Cap and Trade Final Paper
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Transcript of Cap and Trade Final Paper
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I. STRUCTURAL FRAMEWORK
The Carbon Emissions Organization (CEO) will be a private, not-for-profit entity whose primary
purpose is to regulate greenhouse gas emissions in the United States. The mission of our
organization is to eliminate the publicizing of pollution and internalizing of revenue; to preserve
the sanctity of the environment; and to promote innovation in alternative energy. From an
administrative standpoint, the Environmental Protection Agency (EPA) will designate CEO as
the organization responsible for setting emissions standards and monetary sanctions for
associated breaches, developing a mechanism to define and measure units of output with
consistency, devising standards that are sensitive to different regions and different industries, and
conducting individual audits to ensure compliance.
II. COMMITTEES
It is important to have committees assigned with various roles so that our organization has an
internal, hierarchical structure. The Cap and Trade Organization will consist of four committees
that report to the board of directors. The sub-committees will be used to delegate responsibilities
within the organization including both the creation of new standards as well as the enforcement
of existing standards. All committees will be headed by a board member. The oversight board
and the five sub-committees are listed and defined below.
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Oversight regulatory board
The board of directors will consist of five members, each appointed by EPA leadership. These
board members will each serve a four year term, and be eligible for re-appointment for another
four year term. The Board will have staggered end of term years so that at most only two
members terms end in the same year. These Board members will be responsible for the hiring
of the remaining staff members who will be professionals from fields including accounting,
science and engineering. These remaining members will be hired and fired by the Board
according to majority vote.
Emissions expert committee
Member of this committee will be hired by and serve at the discretion of the board of directors
and will set measureable standards that are sensitive to regional and industry differences.
Auditing Standards Committee
This committee will be made up of members with significant public auditing experience as well
as scientists that understand the technology required to quantify and verify carbon emissions.
This committee will be charged with writing the auditing procedures that will be used by public
accounting firms to audit companies carbon emissions. This will be accomplished through
recordkeeping, on-sight testing, and independent verification from third-parties. This committee
will also attempt to standardize the methodologies that companies use to quantify their carbon
emissions via a required installation kit.
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Sanctions Enforcement CommitteeThis committee is charged with the task of creating appropriate sanctions as well as enforcing
them on companies that pollute more than their available carbon credits allow. To incentivize
the trading of carbon credits in the open market, sanctions must be set at a rate above the market
price of a carbon credit, so that firms seek market solutions to their carbon pollution.
Technical Advisory CommitteeThis committee will consist of mostly scientists that will be charged with advising companies on
new methodologies to reduce carbon emissions, such as carbon sequestration projects, or carbon
offset projects like afforestation initiatives. Also, this committee will look to create alternative
methods to measure carbon pollution that can be better applied to companies that do not pollute
necessarily from an individual factory.
Innovation CommitteeThis committee will assess how effective the current programs and standards are and will look to
improve upon them. This committee has an important task of keeping the standards up to date
and changing them appropriately so that the program does not become obsolete.
III. SANCTIONS
Sanctions play an important role because they will incentivize companies to stay within the
boundaries of the program and to trade in the carbon markets for additional credits if they exceed
their carbon emissions levels. The Sanctions enforcement committee will determine the
appropriate sanctions and will enforce them on companies that are to be penalized. Sanctions
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revenue will be used to help fund the organization. This could be used as an abuse of power as
the people creating the sanctions are receiving the revenues from them. However, the sanctions
enforcement committee will create the standards and the sanctions will only have the objective of
achieving the carbon reductions goals set forth by the government.
IV. SEC ROLE
The SEC will play an important role in monitoring the trading of carbon on the public,
commodity exchanges. Derivative trading will most likely emerge as companies create
appropriate hedging strategies and will also need to be supervised by the SEC. The SEC must
buy-off on our auditing standards and carbon emission measurement standards in order for them
to authenticate the trading of carbon credits in an open market. Therefore, a close relationship
with the SEC must be formed so that both organizations have a mutual understanding of the
proposed procedures. This will most likely involve monthly conferences with the SEC to obtain
feedback on our proposed procedures.
V. ADDITIONAL CONSIDERATIONS
From a framework perspective, we examined the structural workings of similar programs and
considered the requisites for our own effective policy structure. In the course of our analysis, it
became particularly clear to us that this cap and trade program needs to function under the
auspices of a private entity rather than a public one for several reasons. First, we feel that the
successful implementation of this program partially resides in its ability to circumvent the type of
partisanship that patently overwhelms good-faith efforts to enact change. Time and again we see
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political, social, and economic agendas beset by partisan lobbying and the political banter so
associated; unfortunately, these agendas almost always result in inaction and the status quo.
The very nature of an elected representative is such that his actions and decisions are necessarily
supposed to advance the public interest and the public good. Decade after decade of partisan
lobbying and institutional corruption, though, has taught us that this does not always happen. In
an effort to curry favor with their constituencies, better position themselves for future political
endeavors, advance a particular ideology, or simply foil a counter-party agenda, elected
representatives often act and decide contrary to their ostensible civic duty. Needless to say,
public entities are plagued by these dueling motivations and interests all the time. On the other
hand, with a private entity structure, we can effectively mitigate the parasitic nature of lobbying
and focus on substance over semantics.
A second major issue from which the private entity structure emerged as the more sensible
choice is compensation. Public entities are often bound by modest governmental compensation
scales that have been rigidly conceived to meet budgetary requirements and serve at least in
spirit as a pro-forma nod to the American taxpayer. Therefore, the financial compensation
under public entities is not particularly flattering, especially to elite talent who demand much
more -- and can get it elsewhere.
Private entities, on the other hand, are not bound by such compensation schemes largely because
they function independently of government. So whereas the viability of a publicly-organized cap
and trade program may be somewhat undermined by an inability to attract value-adding talent
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under government-regulated compensation, private entities avoid this problem -- they have the
latitude to pay whatever they want to attract the very best.
Indeed, a private entity of this ilk will invariably be tied to other public programs and
government-sponsored entities. It will probably also receive government funds in advance of
offsetting revenue generated by the program itself. With this in mind, the cap and trade program
needs to be deliberately crafted to avoid simply becoming a government puppet under the guise
of an independent private entity. If this happens, then the program will effectively lose its
independence and expose itself to the partisan lobbying described above.
Admittedly, public entities have their benefits not the least of which include greater budget
allocation, government backing, greater public exposure, etc. We are confident, however, that a
cap and trade program is better suited in the private sphere for the reasons outlined above.
VI. REVENUE GENERATION
The CEO will generate revenue from four sources. First, the majority of revenue will be
collected when companies purchase emissions credits from the organization. In the case that a
company needs more credits than they were allowed to purchase from the CEO, they will have to
buy or trade for them on the open market. The CEO will institute a small tax on these
subsequent transactions. This will serve the dual purpose of providing funds as well as
encouraging companies to develop the necessary technology to avoid needing to purchase more
credits and therefore avoid this tax. A third source of money will come from the fines companies
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are required to pay as punishment for exceeded their limit on allowable carbon emissions. This
fine amount will be double the market rate for purchasing additional credits in order to deter
companies from surpassing their allowable limit. Additionally, this fee will be adjusted monthly
in response to changing market conditions. Lastly, since the CEO will be designated by the EPA
as the organization responsible for operating the cap and trade system, the EPA will budget some
of its government funds to be allocated to the organization. We anticipate that initially the EPA
allocation to this entity will be greater due to the lack of purchased credits, fines, and taxes when
the program is first set in action. These start-up funds the EPA provides will then disappear
and be replaced by a smaller amount of annual allocations. This will ensure that the CEO
maintains its independence as a private entity.
VII. ECONOMIC IMPLICATIONS
The proposed bill to reduce Carbon emissions will become part of the Clean Air Act since the
CEO would be a subsidiary of EPA. A major concern with the introduction of a cap and trade
carbon program is the economic impact it will have on states, businesses, and individuals. This
bill will affect the cost of energy production, which is a necessity for most Americans. The
creation of carbon costs on business will be considered an overhead cost that will be passed
down to the consumer via higher prices. This is especially concerning for low to moderate-
income households who will be most affected by the cost to reduce carbon emissions.
In order to reduce these costs, the carbon reduction program will develop a phase-in system to
gradually reduce emissions without causing huge market fluctuations. This phase-in program
will be similar to the Acid Rain Program of the 1990s. There will be two phases over the course
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of ten to fifteen years that will establish the long-term emission reduction targets. A long-term
phase-in will give companies time and flexibility to adjust their operations, invest in new,
innovative technology, and become more environmentally friendly. The two reduction targets
also create the foundation for the distribution of carbon allowances (in the form of credits). Each
year the CEO will set a ceiling and floor price on carbon allowances that will gradually guide
companies to reduce carbon and ultimately achieve the target emission reduction. The ceiling
will provide businesses with flexibility to gradually reduce carbon emissions because there is a
set high cost; in other words, firms do not have to worry about the price of an allowance rapidly
increasing in price. Minimizing price uncertainty will allow firms to better evaluate when it is
most cost effective to reduce their carbon footprint. Allowing firms to minimize costs of
reducing carbon, which will help keep consumer prices low. The floor will provide firms with
incentive to improve processes and reduce carbon. The lower prices drop, the more likely that it
will be more costly for firms to reduce emissions than to buy allowances. The floor will ensure
that prices remain high enough to motivate firms to take carbon reduction initiatives. The cap
and trade system is the best alternative to control costs, eliminating any large market
fluctuations, while still provoking firms to cut carbon emissions.
In the cap and trade program, the CEO will distribute to each business a set number of
allowances for each year. Some firms, like those that heavily use fossil fuels, will receive more
allowances to help keep costs low. This should keep the price of energy from increasing too
high, helping low and middle-income families. This will also allow heavily carbon dependent
states, like West Virginia, from suffering the effects of increased costs. After the initial
allowances have been distributed, firms can acquire more allowances from open market trading
or from the governments auction for allowances. The auction will be a major revenue generator
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for CEO. Part of the money from the auction will be used to offset agency costs. The rest of the
money will provide tax plan options that will help offset the costs of higher energy to low and
moderate income households. The money generated would become a tax credit to all households
below a certain adjusted gross income level. This option is the best way to directly help low
income households manage the increased costs associated with the reduction in carbon
emissions.
VIII. CONCLUSION
Perhaps the most difficult part to creating a viable agency that seeks to advance a specific agenda
is the ability to appease all of the players involved and effect change notwithstanding competing
interests. Needless to say, a careful consideration of the structural, economic, and political
implications of far-reaching programs such as this one is an absolute requisite; even then, the
prospects for successful implementation can be somewhat difficult to gauge. Specifically
regarding cap and trade, there can be no quick-fix and no perfect strategy proposals simply
because we are venturing into uncharted waters at least for the United States. But while the
creation of a viable, innovative program may be a big challenge, it is nonetheless a challenge that
must be met by those of us who care to work through it and change the status quo.