CAP AND TRADE
Investing in a Parachute
Daniel Reader
Dept. of Geography & Geology
September 13, 2010
CLIMATE CHANGE
Natural flux due to many causes
 Anthropogenic contribution

THE GREENHOUSE EFFECT
GREENHOUSE GASES
CARBON DIOXIDE AND FOSSIL FUELS
Petroleum (gasoline, diesel, etc.)
 Natural Gas
CO2 + H2O
 Coal
CO2

CO2 + H20
THE INTERGOVERNMENTAL PANEL ON
CLIMATE CHANGE (IPCC)

Increased risk of more frequent, longer-lasting
heat waves
THE INTERGOVERNMENTAL PANEL ON
CLIMATE CHANGE (IPCC)

Increased summer dryness (drought)
THE INTERGOVERNMENTAL PANEL ON
CLIMATE CHANGE (IPCC)

Increased winter wetness (flooding)
IPCC RECOMMENDATIONS
1) Get ready – the climate is changing now, and
is expected to get worse.
 2) Mitigation options include a “large shift in the
pattern of investment in energy plants and other
infrastructure.”
 3) “In order to respect equity, the emissions of
developed countries must decrease by between 25
and 40% between now and 2020, and between 80
and 95% between now and 2050, compared to the
level in 1990.”

IPCC RECOMMENDATIONS
“Policies that provide a real or
implicit price of carbon could create
incentives for producers and
consumers to significantly invest in
low-GHG products, technologies, and
processes.”
CAP AND TAX
Set limits per producer on carbon emissions
 Production exceeding established limits subject
to taxation
 Establishes a negative incentive to produce
carbon emissions
 Prompts greater efficiency, lower production, or
both
 Favored by environmentalists, but few others
 Politically inexpedient, and an enforcement
nightmare

CREATING A CARBON MARKET
Limit carbon emissions to create a fixed supply.
 Provide a means to acquire units of permissible
carbon emissions, enabling the expression of
demand.
 Competitive demand for a fixed supply will create
a market for carbon emissions permits.

CAP AND AUCTION
“Free Market” approach to carbon capping
 Carbon emission permits are put to auction in
lots and then bid upon
 Results in the wealthiest entities amassing a
disproportionate share of emissions permits
 May result in necessary services (such as mining)
becoming subsidized or exempted as they fail to
compete effectively

CAP AND TRADE
Issue a fixed number of permits to carbon
producers based upon past performance.
 Those producers that become more efficient
produce less carbon than they have permits for,
resulting in a surplus.
 Those producers that require additional carbon
capacity may then purchase or trade for permits
from those with a surplus.
 Considered to be the “least of evils” by most

THE REINSURANCE INDUSTRY
Insurance underwriters
 Some of the largest corporate entities in the
world
 Vested interest in objective risk assessment

MUNICH RE ON CLIMATE CHANGE
“Climate Change is one of the greatest risks
facing mankind.”
“The figures speak for themselves… Weather
related natural catastrophes have produced US$
1,600bn in total losses since 1980, and climate
change is definitely a significant contributing
factor. We assume that the annual loss amount
attributable to climate change is already in the
low double-digit Euro range. And the figure is
bound to rise dramatically in the future.”
SWISS RE ON CLIMATE CHANGE

“Climate is warming at a rate which cannot be
explained with natural factors alone.”
“We'd be out of our minds if we
wrote weather insurance on the
opinion global warming would
have no effect at all.”
- Warren Buffett
2006 annual Shareholder meeting
SWISS RE ON CLIMATE CHANGE
THE COST OF DOING NOTHING
Simple cost-benefit analysis rejects inaction.
 Failure to respond immediately with some
method of curtailing carbon emissions will result
in untold losses for the foreseeable future.
 The most reasonable FIRST STEP in reducing
carbon emissions is to establish an upper limit at
some level substantially lower than current
output.
 We must be able to step carbon production down,
preferably at a rate which the economy can
withstand - but it must be done.

WAIT, THERE’S MORE..
HUBBERT PEAK
OPEC INTERVENTION
A NATURAL CAP ON CARBON

Crude oil and natural gas production are now
peaking globally
GLOBAL PEAK COAL PRODUCTION IN 2011
COAL, COUNTRY BY COUNTRY
PEAK CARBON EMISSIONS
Peak Coal projections beat 36 of 40 IPCC
projections for carbon emissions
 The worst case scenarios for climate change are
unlikely
 Beginning in the next few years, rates of carbon
emissions should peak, and go down thereafter

CAP AND WHATEVER
NO TIME LIKE THE PRESENT
We have, at most, a few years to fully implement
whatever fossil fuels policy we decide upon
 The price is exorbitantly high; yet the cost of
inaction is higher still
 The longer we wait, the faster the price increases
 Now is not a good time to do this…yet there will
never be a good time
 The question becomes not one of carbon
emissions, but instead how much plateau to
invest in

INVESTING IN A PARACHUTE
An economy in forced decline due to resource
shortfalls is non-negotiable
 We can choose to invest in a brief plateau to retool for a managed decline
 The plane is on fire. We can ride it out until we
crash. Or instead, we can invest in a parachute to
jump to a mountaintop from which we can hike
down. The choice is ours, but we need to decide
immediately.

FURTHER INFORMATION

For information on any of the material in this
presentation, please contact me at
daniel.reader@wku.edu