A Free-Market Energy Blog

China Cap-and-Trade: James Hansen on Carbon Cronyism

By Robert Bradley Jr. -- September 29, 2015

“Cap-and-trade for CO2 emissions will be just another political plaything for crony socialism…. Cap-and-trade is high on transaction costs and wheeling-dealing and low on emission reduction. In Europe, post-Kyoto Protocol (1997 –) coal usage has increased seven percent, while gas usage has declined.”

China to Announce Cap-and-Trade Program to Limit Emissions,” reported the New York Times last week. President Xi Jinping  joined Obama’s global energy constructivism by committing (?) the world’s most populous country–and largest emitter of carbon dioxide (CO2)–to a to-be-determined cap-and-trade program beginning in 2017.

The Obama Administration is leveraging China’s commitment with his own Clean Power Plan to try to get other countries to sign on to a global accord in Paris this December. But these are paper promises by sovereigns who surely know that there is no guarantee that the next Administration–or Congress–will have any appetite for continuing the futile crusade to ‘save’ the climate. What is happening now is “good PR for China, but a bad deal for the US.”

Cap-and-trade for CO2 emissions is high on transaction costs and wheeling-dealing and low on emission reduction. In Europe, post-Kyoto Protocol (1997 –) coal usage has increased seven percent, while gas usage has declined. An article in Politico explained:

Eni and the other big gas producers argue that coal has benefited from the EU’s dysfunctional Emissions Trading System, which Brussels is now trying to reform. The EU is one of the few regions to have an emissions market, but prices are too low to push power generators to switch to cleaner energy sources. And coal is cheap.

Make no mistake. Cap-and-trade would be just another political play thing for crony socialism. A more sober assessment from the New York Times stated (relying on experts):

It will take years of effort to build a substantial market that plays a major role in curbing emissions, and even then, it could founder, like similar initiatives elsewhere …. The challenges in China are compounded by unreliable statistics, corruption, and local officials who have made blazing economic growth a point of honor. Overcoming these problems will demand far reaching changes to the energy sector, so that trading emissions translates into reduced consumption of coal and other polluting fuels….

Years? By the alarmists own math, including that of climate scientist James Hansen, this will be too late. All economic pain for no climate gain. And lots of waste and cronyism. Enter Hansen, whose strictures against government cap-and-trade programs–federal, state, and foreign–are germane to the new initiative of China.

James Hansen on Australia’s Cap-and-Trade (2014)

“The two main points that I made in discussions in Australia re their cap-and-trade were (1) it would be ineffectual in reducing emissions, and (2) it would be recognized as a tax, and thus it would not survive and grow at the rate needed to phase out emissions.

“Did you know that cap-and-trade is by and for big banks? In the U.S. there is a revolving door between Wall Street and Washington. The skilled trading units at JP Morgan Chase and Goldman-Sachs can make enormous amounts from cap-and-trade, every dime coming out of the public’s pockets.

“The fluctuating prices are bad for our purpose. If the public, businesses, and entrepreneurs know that carbon prices will continue to rise, as in fee-and-dividend, they will begin to make the choices that move us rapidly to a clean energy future.

“The half-baked 3000+ pages of the Waxman/Markey cap-and-trade scheme in the U.S. (and scheme is the right word) were not written by our Senators or Representatives slaving into the night. They were written by lobbyists for special interests and stapled into the bill by our elected representatives, who are beholden to the special interests.

“Our representatives, in both parties, seem to feel entitled to the Washington life style, once elected. Did you know that Dick Gephardt, after retiring as House Democratic Leader, received $120,000 per quarter from a single source (Peabody Coal)? I doubt that Peabody wastes its money — they probably get their money’s worth in lobbying. I don’t mean to pick on the Democrats; one party is not noticeably better than the other in this regard.

“We seem to have a situation where members of both parties like their status and don’t really want to stanch the money flow. And the electoral system has been pretty well rigged such that it is very hard for a third party to rise.”

– James Hansen, Facing Facebook: Australia’s Cap-and-Tax, July 29, 2014.

James Hansen on California Cap-and-Trade (2012)

“You don’t want [California’s] system with caps, where you have trading, you have derivatives, you have markets that then collapse and don’t actually reduce emissions much. That’s been tried in Europe, and it didn’t do much.”

– James Hansen, quoted in David Baker, “James Hansen Blasts Cap-and-Trade,” San Francisco Chronicle, December 5, 2012.

James Hansen on Federal (Waxman-Markey) Cap-and-Trade (2009/2010)

“Cap-and-trade’s complexity provides a breeding ground for special interests…. Why do those special interests deserve it anyhow?”

– James Hansen, “The People vs. Cap-and-Tax,” New York City, January 12, 2010.

“The truth is, the climate course set by Waxman-Markey is a disaster course. It is an exceedingly inefficient way to get a small reduction of emissions. It is less than worthless….”

– James Hansen, “Strategies to Address Global Warming,” July 13, 2009.

“Governments are retreating to feckless ‘cap-and-trade,’ a minor tweak to business-as-usual….

“Why is this cap-and-trade temple of doom worshipped?  The 648-page cap-and-trade monstrosity that is being foisted on the U.S. Congress provides the answer.  Not a single Congressperson has read it.  They don’t need to – they just need to add more paragraphs to support their own special interests.  By the way, the Congress people do not write most of those paragraphs—they are ‘suggested’ by people in alligator shoes.”

– James Hansen, “Worshipping the Temple of Doom,” 2009.

“The Waxman-Markey and Boxer-Kerry cap-and-trade bills in Congress are larded with 2,000 pages of give-aways to special interests, soaking the public who must pay higher energy prices.

“What is the chance that a United States cap-and-trade law could be a precursor for a global agreement? Zero. There is no chance that China will accept a cap. Nor should they. They are still in the early phase of their economic development.

“[Paul] Krugman says that my suggestion that carbon trading will be an open invitation to Wall Street to again pillage the financial system ‘is bizarre.’ What is bizarre, in my opinion, is his implicit presumption that government regulators can outwit Wall Street executives.

“Congress can write a cap-and-trade bill that tries to exclude Wall Street. But to think that Wall Street will not get involved in carbon profits, directly or indirectly, is naïve. This is a free country. Wall Street banks can buy the companies most affected by carbon price.

“Congress is accustomed to working with special interests. There is a revolving door between Congress and lobbyists. Ex-members know the Washington ropes. The lobbyists wrote most of the pages in the 2,000-page bills in Congress.”

– James Hansen, “The People vs. Cap-and-Tax,” paper delivered to the Chairperson of the Carbon Trading Summit, New York City, January 12, 2010.

“Cap-and-trade is a hidden regressive tax, benefiting the select few who have managed to get themselves written into the … bill…. Think revolving door between the government and Wall Street.  Think revolving door between Congress and lobbyists.”

– James Hansen, “I Just Had a Baby, at Age 68,” (2009).

James Hansen on Copenhagen (2009)

“The fraudulence of the Copenhagen approach – ‘goals’ for emission reductions, ‘offsets’ that render even iron-clad goals almost meaningless, an ineffectual ‘cap-and-trade’ mechanism – must be exposed. We must rebel against such politics-as-usual.”

– James Hansen, “Never-Give-Up Fighting Spirit,” November 30, 2009.

“Cap and trade with offsets …is astoundingly ineffective. Global emissions rose rapidly in response to Kyoto, as expected, because fossil fuels remained the cheapest energy.”

“Cap and trade is an inefficient compromise, paying off numerous special interests. It must be replaced with an honest approach, raising the price of carbon emissions and leaving the dirtiest fossil fuels in the ground.”

–James Hansen, quoted in “Copenhagen summit: Is there any real chance of averting the climate crisis?,” The Guardian, November 28, 2009.

“Cap-and-trade is a hidden regressive tax, benefiting the select few who have managed to get themselves written into the …bill…. Think revolving door between the government and Wall Street.  Think revolving door between Congress and lobbyists.”

– James Hansen, “I Just Had a Baby, at Age 68,” (2009).

“Other characteristics of the ‘cap’ approach: (1) unpredictable price volatility, (2) it makes millionaires on Wall Street and other trading floors at public expense, (3) it is an invitation to blackmail by utilities that threaten ‘blackout coming’ to gain increased emission permits, (4) it has overhead costs and complexities, inviting lobbyists and delaying implementation.

“The biggest problem with [cap and trade] is that it will not solve the problem. It may slow emissions, but because of the long lifetime of atmospheric CO2, slowing the emissions does little good. As long as fossil fuels are the cheapest form of energy they will be used eventually. There is no hope that cap and trade can get us back to 350 ppm CO2.”

– James Hansen, “Strategies to Address Global Warming,” 2009.

[1] So what does Hansen want? A carbon tax, a fee-and-dividend, with every penny being rebated to citizens. Such is “clean” tax is a figment of the imagination; proponents admit to the need for border adjustments (tariffs) to penalize those countries lagging in implementing the ‘right’ amount of tax; rebates to lower-income citizens to counter the regressive nature of the tax; and other special provisions for alleged effectiveness and fairness.


  1. Ed Reid  

    All of the above assumes that there is a need to reduce carbon dioxide emissions, which has been the subject of far more remonstration than demonstration.

    Money is a fungible commodity. Any program which removes a unit of money from one component of a person’s budget and returns it to another portion of that person’s budget (PURE fee and dividend or PURE refundable carbon tax) would fail to achieve its goals because the person would merely shift the money within his/her budget. I would also contend that any such PURE program, with government in the middle, is a figment of someone’s imagination. (Read Waxman-Markey, Kerry-Lieberman or Kerry-Boxer if you have any doubts.)

    Were it to be demonstrated that a reduction in CO2 emissions was essential, a PURE cap & trade program would be the most effective and least costly approach, assuming it could pass the Congress. A PURE cap & trade program would simply: establish a cap; set an annual reduction in the cap; permit trading within the cap; and, establish penalties for exceeding the cap. The easiest and least costly reductions would occur first, freeing credits for purchase by emitters for whom the reductions are more costly, require long lead times, or require technology development and demonstration prior to implementation.

    Demonstrating that a reduction in CO2 emissions was essential would require two critical elements: a record of global temperature increases collected from measuring sites such as those in the US CRN and recorded and analyzed without “adjustment”; and, a verified climate model capable of predicting the increases measured by those measuring sites. A substantially improved understanding of climate sensitivities and feedbacks would appear to be essential to this model.


  2. Rick Knight  

    Bradley’s flippant dismissal of the fee-and-dividend as a “figment of the imagination” reveals a careless scrutiny of the actual proposal.
    But first, comment on cap and trade. There are three very big problems with it.
    First, it requires setting a cap on individual emitters, requiring a decision on which emitters should get caps, what those caps should be, and how quickly they should shrink. How small must an emitter be to be excluded? Imagine the lobbying over exclusion and the size of the caps. Imagine the lawsuits. Imagine the trickery to, say, split your factory into two separate legal entities to get both of them out from under the cap. And so on and on for years and years.
    Second, the price of the permit or credit is volatile. No one can plan on a stable price scenario. This is not a theoretical objection; it’s clear from the history in Europe. It’s exactly as Hansen says.
    Third, the (voting) public cannot see any benefit; their energy prices go up, and if there are offsetting benefits they are completely hidden from view. Thus continued political support is extremely doubtful.
    Now for the fee-and-dividend. Bradley doesn’t offer any reason behind his dismissal of the policy, other than to note that proponents “admit” that a border tax adjustment must be part of it. Use of the word “admit” is a predictable semantic trick to imply some fatal weakness, but in reality the ability to impose a BTA is one of the strengths of the fee-and-dividend! It prevents “leakage” across national borders, prevents businesses from fleeing to other jurisdictions, and furthermore has been studied in detail to ensure WTO compliance. None of those are true of cap-and-trade. Next, Bradley is wrong that the policy contemplates rebates to “lower-income citizens.” The rebate, or dividend, would be given equally to ALL citizens, which inherently benefits those of lesser wealth because of the plain fact that wealthier citizens use 9 times more energy per capita. It does this without any kind of means testing, and therefore is quite simple. Finally, Bradley doesn’t enumerate what the “special provisions” for “alleged” (another loaded term!) effectiveness and fairness are, but there really are none, other than the design of the policy itself.
    Hansen’s critiques of cap-and-trade are exactly correct. The straightforward, transparent revenue-neutral fee-and-dividend will be vastly more effective in creating a predictable market signal for both businesses and consumers, will be vastly simpler (there is no need for assigning caps and no trading mechanism), will affect ALL emissions, not just those identified as “qualified” emitters, and will be politically untouchable once enacted because the money will be visibly returned to the taxpayers. It is inherently fair, simple, and resistant to corruption and manipulation.
    The only bad thing I can see about it is that it fails to open up opportunities for special interests to sneak in sweetheart provisions that would weaken its effectiveness to benefit them financially. Explain to me again why this is a bad thing?


    • rbradley  

      Mr. Knight:

      Thank you for the comment.

      You state: “Bradley’s flippant dismissal of the fee-and-dividend as a ‘figment of the imagination’ reveals a careless scrutiny of the actual proposal.”

      The “figment of the imagination” means that Hansen has a blackboard, ivory tower proposal that must encounter political reality when it hits the real world. So, one can be for his proposal theoretically but reject it empirically on ‘market-failure’ grounds because there is government failure in the real world. To use an analogy, it is like using pure-and-perfect competition to argue that the real world is not competitive and needs government intervention.

      In the real world, as Hansen admits, you need border adjustments, introducing an absolute mess. Same with any income adjustment rebates. This is where the scheme breaks down because we do not have perfect knowledge and an environmental Pope.

      Of course, the more basis point is whether there is a huge negative externality to correct in the first place. The good news is that at lower sensitivities, as seems to be the case, the sign of the externality is unknown and even positive for decades to come. CO2 is greening planet earth. Unless it is assumed that nature is somehow optimal, the human influence can be good or bad or very mixed. It does not have to be bad in a moderately warmer, wetter world with CO2 fertilization.


    • Rick Knight  

      Two more “special provisions” that I neglected to mention for the fee-and-dividend:
      1. The fee must be applied as far upstream as possible, meaning at the coal mine, well-head, or port of entry. That way there is no need to monitor emissions – they are embedded in the amount of fossil carbon in the fuel. And this greatly reduces the number of entities that need to pay the fee.
      2. The fee needs to rise by a fixed, legislatively mandated amount every year until cumulative emissions drop by a target amount. The current proposal is to start at $15 per metric ton (mt) of CO2-equivalent carbon and rise by $10 per mt each succeeding year until emissions drop by 80 percent. This is a crucial part of the predictable market signal that will allow entrepreneurs to have confidence their investments will pay off.


      • rbradley  

        All great in theory … in your mind … according to some model….

        Perfect knowledge and an environmental Pope required. What about the real world where nearly 200 sovereign governments are involved? What about government failure–should we assume that away?

        And how do you know that CO2 is bad and does not have benefits, even ‘fat tail’ ones?


  3. Exxon and the Carbon Tax: 'Upon Further Review' - Master Resource  

    […] Ask James Hansen about cap-and-trade, or what should be called cap-and-cronyism. Exxon Mobil’s Cohen had the support of the scientific father and leading activist behind the climate scare; Bennett Freeman did not. […]


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