Interesting article on carbon trading
The Pros and Cons of Carbon Trading – A Primer
By Gary W Patterson
Governments are attempting to find a solution to public growing concern about global warning. And politicians are getting on the bandwagon to be seen as champions of the green crusade. As carbon emissions are seen as the greatest offenders of pollution and global warming, governments (read: politicians) are focusing attention on the carbon trading debate.
The fundamental idea behind carbon trading is that businesses will pollute less if they have to pay for polluting. Since regulations are seen as a less threatening, if not a more subtle, method than the direct method of levying taxes, politicians see this as an easier hand to play with businesses in an effort to require business transition to a greener world.
Conceptually, carbon trading works like this. A government allows businesses to purchase a finite amount of carbon credits in the form of an allotment. Businesses can then use this allotment for carbon emissions without incurring a penalty. However, if a business runs out of credits and it still needs to release carbon emissions, the business is responsible for finding another business that is willing to sell them a carbon credit. The polluting business buys the credits from the non-polluting business, while it transitions to less polluting resources.
In the event that a business is unable to purchase additional credits from another business, the company will not be able to release any more pollutants, plain and simple. Rather than face being blamed for shutting down businesses and throwing people out of jobs, when businesses make the transition to a greener world, some governments plan to initially set a level at which they will sell the needed credits
The next question, of course, is: How are carbon emissions allotted? Initially, the government determines how much industry will be allowed to pollute and puts a carbon cap on its emissions. Then over time, the government lowers the cap. The premise is that eventually the government will reduce the cap to a minimum that will allow business to continue its operations (without hurting or destroying the country’s existing businesses and job base) while helping it transition to a newer, greener world. Again the details of how the allocation by individual company will be done are short on details and steps and long on trust us, your friendly politicians and bureaucrats to do the right thing.
Some proponents find carbon trading to be a better method than other initiatives (e.g. a carbon tax) in that carbon trading does not require as much government involvement as some of the other proposed ideas do. While initially businesses would not notice much change in their ability to release carbon emissions, they will begin to make changes as the cap lowers. At the same time, this incremental approach will give businesses the time needed to evaluate their current practices in relation to adopting green methods. Advocates believe that businesses will take measures to cut down on pollution to save the company money on future carbon trading, but it takes time.
Some environmentalists and government officials also like the idea of free market environmentalism. They feel it gives businesses more choices than carbon taxes and other regulations. Furthermore, they suggest that this method is cheaper for businesses than a carbon tax.
Opponents say if you like the Internal Revenue Service, you will love carbon trading. Since there are no rules and standards to date, naysayers argue that carbon trading will be drafted by faceless bureaucrats who will bear no responsibility for the costs or problems they create for businesses that have to follow arbitrary carbon trading dictates.
In all fairness, it needs to be pointed out that advocates reluctantly admit that there is no effective framework for administering carbon trading. Current efforts have major flaws. In addition, preliminary carbon trading, not to mention carbon tax, proposals seem chockablock full of favors for political lobbyist friends.
Meanwhile, certain businesses say they need to release pollutants to effectively run existing businesses and that they can not immediately replace their plants and retrain workforces. They also question why their products will cost substantially more than imports distributed from countries with few standards and restrictions, and hence cheaper prices. In fact, many businesses argue that they are being penalized when it comes to competing with countries that are less concerned about complying with global and governmental carbon reduction rules and regulations.
Recent history shows regulators are reluctant to allow businesses to pass on these regulatory required additional costs to consumers. Adding insult to injury, the Internal Revenue Service has taken a position that basically accelerates when revenues are taxable and delays when expenses are allowed as tax deductions, on these additional costs.
What we have is a logjam where one set of politicians and bureaucrats will force business to make expensive changes, while the other set conveniently makes it very difficult to recovery those costs. Politicians like carbon trading tax because combining indirect taxes with a lack of accountability shields them from responsibility more than a more visible carbon tax.
Be aware that congressional leadership favors a greener world through carbon trading and tougher regulations, many of which are untested and laden with political pork. What this carbon trading debate is pointing to is the urgency for businesses to begin planning NOW for the inevitability of a greener world and the intended and unintended consequences of going green. One thing is for sure: there will be winners and losers.
Bottom line? – Apply this information to improve your profitability, reengineer business models, and strengthen or gain competitive advantage in the marketplace. And apply the free Fiscal Test at http://fiscaldoctor.com/fiscaltest.html
From Gary W Patterson, http://www.FiscalDoctor.com Copyright 2008
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