

So the actual carbon credit is placed into the system by the forest owner. It would be purchased by some coal-choking skank house in NEPA, while there does seem to be some secondary trading going on by the limited folks discussed on those market sites above.

But do you see the key to us joining in the fun? Assume a company manages forests for, say, a paper mill or wood-products company. They are running just fine right now. Making a profit. The Bambi-mandated cap-and-trade system comes in, and all of a sudden these folks have a new product to sell - carbon offsets. A little forestry-management change, and viola! they have a stake in the market generating revenue at little additional cost. Remember, the wood companies have been plating 1,000 of those little 6" Christmas trees for every old-forest tree they cut down for decades just to shut the huggers up and get them to come out of their tree forts because we brought out the high-pressure hoses.

So I suggest that a key is to find industries that have existing assets that could be relabeled and sold as carbon offsets without disturbing too greatly the existing profit model. In addition to paper and wood-product companies, consider agricultural companies. These industries own the forests and soils - the resources needed for offset. If you can think of other industries, mention it in the comments, please.

Who is likely to buy these credits - thereby increasing their cost of doing business? Traditional electric energy companies. Same business model - increased costs. Increased costs - decreased profit - reduced stock price. Thanks Bambi.

We'll go through some of the players in the forests and soils folks in a later post. If you want to get a head start, use this earlier post to give you some guidelines if you don't have you own already.

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Comments 17

Selkirk on 2009-01-09 22:46:52

A cap and trade program isn't necessarily all bad. At the very least, it provides a market solution for a perceived problem - persons who need to exceed the cap can do so, so long as a market exists of available sellers of capacity. That said, the real problems with the plan is that the money paid for these credits does not go to compensate the person who is the "cleaner" operator - Bambi wants to use this money to fund energy alternatives (like ethanol - don't get me started). As a result, he starts with a program that looks like a market solution (albeit a flawed one) but ends up with nothing but a new tax program to subsidize questionable investments.


Clyde on 2009-01-09 22:52:30

i agree with you in this sense - excess pollution should be given an incentive to be reduced. placing reasonable limits on emissions, and allowing some phased-in compliance to occur via purchasing credits it fine.

but therein lies the problem in my mind. first, companies will not phase-in compliance - they will perpetually purchase credits and pass the costs onto consumers.

second, as you mention, bambi wants to use the money .... arghh!!!! this is a capitalism system - trading a commodity. it is not a source of revenue for the government. if it is, then we are in huge trouble. the government can rachet down ceilings thereby requiring more purchases thereby increasing demand thereby increasing the cost of the purchase credit - and their folding money.

yikes, eh?


Jacob Morgan on 2009-01-09 23:42:37

This would mean that the few remaining manufactuirng operations in the US would be worth more dead than alive. They would be bought up simply to shut down and take the carbon trade. Shut down the last of the blue collar jobs to let another power plant start up to power more government offices.

I'm sure that is what the unions thought when they threw their weight behind the Milli-Vanilli presidential tour.

Do any of these blithering idiots realize that this just makes things expensive here, shuts down jobs, and the carbon just moves to China.


Clyde on 2009-01-09 23:50:09

carbon cap and trade = outsourcing. good point.


Burke on 2009-01-09 23:46:48

Timber Reits actually own the land. The forestry companies established them by placing their forest assts into them and selling them into the market with established contracts for havesting. This is like Ford selling and leasing back its factories.

Of course, carbon trading is a scam and you are correct to note that middle-men will add to the costs. Like anything mandated by government, there is a way to scam it. Take the California energy market, that worked great.

Of course, it doesn't take the government to do this. Remember when greenies were complaining that paper bags at the grocery store were destroying the forests? Paper is made from trees grown and harvested for this purpose. It is long-term farming. Combine that with recycled paper and where is the problem. No the answer they were happy with then was plastic bags. That worked well.

How about that idiot Rachel Carson and her "Silent Spring" that would be caused by DDT. DDT, she claimed, was making bird shells thin. Wrong. Acid rain was making the bird shells thin. THis was a problem handled by inforcing scrubbers on coal stations. DDT was banned globally, thereby sentancing millions of African children to death by malaria. Good job on that one, too.

Our latest folly was CFC's. Remember that hairspray was ripping a whole in the ozone. Given that the CFC's were largely used in the northern hemisphere, not one ever gave a good explanation why this was happening at the South Pole, but never mind, ban them all. As we are not learning, the ozone hole is probably caused by cosmic rays. Excessive rays deplete the ozone. Lower solar winds means higher cosmic rays and a larger ozone whole.

Now is it bad the we eliminated CFC's, paper bags, DDT, and California's power? That is not really the question. As any of these choices involves economic costs, we are free to undertake what we can afford. If we feel better about it. I am not sure why we should feel that we have to inforce these decisions on the entire planet as they may not be able to afford them. When we were poor, there was no moral dilemma concerning child labor. Now that we are, it is a moral sin on par with murder. We can afford that choice because we went through that period, now we do not want anyone else to copy our path to success.

Given past experience, the odds that environmentalists are right about global warming are not good. So creating a wasteful market to trade a commonly occuring gas makes little sense. I agree that you might as well take money out of it, especially since we probably can not stop it.


Clyde on 2009-01-09 23:55:10

so if REITS own the timber - are they all in private hands, or can they be gotten to through an investment vehicle somehow? point is, the asset - the timber - may now generate more revenue with little additional cost. thereby increasing profitabiity. the ROI should be different from when the investment decision was originally constructed ...


Winston Smith on 2009-01-10 00:50:00
Remember Bambi saying he'd destroy the coal industry?

No. I remember Obama saying he was going to support so-called "clean coal" and clips from that speech being used to make it sound like Obama said he would destroy the coal industry.

Continuing to push the lies from the 2008 election will only marginalize the right even more for then next election cycles. When Palin runs again, is she going to trot out "pals around with terrorists," again or will she bother to get some new material?

I hope the former. Because, after all, you guys said it was true in 2008 so it should still be true in 2012, so keep saying it. Please.


Clyde on 2009-01-10 07:51:33

continuing to push a misunderstanding of the coal industry, winston.

specifically he said that if someone wanted to open a new coal plant, they would be capped and traded out of business - they could not do it.

clean coal technology? do even know what that is? we are cranking out 28 new plants now. we are magically going to be clean? he also said - off foreign oil in ten years - really? who is going to convert the $14.4 trillion economy off oil? it is not technically possible.

it is you, i suggest that listens to words from bambi and believes them - without understanding they are fairy tales. how does one make a coal mine clean?

start - http://patriotroom.com/article/half-our-electricity-comes-from-coal


Clyde on 2009-01-10 07:57:35

here's your next piece, winston - http://patriotroom.com/article/obama-january-2008-i-will-bankrupt-the-coal-industry. he did say he would bankrupt it.

now, your turn. explain how and when you are going to magically make 48.6% of our nations electrical needs "clean."

obama is a simpleton. he does not understand.


Susan Kraemer on 2009-01-11 00:32:00

You miss the point.

"Someone cranking out CO2 in Pennsylvania doesn't change the impact to the local environment because they bought some carbon credits from a company in Denver."

Sure they do. This changes the environment, because the CO2 emitter ultimately goes out of business unless they figure out how to sell what they do or make without emitting CO2, like company x in Denver does.

Let me tell you how Democrats understand the economy.

Lets say you drill for oil in Wyoming. After you have paid carbon credits to the geothermal driller in Denver, even a knuckledragging Republican like you would realize, hey, I could be drilling for steam not oil. Then I would earn extra carbon credits, and my former competior in the oil biz will have to pay me.

Lets say you make electricity out of cutting off mountains to make coal. Always did. Always will. Wait. Now you have to pay some wind farm for your CO2 penalty? No fair!

But,....slowly, even a knuckledragger will eventually say, gee, I could just put up turbines on the mountain, while it still is tall enough for wind instead of mowing it down for a couple days fire. So you do. Generations later your descendents have higher IQs because they are not breathing in the fumes of the family coal business and so they are able to innovate even more advanced businesses, and grow wealthier than your wildest dreams.

So carbon credits make businesses think. Businesses that wouldn't otherwise.


Clyde on 2009-01-11 08:15:26

good morning, susan. i rather enjoy the way you direct epitaphs at me personally. how cute of you. anyway.

you need to read a little more. you quote things like - oh gee! i'll just make wind instead of strip mining for coal - as if that is practical. dear, it is not practical. you cannot power a $14 trillion a year economy based upon alternate fuels - not at present. not for decades. not with current technology.

how much of our electricity comes from this blissful world of green you embrace? i hope you know it is roughly 10%. how are you going to make that ten fold? do you understand economics in the least bit? do you understand how mandating such staggering changes to industry will result in inflation that would, in turn, cripple investment? were you around in the 1970s to see the macroeconomic impact of LBJ's infrastructure and social "investment" programs?

carbon credits are a fiction. they will create costs where none existed before. that results in inflation. your theory is just that - a theory. perhaps you should study the EU carbon-credit program and its impact on industry. it appears that you have not.

one last quick thing. you keep you "knuckledragging" labels away for me, and i won't rejoin with similar labels. sound fair? no, susan, i don't find it humorous.


kevin on 2009-08-07 15:08:13

So if I were to build a nuclear power plant that produces no carbon emmisions and actually provides power consistently and cheaply then other companies would have to pay me and I would be haralded as a great enviromentalist for building a "clean" power plant.


Susan Kraemer on 2009-01-11 00:37:45

That said; (just so you understand how Cap and Trade is intended to work,)

I think a straight CO2 tax would work better. Matched with a payroll tax deduction, as Gore suggested.

Paris Hilton would then pay a lot more to watch her 30 60 foot plazma TVs but her maid could still get enough gas to get to work every day.


robert on 2009-01-11 00:57:00

Oh yea, creating a tax is really going to solve the problem? Never mind that this "problem" doesn't exist and that the earth itself pumps out more C02 than we mere humans could think about.

All a tax will do, as all corporate taxes do, is drive up consumer prices. It makes no real difference to the energy company, they will just pass along the cost to the consumer. People will really love that.

And Gore? He is the one who is buying carbon credits from his own company. Yea, that is a good tactic.

However that Obama has chosen a former EPA official, environment activist, and known socialist, I see this disaster coming to fruition.


Clyde on 2009-01-11 08:23:20

"that said"? i know precisely how a C&T system works. both environmentally and as a financial market. i think you need to read up on micro-climates.

you actually think a CO2 tax would leave the maid alone but not Paris? you must be joking. you live in such a world of theory. you really really need to apply your normative views.

instead of looking up at big, bad rich people and ugly corporations causing all the problems in this world, focus on yourself. your logic mandated plastic bags in groceries - remember? got that one wrong.

i'm vegan, susan. what's your diet? eat meat? let's compare carbon footprints. let's put reality to your theories.


Susan Kraemer on 2009-01-11 10:12:10

I agree. Without a payroll tax deduction to offset it, a carbon tax would indeed impact the maid proportionally more than Paris Hilton.

That's why I proposed above that the carbon tax be "Matched with a payroll tax deduction, as Gore suggested."


Clyde on 2009-01-11 10:19:56

so paris' cost of living increases with a direct and proportional increase in the income of the maid to fund the trickle down to her? seems to be income redistribution. seems to be grounded in marxism. don't you like the benefits of the capitalistic system within which you live?

your model of economics is very European. how are the economies of france, GB, and germany doing? are you familiar with the television tax in GB? the television police that check to see if you are watching programming as opposed to using your tv for just dvd's? i wrote about this on my old blog. i'll reprise it here in a while. but start here - http://www.tvlicensing.co.uk/index.jsp.

do you not see where your social engineering is headed?


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