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When U.S. Sen. Harry Reid, D-NV, last week disclosed that the so-called "cap-and-trade" energy proposal that passed the U.S. House of Representatives last year would not be taken up by the Senate, climate-bill proponents were deeply dismayed.
Indeed, Financial Times columnist Clive Crook even said that the United States "has let the world down on climate."
But here's the irony. With the Senate's refusal, we may just have moved a step closer to a climate change policy that will actually work. And that's good news for U.S. taxpayers. And it opens new doors for U.S. investors.
Despite Controversies, Climate Remains an Issue
Admittedly, it's been a rough stretch for the cap-and-trade crowd.
The revelation last October that many of the scientists involved in climate-change research had tweaked the data to improve their case was not surprising. The climate-change industry has over the last two decades been rewarded with huge government grants and massive media sympathy. And since some scientists, like anybody else, can be fallible human beings, it wasn't a surprise that some had papered over flaws in their arguments. Needless to say, it was therefore a relief when the Copenhagen Conference on Climate Change last December failed to produce a meaningful agreement based on that data.
Nevertheless, the fact that many scientists involved in climate change fudged their statistics, and that the Intergovernmental Panel on Climate Change's Fourth Report in 2007 contained unfounded claims, such as the likely disappearance of the Himalayan glaciers in 2035, does not mean that climate change is entirely a myth.
There is a certain amount of well-attested evidence for climate change, and the suggested mechanism by which excess carbon dioxide might produce global warming is a plausible one. Further work needs to be – and should be – done.
Nevertheless, one can discount the more apocalyptic predictions about future climate and say that, while there may well be some warming in global climate, it is very unlikely to exceed 2 degrees Celsius by 2100. That would imply a rise in ocean levels of no more than a foot or two and only moderate agricultural disruption.
That has important policy implications. And here's why. Schemes whereby the environmentalists get to rearrange the world economy to suit their own preferences – leading to trillions of dollars a year in lost or wasted output – can be rejected immediately.
The modest improvement in carbon emissions from some of the more-ambitious and complex carbon-capture-and-storage schemes completely fails to balance their enormous cost.
On close inspection, that's what's wrong with "cap and trade," under which the government would announce a yearly cap on carbon emissions and then issue permits to power companies and others producing emissions. The government is not capable of assessing the cost and benefit of different possible levels for the emissions cap. Thus, its ability to issue permits merely produces a huge rent-seeking industry by which it can give favors to campaign contributors.
Last year's House of Representatives "cap-and-trade" bill was an appalling example of this. It gave out so many favors to those with political "pull" that it ended by producing only an infinitesimal reduction in carbon emissions, and at an enormous cost.
The "cap-and-trade" concept, invented by BP PLC (NYSE ADR: BP) and Enron Corp. in the 1990s as a way to profit through setting up emissions permit trading operations (and through politically favored but uneconomic "biofuels" operations) may not be entirely dead, even in the United States. Sen. Reid could revive it during the "lame duck" session of Congress after the upcoming mid-term elections, when many legislators will have nothing to lose. However, the balance of probability must be against it, unless the Democrats do unexpectedly well in November.
Hope Not Lost for Those Battling Global Warming
For those whose primary goal is to combat global warming – and not to increase government control over the economy – all hope isn't lost. Take, for instance, a simple carbon tax, initially imposed at a moderate rate without politically favored exemptions. Such an arrangement:
- Would be much less economically destructive than a cap-and-trade system,
- Would provide few opportunities for rent-seeking by the Enrons of this world.
- And would be at least as effective as a "cap-and-trade" arrangement in combating carbon emissions.
In fact, by increasing the price of emissions, this carbon tax would favor technologies such as natural-gas power stations that reduce those emissions, while at the same time permitting the continued existence of high-emissions operations in areas where their closure would be impossibly expensive.
There's an additional advantage: This tax would generate revenue for the U.S. Treasury, helping to cut the excessive U.S. budget deficit.
The Likely Path of Climate Reform
No matter which party does better in November, Congress will next year wish to start trimming the deficit, and tax increases are likely to be part of that push. A tax increase that does not fall directly on most consumers – and that can be sold as a "green" initiative – will be very attractive.
Even at a low rate of $15 per metric ton of carbon, such a tax would yield around $100 billion per year, while William D. Nordhaus' "optimal" carbon tax of $60 per metric ton would yield close to $400 billion per annum. If imposed without exemptions – and without offsetting wasteful expenditures on boondoggles – a carbon tax could go a long way to reducing the U.S. budget deficit.
Action to Take: For investors, the apparent killing of "cap and trade" is good news; we must hope that it stays dead. On the other hand, a modest carbon tax within the next year or two is quite likely, if only for budgetary reasons. Hence, investors should look carefully at those energy sources such as natural gas and nuclear power, which are low-carbon and cost-effective without additional subsidies.
[Editor's Note: Money Morning's Martin Hutchinson has been on a global hot streak.
Here's what we mean. Just a week after Hutchinson recommended Germany, the European keystone reported much stronger-than-expected GDP. He recommended Chile back in December, and three of the stocks he highlighted have posted strong, double-digit returns – and one is up nearly 25%. He again recommended Korea – which analysts were downgrading – only to have the traditionally conservative International Monetary Fund (IMF) come out with an upgraded forecast that projects solid growth for that Asian Tiger for this year and next.
A longtime international merchant banker, Hutchinson has a nose for profits instincts – as evidenced by his unerring ability to paint a picture of what's to come. He's able to show investors the big profit opportunities that are still over the horizon – while also warning us about the potentially ruinous pitfalls hidden just around the corner.
With his "Alpha Bulldog" investing strategy – the crux of his Permanent Wealth Investor advisory service – Hutchinson puts those global-investing instincts to good use. He's managed to combine dividends, gold and growth into a winning, but low-risk formula that has developed eye-popping returns for subscribers.
Take a moment to find out more about "Alpha-Bulldog" stocks and The Permanent Wealth Investor by just clicking here. You'll the time well spent.]
News and Related Story Links:
- The Financial Times:
Action on Carbon is Down the Drain - The Telegraph:
UN climate change panel based claims on student dissertation and magazine article - Examiner.com:
Dr. Michael Mann cleared of tweaking climate change data; second inquiry on the way - Guardian.UK:
IPCC officials admit mistake over melting Himalayan glaciers - Wikipedia:
Carbon Capture and Storage - Money Morning News Archive:
Cap and Trade - Wikipedia:
Enron Corp - Money Morning News Archive:
Midterm Elections - Wikipedia:
Carbon Tax - William D. Nordhaus:
Official Website
I really have difficulty entrusting my wealth to someone whe believes that a trace atmospheric gas (less than 1/3 of 1%) and what I exhale and plants use for existence is going to destroy the planet. what level of CO2 would you like to get down to before you destroy all plant life?
Your essay on climate change that no more then a 2 degree Celsius rise in global temperatures assumes we have no more then a 400ppm amount of CO2 in the Atmosphere by centuries end.
We currently stand at around 392ppm- and rising at the rate of over 2ppm a year. We should pass 400ppm in 2015, and around 450ppm by as early as 2030 with unrestricted CO2.
We will easily pass the 2 degree threshold by mid century or sooner- and at this point there is a 50/50 chance of 3 degrees or more by the 2090s.
This therefore makes your predictions incorrect.
Your prediction of a 2 degree (c) rise in global temperatures by 2100 can only be accomplished if we limit the amount of CO2 in the atmosphere to 450ppm- at the current rate of over 2ppm a year (and the current CO2 level at around 391ppm) This will not be possible.
We should see a global rise of 2 degrees by 2050 easily. If we continue to have unrestricted CO2 emissions till 2050- the rise in global temperatures will likely exceed 3 degrees by the 2090s by more then a 50/50 possibility.
A rise of 3 degrees will in fact have societal and economic ramifications that could be considered bad.
The claim that "many of the scientists involved in climate-change research had tweaked the data to improve their case" is erroneous and unfortunately plays into the hands of climate change deniers. The original concern involved critics' charges that climate scientists at East Anglia University's Climate Research Unit had mishandled climate data and engaged in scientific misconduct. There has never been any concern that "many" of the thousands of climate researchers tweaked their data as Mr. Hitchinson seems to imply. Even then, the CRU matter was reviewed and the findings generally exonerating it widely reported in the news three months ago. At the same time the 22,000 member Geological Society of America released a statement confirming global warming with humans a major factor, and on May 7, 2010, 255 members of The National Academy of Science condemned the politically based assaults on climate researchers.
Global warming with human activity a primary contributor continues to be scientifically supported and, as Mr. Hutchinson advises, efforts to combat it will provide investment opportunities – but our investments must be informed by the best scientific information available.
I sent a detailed response 30 minutes ago but it is not displayed. What happened to it?
First up: carbon dioxide has fluctuated considerably for as long as the planet has existed. That's what results from ice core samples have been showing for some time – if you'd bother to check. Each year any number of volcanoes spew out more co2 than than all of humanity together – good ones like Pinatubo or St. Helen will add even more!
And how will a tax, no matter how small (?!?), keep that from happening?? Will a tax enable any of the useless, stupid politicians, or their aparatchiks, to prevent 'global climate change'? Or they take the tax money and '… a carbon tax could go a long way to reducing the U.S. budget deficit.'
Hey, Hutchinson, what planet have you been living on … or is it something you're smoking?
Those morons will take that money and BORROW ANOTHER DOLLAR FOR EACH ONE THEY STEAL!!! … AND BOONDOGGLE IT AWAY!!!
Small comfort to polar bears left to tread water until ice reforms in arctic. If you believe global warming is not happening, I have some lovely beachfront property in central Texas i would like to sell to you.
Martin makes the claim "There is a certain amount of well-attested evidence for climate change, and the suggested mechanism by which excess carbon dioxide might produce global warming is a plausible one."
I thought so too until I took the trouble to read the IPCC Reports and other material. The only 'evidence' they can offer is circumstantial. Rising temperatures and melting ice, etc is very good evidence that the globe has warmed but says nothing about the cause. The IPCC computer models are incapable of predicting future climate, they even admit this themselves.
The staggering fact is, there is not one piece of empirical evidence indicating rising man-induced greenhouse gasses are the principle cause of the warming. If there was we would have all heard about it ad nausium by now.
The world has built in mechanisms that act to vent off excess heat (as satelite data verifies) and variable cloud cover, the largest single determinant of global temperatures, and other factors, act to maintain Earthly temperatures within reasonable bounds.
While minor gasses like CO2 do influence temperatures, there is convincing evidence that this is so small as to be impossible to identify amongst the 'noise' of the many other more important factors.
Any suggestion therefore that we would be somehow better off with the introduction of a carbon tax is ill-founded. It would only act to progressively increase costs, destroy competitiveness and viability, increase unemployment, etc.
Any investment based on such a poor assumption would likely prove to be bad.
Oil and natural gas are the natural resources that represent power to those who control their reserves. When it comes to governments, there will always be schemes developed to take control of the power that comes with manipulation of the oil and gas interests. The hoax of man-made global warming is the perfect scheme in that most everyone living on earth has an interest in protecting the earth from destruction.
The fact that the constituents in the atmosphere is and has always been over 99% non-greenhouse gas (nitrogen and oxygen) and less than 1% greenhouse gas, makes one scratch their head as to the logic that there is a correlation between carbon dioxide emissions and temperature rise. The predominant greenhouse gases in the atmosphere are approximately: water vapor and clouds ~ 8,000 ppm; carbon dioxide ~380 ppm; methane ~ 1,745 ppb; nitrous oxide ~ 314 ppb; and fluorinated gases ~ 533 ppt.
Carbon dioxide makes up only 0.038% of all the atmospheric constituents even though the natural resources we are all so dependent upon for energy and transportation in the US and worldwide all emit carbon dioxide during combustion. Interestingly, other than water vapor, carbon dioxide is also the most, vitally important greenhouse gas that makes life on earth possible. Plants and trees absorb carbon dioxide and produce oxygen through photosynthesis and humans breath in oxygen and exhale ~40,000 ppm of carbon dioxide. One can then argue that curtailing carbon dioxide emissions will have consequences to life.
If the Senate passes the cap and trade bill, the scheme will have the consequences of taxing the poorest and the richest with costly increases to food, gasoline and electricity. It likewise will make the United States less competitive and ever more dependent upon dependent upon oil and gas imports. Using climate change as if it were a man-made crisis, the scheme punishes everyone who produces and uses energy in an effort to curtail its use, but actually accomplishes nothing to reduce greenhouse gas worldwide. Afterall, the citizenship in the United States only represents ~4% of the world population.
As we are now discovering, the IPCC has been consistently wrong on its forecasts for ice melt, polar bear extinction, higher sea levels, etc. Though we continue to hear arguments to the contrary as can be seen from some of the comments to this article, the global temperatures have likely been cooling since 1998 and global temperatures were actually hotter in the 1930s. The earth has experienced multiple times of severe temperature swings (i.e. the ice age) that had nothing to do with civilized development. The glacial melting could just as likely be a "normal" cycle, albeit not one civilized man has yet to witness (or document). The bottom line – just because you can connect some dots does not mean that they are related or dependent. Our atmospheric system is huge; it does in fact cycle; it warms and it cools.
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