Cap and Trade-A sequel

Ok folks, you want an example of why I am so against this cap and trade policy making its way through to reality.

Reluctantly, but happy to serve, here are two of the primary issues I foresee on the horizon.


1. We will be turning unwanted behavior and environmental damage (if we believe the environmentalist) into a commodity that will become another "esoteric instrument" that will be the playground of everyone we have heard about involved in the derivatives, SIV's, CDO's, hedge funds and ponzi schemes and more.

The market will set a price for pollution and carbon and the speculators will fall onto these contracts and move the pricing in ways that they managed to drive crude oil, gold, soybeans or whatever other contract listed on these commodity exchanges.

This will produce a destablized market with a danger to dynamically drive prices in accordance with the flow of dollars into the market or, one or more groups acting in concert to drive prices up or down.

Here are two dyametrically opposed groups and what they might think about doing with this new commodity:

Power generators. This group will not want to have to pay too high of a price for these carbon credit contracts that they will need to be able to keep operating any power plant that is producing emissions. They will do all they can to find a means to hold the prices down. They can do it by simply standing in the pit so to speak via their traders and just keep selling pressure on the contracts. Acting in concert the industry itself could disrupt the market.

Environmental groups and alternative energy providers. These groups would want to see the value of this commodity be as high as they could be to extract a toll on the polluting generators perhaps to a point of forcing the issue on continuing to operate their plants.

Make any sense yet?

Now, the real issue; The speculator universe.

I traded commodities for a good part of my early career and no matter what anyone wants to try and tell me, I know how a trader thinks and the motivation of a trader.

It is money, it is capability to drive momentum (makes no difference the direction, up or down) and they don't take prisoners or swerve to miss hitting bunnies or squirrels on the highway.

Back in the early days of the commodity exchanges, there wasn't a lot of money sloshing around in zero yielding T Bills. In fact, the farmers had a great deal of problems trying to find a way to sell their crops and get paid for them. At that time, the exchanges did provide a valuable service and actually did the job of bringing buyers and sellers together at a reasonably fair price.

The markets grew out to a point where they did even help both manage their businesses by being able to predict and hedge future pricing on these commodities.

Fast forward to today and we have contracts for weather, spark rates for electricity and now we are going to create a contract for carbon emissions into the atmosphere.


So, as with a commodity contract for corn or soybeans, if I sell my September contracts I take on a liability to deliver 5,000 bushels of corn to a grain storage elevator unless I find someone who will buy it from me. No problems really, I just put them on the truck and send them to the grain elevator.

What do I do if I sold carbon emissions and I have to deliver against my contract? Call up the plant manager and tell him to put some really dirty coal into the boiler so that I can run about 3,000 tons of carbon emissions up the smokestack and into the atmosphere because that is the contract that I sold?


This of course is taking things to the realm of the ridiculous but, that is exactly what these people are talking about creating.

It is a system that is ripe for manipulation and corruption and as I keep saying, will not do one thing to take one ton of carbon emissions out of the atmosphere.

Lastly ladies and gents, it will, not might, will increase your electric bills because the costs for all of this will be passed on to you in a variety of ways and for a variety of reasons.

This is another one of those poorly thought out plans that politicians are famous for producing.

It is just plain stupid!!

Someone had to say it--- I am happy that I just did!