Friday, April 7, 2017

The Politics of Trading

[Todayʻs post follows from the last posted conversation with my brother, an expert on financial matters and our discussion in 2006 regarding a legislative proposal that would become Californiaʻs export model for addressing climate change: cap-and-trade]

"Casey, I've got a question." It was another of what were becoming more frequent calls to sound-out a private sector perspective on my political crisis du jour.  ”Go ahead” Casey answered, “What's the latest from the temple of doom?"  

I explained the outlines of the global warming bill, ending with a question about market mechanisms: "What do you make of the use of such an approach, especially emissions trading, since this seems to be where the bill is headed?"

"Bruce, Bruce, Bruce.....what's the matter?  Why haven't you given yourself over to the market?  It is a wonderful faith-based system and it makes it easier for you to sleep at night." Casey then walked through how various of his financial wizardry conducted on behalf of major corporations typically relied on a contract to specify the obligations and responsibilities for both parties.  

"So let me get this straight; you're saying this is a perfectly acceptable way to construct a program for reducing greenhouse gases, yet...?" Before I completed the question Casey interrupted, "No, I said that in corporate-land I have helped to define the financial terms for contracts. But in many instances the contract has followed a prime directive: if things turn sour, make certain that the other party is screwed to the wall. One of the wonderful parts of financial engineering is that virtually no one understands how any of this works. So my question to you is a simple one: who in the Legislature understands trading?  Or better yet, ask the legislators and their supporters if they can explain it to you in more than a couple of sound bites." Casey, not quite done, was saving the best for last.

"...Oh, and there is the second part of working with contracts. For all of the contracts that I have been party to, we would typically write up something about 1,000 pages long, just to make certain that we have a very thorough understanding of where this agreement will take us and, most especially, a very clear statement about when the contract has not been fulfilled, how it will be enforced and, most especially, what we get when the contract doesn't have the outcome that we have agreed on.”  

“...So, you’ve got to ask some additional questions” continued Casey. ”First, what does trading mean in this bill?  Second, what happens when greenhouse gases aren't reduced over some period of time?  And third, how extensive is the contract language?” "Well,” I responded, “the bill does not have any specific contract language as such. It is simply a vague statement regarding the use of market mechanisms to achieve a reduction in greenhouse gases."

"Well, whoopee! is all I can say," Casey laughed. "I know which side of that deal I want to be on....and it certainly isn't backing the people of California! ...By the way, let me know when this bill is going to the Governor so I can start shorting the state. Remember when Enronʻs traders giggled as California's bureaucrats came to the floor to make energy contract purchases?  This will be even better!"

I ended the phone conversation wondering if some of the materials I had used years earlier with groups of students at UC Berkeley might have prompted a better basis for considering the value of emissions trading among legislators and staff. A particularly thoughtful author, Tom Athanasiou, prominent in my syllabus, argued that solving global warming involved more than simply a re-jiggering of technologies to capture fugitive gases. Instead, the task required more fundamental changes.

“If greenhouse theory is correct, and the preponderance of evidence indicates that it is correct, humanity must drastically reduce its use not only of methane and CFCs (greenhouse gases), but of coal and oil as well, even though such a reduction means that the entire planetary economy must be re-structured -- to a degree that implies a fundamental break with the energy economy that has underlain capitalism from its earliest days. This is not a matter of a few technical fixes, of isolated reforms to an economy that can remain essentially unaltered.”

Sitting at my desk inside the capitol, I wondered if the architects of cap-and-trade really thought that cap-and-trade was an answer to the fossil-fueled threats of the 21st century. Or was this merely subterfuge; a political device for obscuring the urgent necessity to restructure one of the worldʻs major economies?

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