Comparative Advantage: "The US doesn’t make bicycles anymore..."

From The Verge, June 6:

It took 30 years for the US to lose almost its entire bike manufacturing industry. Can the most bike friendly member of Congress fix that? 

Good luck finding a bicycle — an especially an e-bike — made in the US.

It only took 30 years for the US to lose its entire bike manufacturing industry. China dominates global bike manufacturing, with imports accounting for 97 percent of bikes purchased in the US, according to one report. Indeed, China has captured some 86.3 percent of the US bike market. And now tariffs threaten that market.

Congressman Earl Blumenauer sees an opportunity. The 75-year-old Democrat from bike-friendly Portland, Oregon, is introducing a new bill that aims to re-shore domestic bike manufacturing by stealing it back from China while also helping protect electric bikes from high tariffs that could put them out of reach for many Americans. 

His bill includes three different proposals:

• A 10-year suspension of tariffs on imports of bike components, like frames, wheel rims, hubs, brakes, saddles, and electric motors, to incentivize domestic bike assembly;
• A transferrable e-bike production tax credit for bikes manufactured in the US to encourage companies to utilize domestic manufacturing; 
• Low-interest loans, repayable after 12 years, for bike manufacturers to buy production equipment and other capital expenses.

Blumenauer also wants to close the loophole that allows for the import of cheap Chinese e-bikes with safety checks, some of which have been linked to deadly fires caused by faulty batteries. And he is continuing to lobby for his bill to give Americans a $1,500 discount on the purchase of a new electric bike.

And he’s trying to get it all done before he retires at the end of the year, after half-a-century spent in Congress. Its been tough trying to get his deeply polarized colleagues to band together to support, of all things, bikes and cycling. His e-bike rebate program remains stalled. All everyone wants to talk about is electric cars. But Blumenauer, who chairs the Congressional Bike Caucus, sees these efforts as part of the legacy he wants to leave behind....

....MUCH MORE

The Harvard Business Review Looks At Carbon Credits

Less superficial than almost anything we've seen addressed to a general audience.

After many, many years of looking at this stuff, our preferred approach to pricing carbon dioxide in the U.S. is a tax on emitting sources, (to raise the price of carbon intensive activities) combined with a 100% rebate of the funds raised on a per capita basis. This would have the big-picture effect of transferring some income from the private-jet-set to people who don't use as many carbon intensive resources and the smaller-picture effect of pushing economy-wide substitutions for various industries. One example is the steel industry where at some price-point on carbon so-called "green steel" produced using hydrogen becomes viable.

As Senator Obama said:

“Under my plan … electricity rates would necessarily skyrocket.”
—Presidential candidate, Senator Barack Obama,

Q&A with the editorial board of the San Francisco Chronicle, January 21, 2008

The issue that must be kept in mind is that the entire exercise of the energy transition is to raise the cost of things deemed "bad" to change behavior toward things which are deemed as "good."

And cushion the blow of higher prices on those least able to afford them.

The per capita rebate helps to ameliorate some of the cost impacts on people who use fewer carbon-emitting resources.

Perhaps just as importantly the rebate would keep the money out of the hands of politicians who have never met a potential revenue stream—except perhaps taxing Harvard's endowment income—that they didn't love and couldn't co-opt to fund pet projects and pay off their cronies and voters.

The other approaches, mandating winners and losers by executive fiat and trading virtual carbon are much less efficient and lend themselves to much more corruption and fraud.

Here, the HBR looks at the latter approach, December 15:

What Every Leader Needs to Know About Carbon Credits

Summary.
Many companies have begun to look into credits to offset their emissions as a way to support their net zero goals as their target years get closer and closer. As it stands, the carbon credit market is too small to bear the brunt of reducing companies’ impacts on the environment. However, the voluntary carbon market has the potential to drive billions of dollars over the coming decade into climate solutions. Here, the authors offer a primer for leaders to learn about the carbon credit market. What’s the best way to participate in the market? Which types of credits are considered to be the highest quality, and thus carry the least reputational risk? Who are the players when it comes to standards and regulation? The authors answer these questions and outline the characteristics of high-quality carbon credits

In the absence of government regulations requiring dramatic reductions of greenhouse gas (GHG) emissions that are causing climate change, a growing number of companies are adopting “net zero” targets. More than one third of the world’s 2,000 largest publicly held companies have declared net zero targets according to Net Zero Tracker, a database compiled by a collaboration of academics and nonprofits. These targets typically entail public commitments to reduce GHG emissions through measures such as process modification, product reformulation, fuel switching, shifting to renewable power, investing in carbon removal projects — and a pledge to zero-out their remaining emissions by purchasing carbon offsets, also known as carbon credits. Carbon credits are financial instruments where the buyer pays another company to take some action to reduce its greenhouse gas emissions, and the buyer gets credit for the reduction.

As companies creep closer to their net zero target years, many have already begun purchasing carbon credits. The market for carbon credits is projected to grow 50-fold within a decade, from nearly $2 billion in 2022 to nearly $100 billion by 2030, and as much as $250 billion by 2050, according to Morgan Stanley. But navigating the world of carbon credits creates brand risk because the market remains immature and complex, with wide variation in project types, developers, location, and cost, resulting in unclear quality, transparency, and credibility.

Companies routinely choose to purchase rather than produce goods and services that other companies can create more inexpensively, and this decision doesn’t often attract the attention of activists or the media. Not so for carbon mitigation: Activists are vocal about how companies choose to meet their net-zero goals. Corporate carbon mitigation plans viewed as overly reliant on buying carbon credits rather than making carbon reductions to their own operations and supply chains risk being accused of not being sufficiently serious about decarbonization and seeking to “buy their way out” of meaningfully achieving their goals. In part, this is because the carbon credit market is far too small to accommodate the dramatic carbon reductions necessary to meet companies’ net-zero goals or for the world to reduce GHG emissions by 45% by 2030 and reach net zero by 2050 that the UN claims is necessary to avoid the worst effects of climate change by limiting the global average increase to 1.5 degrees Celsius. Questions about credits’ credibility abound, including whether they deliver on their promise to reduce GHGs, whether any such reductions will endure, and whether the project would have occurred even without the sale of carbon credits. From John Oliver’s claim that “offsets are bullshit” to the Guardian calling some carbon credits purchased by Disney, Gucci, and Shell “largely worthless,” some offsets receive charges of “greenwashing” — environmental performance claims that outstrip reality. That’s hardly the reputation boost firms seek.

Yet, the voluntary carbon market has the potential to drive billions of dollars over the coming decade into climate solutions, creating along the way an estimate of cost-of-carbon in goods and services. What’s the best way to participate in the market when carbon credits claiming to avoid or remove one metric ton of GHG range in price from nearly $2 per ton to $1,800 per ton? Which types of credits are considered to be the highest quality, and thus least likely to lead your company to be named and shamed? Despite the emergence of standards and registries meant to inject confidence in the market, many quality concerns remain. Leaders need guidance to apply due diligence to decisions regarding the carbon credit market.

What projects create carbon credits?
Carbon credits are created from projects that avoid the generation of GHG emissions or that remove GHGs from the atmosphere. These projects include “nature-based solutions,” such as reforestation and regenerative agriculture efforts, and “engineered solutions,” such as combusting methane emitted from landfills to generate electricity and direct air capture.

Examples of Carbon Credit Projects
This table illustrates the differences between nature-based and engineered solutions for both carbon emissions avoidance and carbon removal.

	Carbon emissions avoidance	Carbon removal
Nature-Based Solutions	Preservation of forest land to avoid its conversion into farmland	Regenerative agriculture practices that sequester (embed) atmospheric carbon into soils and vegetation
Engineered Solutions	Carbon capture and storage of GHGs from smokestacks at coal- and natural-gas-fueled power plants and other types of factories New solar-and wind-power plants that substitute for fossil fuel electricity Combustion of stockpiles of ozone-depleting substances that would otherwise leak into the atmosphere Combustion of methane emissions from landfills	Direct air capture of GHGs from the atmosphere with deep-well storage

Source: Varsha Ramesh Walsh and Michael W. Toffel

Some companies focus only on some of these types. Microsoft, for example, invests only in carbon removals. Others create a portfolio across the spectrum, such as Delta’s $137 million investment in carbon credits that include REDD+ (reducing emissions from deforestation and forest degradation) avoidance credits, avoidance credits from solar and wind-power projects, and removal credits including afforestation and carbon capture and storage.

Who are the players?
Unlike with stock exchanges, carbon credits lack widely adopted standards and large centralized marketplaces. This makes it difficult to find, understand, and compare carbon credit projects.

Instead, leaders have to navigate a maze of various standards and players with frustratingly overlapping roles. There are numerous carbon credit registries and standards bodies that provide minimum requirements for various project attributes and in some cases list projects that meet their own standards.

• Carbon credit verifiers, also known as validation/verification bodies (VVBs), assess whether projects meet certain standards. They range from global companies to niche players that focus on just one type of project.
• Carbon credit brokers and marketplaces connect buyers with project developers. Some list projects they helped finance and develop, raising the potential for conflicts of interest.
• Carbon credit ratings agencies assess carbon credit projects along various dimensions, including but not limited to the attributes featured in standards. They tend to sell their ratings via a subscription model to prospective credit buyers. These ratings agencies provide much-needed transparency and convey key attributes of the projects they rate.

With so many players and many standards, it’s no wonder companies find it difficult to navigate the landscape. The Voluntary Carbon Markets Integrity Initiative or Oxford Net-Zero Aligned Offsetting Principles provide holistic carbon credit and offsetting principles and are a great place for leaders to start, but even these are updated periodically to keep pace with the changing landscape.

Examples of players in the carbon credit marketplace....

....MUCH MORE

Slavery: "Barbados PM says country owed $4.9tn as she makes fresh call for reparations"

Following on December 2's "COP28: It Looks Like The Plan Is To Have Britain Pay For All Of Humanity's Emissions".

From The Guardian, Dec. 6:

Mia Mottley tells London audience that King Charles’s comments about slavery’s impact were welcome

King Charles’s comment that the “time has come” to acknowledge the enduring impact of slavery has been welcomed by the prime minister of Barbados as she spoke in London about the need for reparations.

Mia Mottley said Barbados was owed $4.9tn (£3.9tn) by slave-owning nations, noting that conversations over how this debt should be repaid would “be difficult and will take time”, she said on Wednesday evening.

“We’re not expecting that the reparatory damages will be paid in a year, or two, or five because the extraction of wealth and the damages took place over centuries. But we are demanding that we be seen and that we are heard,” she said....

....MUCH MORE

Working the sugar plantations on Barbados was as brutal as African slavery in the Americas could get. And some 90% of the people caught in the trans-Atlantic slave trade went to the Caribbean and South America.

In comparison the Christians enslaved by the Ottoman Muslims had it comparatively easy.

From a post just before Russia invaded Ukraine: "That Time Catherine The Great Annexed Crimea (plus the Crimean slave raids extending from Ukraine to Finland and Potemkin got a bad rap from history)":

I should probably do a separate post on the slave raids the Crimean Khanate conducted in eastern Europe (and the Barbary corsairs up to Iceland, 1624!) [also Baltimore Ireland, 1631] but the short version is that 15 years after the Muslim Turks invaded and conquered the Christians of Constantinople in 1453, the Khanate began slave raids they called ‘harvesting of the steppe', making huge bank by sending the slaves across the Black Sea to the newly renamed Istanbul:

The Turks especially like blonde women but were quite enthusiastic about buying brunettes and redheads as well. Somewhere in the neighborhood of three million people were enslaved and let's just say this history engendered a lot of bad blood. The last harvest of the steppe was in 1769 when about 20,000 people were enslaved, to be sold in Crimea and resold in Istanbul.

On the other hand, Britain was the first nation in world history to, not just outlaw slavery but actively eradicate it on the high seas:

"The Royal Navy’s Triumph over Slavery"
Slavery was practiced by people of all colors.
And had been for thousands and thousands of years.
It was a worldwide phenomena....

*****

... The most important active British anti-slavery naval force, however, in the first half of the nineteenth century, was that based in West Africa which freed slaves and took them to Freetown in Sierra Leone, a British colony founded for free black people. They could not be returned to their homes, as they would only be captured anew by fellow Africans and sold as slaves. Indeed, in 1862, Viscount Palmerston, the Prime Minister, observed:

Half the evil has been done by the time the slaves are captured in the American waters. The razzia [devastating raid] has been made in Africa, the village has been burnt, the old people and infants have been murdered, the young and the middle aged have been torn from their homes and sent to sea.

In 1834, another outgunned British ship, the HMS brigantine Buzzard, under Lieutenant Anthony William Milward, took on the well-armed and larger Spanish brig Formidable off West Africa after a chase of seven hours. In a “smart action” of forty-five minutes, the Buzzard had several injured and, as Milward reported, the “fore and maintop-mast stays were cut, running rigging and sails much damaged, flying jib-boom shot away, and bumpkin carried away in boarding”, but six of the slaver’s crew were killed. Seven hundred slaves were freed.....

....MUCH MORE

700 freed in one action.
When carbon markets were all the rage—we preferred tax-and-100% rebate, less opportunity for rent-seeking and graft but a tough sell to the powers-that-be who would profit from said rent-seeking and graft— when they were all the rage one of our pithy little analogies was:

"When Britain decided to end slavery,
Wilberforce didn't set up a cap-and-trade system"

—from our October 2007 post "Cap-and-Trade Market in Babies" 

It was a bit surprising how many intelligent, educated people would ask: "Who's Wilberforce?"

"...Who Was Behind History's Biggest Bank Heist?"

From The Economist's 1843 Magazine, July 27:

Criminals stole $2,5bn from Iraq's largest state bank in broad daylight. Nicholas Pelham follows their trail.

 On a scorching September day last year, Hussein Kanber Agha reached the front door of his house in central Baghdad. He had got in the habit of scanning the street for anything out of the ordinary before turning the key. In his free hand he clutched a tattered brown leather briefcase. There was a chance someone might kill him for its contents.

Kanber wasn’t used to acting as though he were in a spy film. A 49-year-old consultant with a passion for digital banking, he was born in Iraq but had spent much of his adulthood in Stockholm. He led a quiet, orderly life there: working, going to the gym and drinking coffee. Then, last summer, Iraq’s finance minister asked him to return to Baghdad and investigate rumours about a theft at Rafidain, the country’s largest state-owned bank.

One particular account at Rafidain presented a tempting target to those in the know. Oil companies (and other firms operating in Iraq) are obliged to pay tax in advance when they receive a contract. The tax authority keeps these deposits in Account 60032. Firms can claim a rebate if they end up making less profit than expected but the bureaucratic hurdles are extensive. Unclaimed rebates hang around for five years before reverting to the treasury. Over time hundreds of millions of dollars accumulated in Account 60032, where they sat, alluringly. Then in mid-2022 word trickled out that huge amounts of this money were being withdrawn.

In theory the finance minister could have asked one of the country’s half-dozen oversight bodies to investigate. But Iraq is home to powerful militias, each with its own political wing and business empire. They are known collectively as the factions, and they exert vast influence over every aspect of government. Bribery is rampant. Those who cannot be bought are threatened (“You will leave Iraq horizontal,” an official recalls being told when she refused to do one faction’s bidding). A political outsider was needed. 

The accountants told Kanber they didn’t want anything more to do with the investigation. They were afraid of the consequences

 Kanber – thin, slightly stooped, the kind of man who drove an old Kia – seemed the perfect choice. He came from one of Baghdad’s old merchant families, and had fled Iraq in 1992 at the age of 19 after Saddam Hussein’s thugs detained him at a checkpoint. He moved to Sweden, where he earned a master’s degree at the Stockholm School of Economics and worked for a Swedish bank. He was on track for a conventional life as a European businessman until America overthrew the Iraqi regime in 2003.

Like many in the diaspora, Kanber was excited at the prospect of living in a free Iraq. He quit his job and moved to Baghdad to set up a mobile-payment system. But over the next five years the city was ravaged by sectarian violence. At one point 40 bodies were turning up on the streets every day. Eventually Kanber gave up and returned to Sweden.

In 2021 he was back in Iraq working on a banking-reform project for USAID, America’s international development agency. While there he heard rumours that the tax authority’s account at Rafidain was being plundered. When the finance minister asked him to investigate in August 2022, Kanber, by then back in Stockholm, didn’t relish the prospect, but he felt a duty to see that the inquiry was done “properly”. Also, he was curious: “Wouldn’t you want to know, if there was a huge theft like this?”

Kanber suggested that the finance minister discreetly assemble a team of trusted lawyers and accountants, then flew to Baghdad to join them. When they met he told the group to go to Rafidain immediately with a letter from the minister requesting copies of Account 60032’s statements. He knew that convenient fires often break out in Iraqi record departments when investigations begin. 

 The next day the team gathered in a conference room at the ministry of finance to examine the stack of print-outs. One of the accountants quickly spotted the two most important pieces of information: the balance at the start of the year and the most recent one. Account 60032 had been almost completely emptied.

The team called everyone they knew at the bank. Within a few hours their sources provided the names of five companies to whom the money had supposedly been transferred. None of them was a big oil firm. In fact, no one had even heard of them before.

At that point the lawyers and accountants told Kanber they didn’t want anything more to do with the investigation. It looked like looting on a huge scale, which meant at least one of Iraq’s murderous factions was likely to be involved. If Kanber wanted to dig further, he would have to do so alone.

First he had to prove that a theft had actually taken place. The tax authority, the nominal victim of the crime, denied that anything untoward had happened. Its balance sheets showed that all its money was still there, because technically no rebates had been claimed. Kanber needed to find out how and why the money had worked its way into the five companies’ accounts.

Iraqi state institutions, Kanber later told me, are profoundly opaque places. Records are incomplete; many officials have their own agenda. Yet there are some people working within them who simply want to do their job well. Kanber thought he could spot them by the way they dressed – if they didn’t wear brash clothes, they might be worth approaching. He had neither rewards nor threats to wield. But he believed some people might simply want to do the right thing.

“Your life is going to be threatened anyway, so you might as well be corrupt and make money”

To avoid attracting attention, Kanber met these middle managers in coffee shops and restaurants rather than at their offices. About a week into his investigation, one of his contacts sent Kanber a message saying that they had received a delivery that might be of interest. At the finance ministry the brown briefcase was waiting for him.

Kanber opened the briefcase when he got home. Copies of 247 cheques made out from Account 60032 to the five companies spread across the table and onto the floor. He spent hours sorting them into chronological order, the first dated September 2021 and the last August 2022. The document haul wasn’t proof of a fraud (though the amounts were often suspiciously round numbers), but it did irrefutably show where the missing funds had gone. Around $2.5bn, an amount comparable to the country’s entire health-care budget, had been diverted. It later transpired that it had been carried off in trucks in broad daylight. And the withdrawals had been approved by some of the highest officials in the land....

....MUCH MORE, one helluva story. 

Money, Money, Money: "U.S. to Announce Plan for Private Companies to Fund International Renewable Energy Transition

From naked capitalism, November 9:

Yves here. True to form, the US is willing to engage only in virtue signaling and marginal at best private sector enriching climate/energy schemes. We need war level mobilization and we need it yesterday. But the US does not do dirigisme, and our current leaders can’t manage their way out of a paper bag.

By Olivia Rosane, edited by Chris McDermot. Originally published at EcoWatch

The U.S. is set to unveil a plan at COP27 for private companies to fund the renewable energy transition in exchange for carbon credits.

U.S. president Joe Biden’s climate envoy John Kerry has reportedly been speaking with private companies and national governments to build support for the idea. It is slated to be announced at the UN climate conference in Sharm el-Sheikh, Egypt, on Wednesday, people familiar with the matter told Reuters.

“One of the things we’re looking at is the possibility of the private sector, in effect, being enticed to the table,” Kerry said last month, as the Financial Times reported. He added that money would be siphoned “directly into closing down some coal plants and acquiring renewables, which is direct emissions reduction.”

The plan, first reported by the Financial Times on Sunday, would see either regional or national governments amass carbon credits by shutting down fossil fuel infrastructure like coal-fired plants and replacing it with renewable energy. Private companies could then purchase these credits to offset their greenhouse gas emissions. The scheme would be voluntarily and would be certified by an independent entity still to be determined.

The purpose of the plan is to provide an incentive for private companies to help fund the renewable energy transition in poorer countries, The Washington Post reported. Fossil fuel companies would not be allowed to participate, according to Reuters.

The plan has many potential weaknesses. For one thing, carbon offsets are already controversial because they give companies a license to continue polluting without any real guarantee that an equal amount of carbon will be drawn down from the atmosphere to compensate. In this case, a company purchasing carbon credits from a coal plant turned into a wind farm, for example, would only truly offset its emissions if the transformation would not have happened without its assistance.

People familiar with the plan told the Financial Times that it currently lacked the details that would make its offsets mechanism robust.

“[Carbon credits are not] the kind of thing you can have half-baked. The rules matter, the details matter,” the anonymous person said. “There’s no easier way to get people angry than to throw offsets into the mix.”....

....MUCH MORE

In 2009's "Climateer Investing on Carbon Trading and Traders" I put together another admittedly incoherent post on what carbon trading was all about:

Our preference is "Cap-and-Tax (auction) with 100% Rebate" not Cap-and Trade.

The post immediately below, "Richard Sandor, Barack Obama and the Founding of the Chicago Climate Exchange (CLE.L)" got me to thinking about the carbon markets.
Proponents repeat the mantra that cap-and-trade is a "market based 'solution'". This is, of course, nonsense.

Just as an economist using the tools of science (mathematics) doesn't make economics a science, carbon traders using the tools of markets doesn't make carbon trading market based.

The carbon markets are an entirely artificial construct, beholden to political paymasters for their very existence. Which may be why so many political types are planning to profit from them.
Directly, think Al Gore's Generation Investment Management's investment in carbon project developer Camco or Lord Nicholas Stern's Vice-Chairmanship of IDEACarbon's parent IDEAGlobal or indirectly as a source of campaign contributions for pols still in office, or an unaccountable slush fund in the case of the U.N.

The word artificial led me to think of it's cousin, artifice. Here's the Oxford Pocket definition:

ar·ti·fice n. clever or cunning devices or expedients, esp. as used to trick or deceive others: artifice and outright fakery.

The securities attorneys among our readers will recognize the word from the common state security law usage "...employ any device, scheme, or artifice to defraud".
Coincidence?

Here's the view from Russia, quoted in The Bored Whore of Kyoto:

"I don't know if climate change is caused by burning coal or sun flares or what," said the Moscow-based carbon cowboy. "And I don't really give a shit. Russia is the most energy inefficient country around, and carbon is the most volatile market ever. There's a lot of opportunity to make money."

Here's a former Goldman Sachs trader:

The whole reason for the existence of traders is to make as much money as possible, consistent with what's legal...I lived through this: if you didn't manipulate the market and manipulation was accessible to you, that's when you were yelled at.
-Former Goldman Sachs trader
New York Times, May 8, 2002

Here's Lord Stern at the Bali Climate Conference where the largest NGO contingent were the gang from the International Emissions Trading Association, 336 representatives including lawyers, financiers, emissions traders, consultants, certifiers and emissions trading experts... the IETA made up 7.5% of the 4483 Non-Governmental Organisation (NGO) delegates registered for the U.N. shindig:

“Bali will set in motion a process that will define the structure
of the carbon markets for decades to come”
“By 2020 the global carbon market could be worth EUR 240-
450 billion”
-Sir Nicholas Stern

"This (climate change) is much too important to leave to environment ministers"
-Sir Nicholas Stern
to Finance Ministers basking in Bali

I'm with David Sokol (Chair, Berkshire Hathaway's MidAmerican Energy Holdings subsidiary) regarding the trade part of cap-and-trade:
Berkshire Hathaway's MidAmerican Energy on Waxman-Markey: "We Don't Much Care For It" (BRK.A)

And here's a post from 2007:

"When Britain decided to end slavery,
Wilberforce didn't set up a cap-and-trade system"
That's me, misquoting myself.

Sometimes I find my fellow capitalists repulsive. When they lobby for political favors, then turn around and blandly refer to the result as an example of free markets I don't know whether to laugh, cry or attempt to destroy them. Laughing is probably the healthiest response, world domination the most challenging.

I've been looking for examples to skewer CO2 cap-and-trade.
One thought problem was how to end slavery.
Another was Nuclear weapons proliferation. Think about it.
Mr. Consultant comes up to you and says "The market based system of capping production and handing out allowances to produce nukes, which can then be traded, is the only rational approach".

Don't think too long though, lest you enter "Le Théâtre de l'Absurde". Trust me, the world of Jean Genet and Sam Beckett gets old fast, Pinter and Albee's, faster....

"The public should not pay for a carbon levy"

I couldn't agree more.*

From FT Alphaville:

Carbon taxes should be raised. But all of that revenue must be paid back if the levy is to gain support from businesses and households

John Llewellyn, an economist and founder of Llewellyn Consulting, explains why raising carbon taxes — and redistributing the proceeds — is the best means to lower carbon emissions. 

The world’s present approach to reducing greenhouse gases is not working. And it is not, despite the enthusiasm surrounding COP26, ever likely to work.

A mish-mash of treaties, pledges, targets, exhortations, prohibitions, subsidies, and regulations all claim to reduce greenhouse gas emissions. Yet the myriad decision-takers in modern complex economies, individually and collectively, are failing to take the actions necessary to meet the objectives set out under the Paris agreement.

So what incentive would be up to the task? What is required is unequivocal certainty that the price of carbon emissions is henceforth going to be sufficiently high that producers and investors have no doubt whatsoever about the future profitability of producing sustainable alternatives; and consumers have no doubt about the financial gain to be had from changing their patterns of expenditure. In short, what is needed is a tax on all greenhouse-gas emissions.

Yet this highlights the reason why it is so difficult for decision-takers to do what it will take to keep climate change in check. Transition, if it is to be successful, will substantially raise the cost of emitting carbon. That will in turn raise costs for businesses and households. A fact that is politically unpalatable.

But there is a way around it: simply give the money raised by such a levy back to the electorate, every last cent of it.

At first blush, this proposal is bemusing. Raising the price of carbon in and of itself makes people worse off. They hate that. Typically they vote down politicians who propose it. So what is the point of raising a tax and then giving it all back?....

....MUCH MORE 

The key is the per capita rebate. Bill Gates gets the same rebate as the little old lady who ventures out of her apartment once a week, despite Gates' Sasquatch-sized carbon footprint.

What you've done is raise the price of carbon relative to the rest of the economy but eased the burden on those who emit less. Without Orwellian personal carbon allotments.

*Some prior posts:

June 2009
Climateer Investing on Carbon Trading and Traders

Our preference is "Cap-and-Tax (auction) with 100% Rebate" not Cap-and Trade.

The post immediately below, "Richard Sandor, Barack Obama and the Founding of the Chicago Climate Exchange (CLE.L)" got me to thinking about the carbon markets.
Proponents repeat the mantra that cap-and-trade is a "market based 'solution'". This is, of course, nonsense.

Just as an economist using the tools of science (mathematics) doesn't make economics a science, carbon traders using the tools of markets doesn't make carbon trading market based.

The carbon markets are an entirely artificial construct, beholden to political paymasters for their very existence. Which may be why so many political types are planning to profit from them.
Directly, think Al Gore's Generation Investment Management's investment in carbon project developer Camco or Lord Nicholas Stern's Vice-Chairmanship of IDEACarbon's parent IDEAGlobal or indirectly as a source of campaign contributions for pols still in office, or an unaccountable slush fund in the case of the U.N.

The word artificial led me to think of it's cousin, artifice. Here's the Oxford Pocket definition:

ar·ti·ficen. clever or cunning devices or expedients, esp. as used to trick or deceive others: artifice and outright fakery.

The securities attorneys among our readers will recognize the word from the common state security law usage "...employ any device, scheme, or artifice to defraud".
Coincidence?
Here's the view from Russia, quoted in The Bored Whore of Kyoto:

"I don't know if climate change is caused by burning coal or sun flares or what," said the Moscow-based carbon cowboy. "And I don't really give a shit. Russia is the most energy inefficient country around, and carbon is the most volatile market ever. There's a lot of opportunity to make money."

Here's a former Goldman Sachs trader:

The whole reason for the existence of traders is to make as much money as possible, consistent with what's legal...I lived through this: if you didn't manipulate the market and manipulation was accessible to you, that's when you were yelled at.

-Former Goldman Sachs trader
New York Times, May 8, 2002

Here's Lord Stern at the Bali Climate Conference where the largest NGO contingent were the gang from the International Emissions Trading Association, 336 representatives including lawyers, financiers, emissions traders, consultants, certifiers and emissions trading experts... the IETA made up 7.5% of the 4483 Non-Governmental Organisation (NGO) delegates registered for the U.N. shindig:

“Bali will set in motion a process that will define the structure
of the carbon markets for decades to come”
“By 2020 the global carbon market could be worth EUR 240-
450 billion”
-Sir Nicholas Stern

"This (climate change) is much too important to leave to environment ministers"
-Sir Nicholas Stern
to Finance Ministers basking in Bali

November 2012
Do You Hear the Carbon Tax Drumbeat?

It was quite a few years ago that I realized a carbon-tax-with-100%-rebate was the best approach to get what you want less of (carbon) with the least vigorish going to my Wall Street confreres.

Now that Exxon is backing the idea I'm wondering if there was a flaw in the thinking. I trust the oil majors about as much as I trust a commodity trader or...

September 2020
"The Royal Navy’s Triumph over Slavery"

When carbon markets were all the rage—we preferred tax-and-100% rebate, less opportunity for rent-seeking and graft but a tough sell to the powers-that-be who would profit from said rent-seeking and graft— when they were all the rage one of our pithy little analogies was:

"When Britain decided to end slavery,
Wilberforce didn't set up a cap-and-trade system"

—from our October 2007 post "Cap-and-Trade Market in Babies" 

It was a bit surprising how many intelligent, educated people would ask: "Who's Wilberforce?"

And many, many more

Strange Bedfellows In The Carbon Removal Business

Classic "Bootleggers and Baptists" *

From AgFunderNews:

BREAKING: Precision ag player reborn as soil carbon market Boomitra; scores $4m from Yara, Chevron

US carbon credits startup Boomitra has raised $4 million funding in a round led by Norwegian fertilizer major Yara International.

Joining Yara Growth Ventures was US petroleum giant Chevron, which participated in the round through its VC arm Chevron Technology Ventures, along with several individual investors including Yahoo co-founder Jerry Yang, former US Presidential candidate Tom Steyer, and Radicle Impact co-founder and ag impact investor Kat Taylor.

Boomitra founder and CEO Aadith Moorthy told AFN that the funds will mainly be used for investment in tech and talent.

“There is a significant, growing backlog of projects waiting for analysis [and] in order to actually process and certify credits on the scale of millions of acres and many thousands of farmers, we need a much larger software platform and support team built out,” he said.

The San Jose, California-based startup is one of a growing number of players entering the nascent but rapidly developing low-carbon economy.

It’s aiming to remove atmospheric carbon “on a global scale” by tapping into agricultural-use soils and offering farmers an easy, cost-effective route to measuring soil carbon and participating in carbon credits markets....

....MUCH MORE

 *Bootleggers and Baptists:

"Here is the essence of the theory: durable social regulation evolves when it is demanded by both of two distinctly different groups. “Baptists” point to the moral high ground and give vital and vocal endorsement of laudable public benefits promised by a desired regulation. Baptists flourish when their moral message forms a visible foundation for political action. “Bootleggers” are much less visible but no less vital. Bootleggers, who expect to profit from the very regulatory restrictions desired by Baptists, grease the political machinery with some of their expected proceeds.
They are simply in it for the money."

—From Bootleggers and Baptists in Retrospect by Bruce Yandle (the guy who coined the term).

And another really handy phrase when looking at this stuff. Probably half of all climate policy proposals::

Rent Seeking

"Rent seeking occurs when an individual, organization, or firm seeks to make money by manipulating the economic environment rather than by making a profit through trade and production of wealth."

—From Wikipedia

"Until 1974, the term 'rent seeking' did not exist. This term was invented in 1974 by Anne Kreuger in an excellent paper published in the American Economic Review."

—From "The Fundamentals of Rent Seeking" by Gordon Tullock in "The Locke Luminary" vol.1, no.2

See, for examples of both phrases, Enron Corporation: 

"The Bored Whore of Kyoto"

Back in the day (2007 - 2013), emissions trading was quite the thing (our preferred policy was tax and rebate vs cap-n-trade) and in fact the International Emissions Trading Association was the single largest contingent at the Bali climate confab, fully 336 of the 4483 NGO gadflies (emphasis on fly, Bali is a long way from Geneva) that went to Bali that winter of '07.
Tough duty but someone had to do it.

But before Bali there was Kyoto, which Enron pushed with all their—then considerable—might.
When the Protocol was agreed in 1997, Enron's top lobbyist, John Palmisano, senior director for environmental policy and compliance emailed from Kyoto:

If implemented [the Kyoto Protocol] will do more to promote Enron’s business than will almost any other regulatory initiative outside of restructuring of the [electricity] and natural gas industries in Europe and the United States…. The endorsement of emissions trading was another victory for us…. This agreement will be good for Enron stock!!

It was time to turn deeds into dollars, he added:

Enron now has excellent credentials with many ‘green’ interests including Greenpeace, WWF [World Wildlife Fund], NRDC [Natural Resources Defense Council], GermanWatch, The US Climate Action Network, the European Climate Action Network, Ozone Action, WRI [World Resources Institute], and Worldwatch [Institute],” reported Palmisano. “This position should be increasingly cultivated and capitalized on (monetized).....

Carbon Capture & Storage: The Current State of Play

 CC&S, along with a CO2 tax-and-100%-rebate—no carbon traders, no money for politicians to give to their friends, just a straight-up Pigovian tax* and per cap rebate of all the money—are our preferred policy approaches to anthropomorphic genic, anthropogenic CO2. [sheesh, type slower, think faster]

Here's the intro from January's "Elon Musk to offer $100 million prize for 'best' carbon capture tech":

Carbon capture is an approach the Norwegians among others are exploring but it is not easy. Because the concentrations of CO2 in air are so low, ~415 parts per million, you have to move a lot of air through your systems to get meaningful amounts of CO2 to sequester.

The other reasons are ideological. A lot of folks in the authoritarian crowd don't like it because it means that things don't have to change as much as they would like things to change. Wealth transferers don't like carbon capture because it directly attacks their rationalization for "climate reparations", always set with a starting point far enough back in time so that only Northern Hemisphere and in particular, western, countries owe x-number of trillions of dollars to southern and eastern countries. And then there are the....

Yeah, I've been doing this a long time.

Putting all that aside, prizes are good, a very efficient way to mobilize talent and creativity in a focused pursuit. I may even see if I can recruit a team of folks smarter than I to claim Elon's money.....

last seen three days ago in "Carbon Capture and Storage: The Negative Carbon Option?".

And from PitchBook, March 29:

Carbon capture is all the rage. Can these startups make it profitable?

A growing number of startups have ambitions to turn carbon dioxide emissions into cold hard cash—with the hope of charting a course to clean up emissions-heavy industries without relying on perpetual government subsidies.

Capturing carbon—whether it be from the air, ocean or factory smokestacks—has amassed prominent fans who see it as a moonshot that could one day help humanity reverse course on CO2 emissions.

Elon Musk recently volunteered $100 million of his own money as part of an XPrize competition to be doled out to carbon capture startups. Bill Gates has backed Carbon Engineering, a prominent startup that scrubs CO2 directly from the atmosphere. And BP, Shell and the Norwegian government have all launched significant projects to catch and bury carbon. 

But the industry has received relatively little funding from venture capital in recent years, despite startup investors' frothy backing of electric vehicles and related technology. 

VC-backed carbon capture startups took in $336.5 million last year to set a modest record, according to PitchBook data. Much of that investment was driven by non-traditional investors—oil companies, governments and others—who participated in nearly two-thirds of all deals.

Carbon capture VC deals, global

Investors have plenty of reasons to be skeptical. Carbon-capture projects often involve immense capital investment, political uncertainty and vastly longer time horizons than typical startup efforts. And storing CO2 underground in and of itself isn't a business; it relies on subsidies or a carbon market with sufficiently high prices to function.

"You can capture the carbon, but then what do you do with it?" said Andrew Chung, founder and managing partner of 1955 Capital, a VC firm that invests in sustainable technologies. "You want to be able to reuse it."

Carbon Engineering and Climeworks are among the most prominent companies to attempt direct-air carbon capture at scale. The approach pulls in air using massive fans, sends it through a liquid or solid filter to remove the CO2, and typically stores the gas permanently underground. 

Direct-air capture could effectively allow humanity to turn back the clock on past emissions, and it has gained traction with corporations and governments in recent years. Shopify recently became one of the largest corporate buyers of the technology in a deal with Carbon Engineering to capture and store 10,000 metric tons of CO2.

But such direct-air carbon capture systems remain far more expensive than natural solutions like planting trees....

....MUCH MORE

*If you are new to this stuff here's Baumol with a pretty good introduction. 

Then economists being economists, with seemingly unlimited time on their hands, began picking at and prodding, pinching and posing and finally making the entire conversation all about economists (as is their wont).

"Famed Climatologist Charlie Munger" (DJCO; BRK)

The recent hubbub around Mr. Munger's thoughts* on investing, shared at the Daily Journal Corporation where he serves as Chairman brought to mind this story by Bill and Cole Smead of Smead Capital Management, writing at Advisor Perspectives, December 23, 2020:

....This reminds us of the summit held in 1898 by the city managers of London, New York and Paris. The biggest environmental problem was horse manure expelled from the animals. Here is how the writer, Eric Morris, explained this in his piece, From Horse Power to Horsepower:

In 1 8 9 8 , D E L E G A T E S F R O M A C R O S S T H E G L O B E gathered in New York City for the world’s first international urban planning conference. One topic dominated the discussion. It was not housing, land use, economic development, or infrastructure. The delegates were driven to desperation by horse manure. The horse was no newcomer on the urban scene. But by the late 1800s, the problem of horse pollution had reached unprecedented heights. The growth in the horse population was outstripping even the rapid rise in the number of human city dwellers. American cities were drowning in horse manure as well as other unpleasant byproducts of the era’s predominant mode of transportation: urine, flies, congestion, carcasses, and traffic accidents. Widespread cruelty to horses was a form of environmental degradation as well. The situation seemed dire. In 1894, the Times of London estimated that by 1950 every street in the city would be buried nine feet deep in horse manure. One New York prognosticator of the 1890s concluded that by 1930 the horse droppings would rise to Manhattan’s third-story windows. A public health and sanitation crisis of almost unimaginable dimensions loomed.

The technology which solved that great environmental problem in the early 1900s is the one which created today’s environmental problem, the internal combustion engine. Munger would argue that something in new technology will come along by virtue of a profit seeking capitalist (think Henry Ford or Elon Musk) and solve the problem. Charlie said the academics “think more and more about less and less”, and must realize that electricity is created from something and most of the ways it was created in the past have been rejected (hydro, nuclear, coal)...

One of the most profound observations made by historian Frederick Lewis Allen in Only Yesterday was the change in the sound of cities, specifically that we no longer hear horses clip-clopping along.

*e.g.  Reuters, February 24:

Charlie Munger discusses many issues at Daily Journal annual meeting

Back in 2009 Charlie shared his thoughts on Cap-and-trade as a policy approach to controlling carbon dioxide emissions:

Berkshire Hathaway's Munger on Cap-and-Trade ("Monstrously Stupid Right Now...Almost Demented"); Warren and Charlie on Wind and Solar (BRK.A) 

And I'd have to agree but for reasons that differ from Charlie's. The most efficient policy in terms of transparency and equitable distribution of the pain of higher prices is Tax-and-100% rebate, with no siphoning off of money to traders or politicians.

But of course there is no one in Brussels or Washington lobbying for such a thing.

"No Morals, No Mayfair: A Tax-Advantaged Hedge Fund Manager’s Lament"

 From DealBreaker, October 7:

Dubai’s nice and all, but kind of boring. Also he’d like his $500 million back.

Some years ago, a London trader named Sanjay Shah stumbled upon a handy little loophole called Cum-Ex. This cute little maneuver allowed banks such as Shah’s to agree to sell a stock prior to a dividend payout but deliver it after, allowing both sides to claim a tax rebate in spite of it only having been paid once. And when Shah fell victim to Rabobank’s financial-crisis-era layoffs, he took that useful bit of knowledge to his hedge fund, Solo Capital Partners, which used it to wildly successful ends that ultimately cost national tax authorities billions upon billions.

Shah does not feel bad about it, because he did not write the law.

“Prove that any law was broken,” Shah said. “Prove that there was fraud. The legal system allowed it….” To the authorities trying to extract him from his exile, he has a piece of advice: know your tax code.

“It’s very nice to put somebody’s face on a front page of a newspaper and say ‘Look at this guy living in Dubai, sitting on the beach every day sipping a Pina Colada while you’re broke and you don’t have a job’,” he said. “I would say look at your legal system.”

He also doesn’t feel bad about it because it’s not his job to feel things.

“Bankers don’t have morals,” the 50-year-old said on a video call. “Hedge-fund managers, and so on, they don’t have morals….”

....MORE

Thanks to a reader for giving me a heads-up on the Cum ex crowd.

"The Royal Navy’s Triumph over Slavery"

Slavery was practiced by people of all colors.
And had been for thousands and thousands of years.
It was a worldwide phenomena.

From Australia's Quadrant Magazine:

The name HMS Pickle, a schooner with only five cannon, may not call forth patriots today, but it was a stirring sight on the night of June 5-6, 1829, when after a deadly exchange of cannon fire at close range, it captured the slaver Voladora off Cuba, with slaves bound for American plantations. The Voladora was larger and had a crew twice the size, but the Pickle under J.B.B. MacHardy closed, and after an action of eighty minutes (above) the Voladora, its mainmast shot away, sails repeatedly holed, and rigging trailing over the stern, surrendered. The British had lost four men, their opponents at least fourteen. Two hundred and twenty-three African men and ninety-seven African women who had been bought in Africa were freed. Thirty-two slaves had already died on the voyage. The British crew imprisoned the slavers in their own chains. The victory was celebrated in Britain, with memorable paintings depicting the plucky triumph of the smaller crew.

The Pickle was not alone. Five days after its victory, the navy’s smallest warship, the schooner HMS Monkey, under Lieutenant Joseph Sherer, captured the far larger Spanish brig Midas after an action of thirty-five minutes even though the Monkey had only one twelve-pounder cannon and a crew of twenty-six, while the Midas had four eighteen-pounders and four twelve-pounders, and a crew of over fifty. Midas had bought 562 slaves from Africa, but only 369 were still alive when it was captured. Earlier in 1829, the Monkey had already captured an American slaver and a Spanish one, the latter, again more heavily-gunned, carrying 206 slaves.

Why does this dramatic long-forgotten aspect of our history matter so much? Because, despite all the criticism seemingly endlessly repeated today, we British actually have many, many reasons to be proud of our history and of what ends we used our power to purpose. Notably so in our leading role in ending first the international slave trade and then slavery around the world. For over a century, Britain stood at the forefront of the push to end both, using much effort, losing many lives, spending much money, and exerting much diplomatic pressure to achieve these goals. Yet, you would not know it today from the narrative from campaigners and activists keen to denigrate Britain’s history and to destroy our sense of identity in and through it.

Stopping first the slave trade and then slavery in British colonies was but a prelude to vigorous action against them elsewhere. In 1807, when Britain was in a difficult war with France, two warships were still sent to African waters in order to begin the campaign against the slave trade.

Action increased after the Napoleonic wars ended in 1815 with victory at Waterloo. The next year, Admiral Lord Exmouth and a fleet of twenty-one British warships, with the support of a Dutch frigate squadron, demanded the end of holding Christians as slaves in Algiers. When no answer was returned, Exmouth opened fire and 40,000 roundshot and shells destroyed the Algerian ships and much of the city. More than a thousand slaves, mostly from Spain and Italy, were freed; and the message was driven home by the appearance there of British squadrons in 1819 and 1824, and off Tunis in 1824. The overwhelming firepower of the Royal Navy’s thirty-two-pounders at almost point-blank range destroyed the Ottoman-Egyptian fleet in Navarino Bay, helping Greece win independence from the Ottoman Turks, who thus lost their ability to acquire Greeks as slaves.

The most important active British anti-slavery naval force, however, in the first half of the nineteenth century, was that based in West Africa which freed slaves and took them to Freetown in Sierra Leone, a British colony founded for free black people. They could not be returned to their homes, as they would only be captured anew by fellow Africans and sold as slaves. Indeed, in 1862, Viscount Palmerston, the Prime Minister, observed:

Half the evil has been done by the time the slaves are captured in the American waters. The razzia [devastating raid] has been made in Africa, the village has been burnt, the old people and infants have been murdered, the young and the middle aged have been torn from their homes and sent to sea.

In 1834, another outgunned British ship, the HMS brigantine Buzzard, under Lieutenant Anthony William Milward, took on the well-armed and larger Spanish brig Formidable off West Africa after a chase of seven hours. In a “smart action” of forty-five minutes, the Buzzard had several injured and, as Milward reported, the “fore and maintop-mast stays were cut, running rigging and sails much damaged, flying jib-boom shot away, and bumpkin carried away in boarding”, but six of the slaver’s crew were killed. Seven hundred slaves were freed.....

....MUCH MORE

700 freed in one action.

When carbon markets were all the rage—we preferred tax-and-100% rebate, less opportunity for rent-seeking and graft but a tough sell to the powers-that-be who would profit from said rent-seeking and graft— when they were all the rage one of our pithy little analogies was:

"When Britain decided to end slavery,
Wilberforce didn't set up a cap-and-trade system"

—from our October 2007 post "Cap-and-Trade Market in Babies" 

It was a bit surprising how many intelligent, educated people would ask: "Who's Wilberforce?" 

Capital Markets: "Are Risk Appetites Satiated, or Simply Taking the Day Off?"

From Marc to Market:

Overview: Many observers are attributing the sell-off in risk assets today to the Federal Reserve's pessimistic outlook, yet, as we note below, the Fed's median GDP forecast this year is better than many international agency forecasts, including the OECD's that was issued yesterday. Moreover, some near-term trends were already in place.

 Although the MSCI Asia Pacific Index snapped its longest advance in three years today, Europe's Dow Jones Stoxx 600 is lower for the fourth consecutive session, and the S&P 500 will likely fall today for the third successive session. Both of these streaks are the longest since the first half of March. Bond yields are tumbling. The US 10-year yield, which had been flirting with 90 bp at the end of last week, is struggling now to hold above 70 bp. European benchmark yields are 2-5 bp lower after the Australian and New Zealand yields fell 8-9 bp. The dollar itself is mixed against the majors. The recently high-flying dollar-bloc and Scandis are down the most, while the Swiss franc and yen are higher. The euro is holding its own, while sterling is in the high beta camp of weaker currencies today. Led by the liquid and accessible currencies, like the Mexican peso, Russian rouble, and the South African rand, the JP Morgan Emerging Market Currency Index is off for the third consecutive session. Meanwhile, gold is consolidating is gains that carried it to almost $1740 yesterday, and July WTI is unwinding its recent gains to return to where it settled last week (~$38.20).

Asia Pacific
The Abe government is considering extending its cash payment of JPY100k (~$940) to Japanese citizens living abroad. It would be funded out of the second supplemental budget. The requirement is the person would have to be on the resident register as of late April. The latest figures available showed 1.39 mln Japanese were on the register at the end of 2018. It raises the question of whose economy will be stimulated by the measures: the Japanese economy as the payment is in yen or will it boost spending in the current locale of the ex-pat.

Separately, Japan reported that last week, investors bought more than JPY1.06 trillion of foreign bonds. This was the most since the first week of March. We are reluctant to read much into it. The buying seems to be seasonal at the start of the quarter. For their part, foreign investors sold almost JPY740 bln of Japanese bonds. This is the largest weekly divestment since late March and offsets the purchases of the past three weeks in full. Equity transactions were unremarkable.

Hong Kong Monetary Authorities appear to have continued to intervene to prevent the US dollar from falling through the lower band. The recent inflows appear drawn to the new IPOs. This demand is likely to ease over the next week. The greenback initially extended its loss against the Chinese yuan, falling to about CNY7.0560, the lowest since the end of April, before bouncing to CNY7.0750 and running out of steam. The reference rate was set a little above CNY7.06, which was a bit firmer for the dollar than the models suggested.

The US dollar extended its losses against the yen to about JPY106.80. It is the fourth consecutive session the greenback is moving lower after peaking at the end of last week shy of JPY110. While the JPY106.45 may offer some support, the next important level is near JPY106.00. The JPY107.30 area now maybe resistance. The Australian dollar's seven-rally ended Tuesday, and it has been consolidating, albeit choppily, since. Today's setback saw it approach the week's low (~$0.6900), and recover toward the middle of the roughly one-cent range today or around $0.6955 in the European morning. It settled last week near $0.6970.

Europe
European finance ministers meet again today to try to see if a meeting of the minds is possible ahead of next week's heads of state summit to ideally agree on a European Recovery Fund. It seems as if some of the objections were largely negotiating tactics. Denmark, for example, has indicated that while it is still skeptical of the subsidy component (grants), its priority is that it maintains its EU budget rebate. Austria suggested a similar approach is possible. There are still some principled objections for others, including Eastern and Central Europe. Note too that Eurogroup (finance ministers of the eurozone) head Centeno term ends next month, and he has indicated he will step down. Spain's finance minister Nadia Calvino seems to be the early favorite.

The US threatened tariffs on European autos if it did not cut the tariffs on US lobsters recently, but that may be a sideshow to the coming clash over the digital tax of several European countries....

....MORE

So You Think You Know Market Structure: "Bitcoin, ethereum and ripple: a fractal and wavelet analysis"

Understanding market structure is very important and sometimes profitable.
One example, and there are hundreds, is (was) the emissions trading scheme set up by the EU in 2005.
From a 2009 post:
Climateer Investing on Carbon Trading and Traders

Our preference is "Cap-and-Tax (auction) with 100% Rebate" not Cap-and Trade.

The post immediately below, "Richard Sandor, Barack Obama and the Founding of the Chicago Climate Exchange (CLE.L)" got me to thinking about the carbon markets.
Proponents repeat the mantra that cap-and-trade is a "market based 'solution'". This is, of course, nonsense.

Just as an economist using the tools of science (mathematics) doesn't make economics a science, carbon traders using the tools of markets doesn't make carbon trading market based.

The carbon markets are an entirely artificial construct, beholden to political paymasters for their very existence. Which may be why so many political types are planning to profit from them....

The fact the market was artificial meant there would be exploitable biases built into the structure.
Using our trademark low-I.Q. approach to investing we glommed onto the fact the politicians, in an attempt to get industry on-board would over-issue the tradable credits and create a directional bet (lower, duh) that would make any curve analysis that much easier.

Or credit default swaps, again with asymmetries inherent in the structure of both the underlying and the wrapper, introducing what Harley Bassman sums up so simply (I hate him):

...Wall Street loves to make convexity sound complex (I suppose it’s so they can charge higher fees?). We speak Greek (calling it “gamma”), employ physics as a metaphor (analogizing to it “acceleration”), and use mathematical definitions (since it is the second derivative of the asset’s price change).

Pish, posh. An investment is convex if the payoff is unbalanced for equally opposite outcomes. So if there’s the potential to earn a profit of two on a bet versus a maximum loss of one, the bet is positively convex. If you can lose three versus making two, it is negatively convex. That’s it. The rocket scientists are called upon to help (fairly) price the cost (value) of such possible outcomes. This is why the expansion of derivative trading in the 1990’s resulted in a hiring spree of physics PhD’s....

Ditto for bundled mortgages.
And it's not just packaged product. Even plain vanilla stuff has underlying structure that can bite you in the butt.
My favorite example of that is the Hunt bros. merrily buying up their physical and derivative silver.
They didn't understand the structure of the market in which they were playing. From a long ago post:

....When the Billionaire Hunt brothers were attempting to corner the silver market in January 1980 the head of one of the world's largest grain traders said "Those boys don't know what deep pockets are". 

The "commercials" had been shorting into the Hunt bros. buying and the grain trader was at the top of the "commercial" heap.

On January 21 the COMEX went "liquidation only".

On January 22 the CBOT went "liquidation only".

On Tuesday the 22nd silver closed at $34, down 27% from its close the previous Friday.

The Hunt's still had enormous paper profits but any attempt to book them would smash the markets even further.

Prices declined to $17 by March, down 66% from the January high and the Hunt's were receiving calls of $60 Million per day in variation margin. On March 27 the price dropped from $21.62 to $10.80 and one of their brokers, Bache was in violation of net capital requirements and another, Merrill Lynch was on the brink.

As the attorneys got involved over the next few years, oil prices headed south, destroying the value of Daddy's creation (and the brother's piggybank) Placid Oil.

Bunker Hunt filed for bankruptcy in September 1988 as did his brother and Placid.

At the time the grain trader spoke it is probable that the various branches of the Hunt families comprised the wealthiest "family" in America....

Retold in 2014's "On The Passing Of Nelson Bunker Hunt, Two Words".
Market structure, very important.

And speaking of "bros", from the LSE Business Review:

The three major cryptocurrencies remain detached from the fundamentals, presenting problems for fundamentals-focused long-term investors, write Shaen Corbet and Constantin Gurdgiev

In recent years, repeated boom-bust cycles in cryptocurrencies valuations have generated waves of media and public attention, helping to attract a growing number of retail and professional investors to this new asset class. Regulatory environment and markets research, however, lag these developments.

In general, there is no consensus in the markets and amongst regulatory authorities as to the preferred classification of cryptocurrencies as an asset class. Some jurisdictions define them as commodities, others as currencies, or even as general assets, without a singular definition. For example, the U.S. Security Exchange Commission (SEC) view cryptocurrencies as belonging to two different asset classes, simultaneously: cryptotokens issued in the primary market representing securities, while the same tokens traded in the secondary markets constituting currencies.

Likewise, the new asset class lacks definitive theoretical framework for analysing the valuations of the cryptocurrencies in relation to financial and economic fundamentals. Dynamic and distributional properties of cryptocurrencies clearly indicate that the mainstream efficient markets hypothesis (EMH hereafter) framework used in traditional investment markets fails to hold in the crypto markets. The EMH is an investment theory that states it is impossible to ‘beat the market’ because asset market efficiency causes existing asset prices to reflect all relevant information.

Looking for a comprehensive theoretical framework

In an attempt to provide a more realistic description of this market, Peters (2015) used the fractal market hypothesis (FMH hereafter). FMH assumes that market stability is preserved when the agents trading in the markets make self-similar decisions that span across different investment time horizons, providing market liquidity (Kristoufek, 2013b). When the long-term investors either stop trading or shorten their investment time horizon, the market becomes unstable leading to periods of high volatility (Roch, 2011). The dominance of a single time horizon in the FMH setting would therefore undermine the market liquidity and cause severe corrections (e.g. flash crashes), as well as large and longer-term events, such as those experienced in the global financial crisis of 2008-2009 (Kristoufek, 2013a).

The FMH proposes the following assumptions:

1. The market is stable when it consists of investors covering a wide range of investment horizons;
2. Market sentiment and technical factors are more relevant to investors in the short-term. As investment horizons widen, long-term fundamental information tends to dominate;
3. If an event occurs that makes the validity of fundamental information questionable, long-term investors will either stop participating in the market or begin trading based on the short-term information set. When the average investment horizon in the market declines to a uniform level, the market becomes unstable;...

...MORE

We've visited the blog of one of the co-authors, Trinity College, Dublin's Constantin Gurdgiev a few times. The other co-author's name, Shaen Corbet rings a bell but I don't recall linking.

BlackRock and Alphaville Are Thinking About Pricing Carbon

We've never been fans of carbon trading, preferring instead a ratcheting carbon tax and 100% rebate to households. A couple examples after the jumps.
First up, Claire Jones at FT Alphaville:

What is the true cost of carbon emissions?

One of the many challenges facing attempts to green the economy is gauging an “acceptable” price for carbon emissions.

The German government, for instance, was met with criticism from both sides when it said last week that it would price emissions at €10 per tonne under a new certificate scheme beginning in 2021 (with the figure rising to €35 by 2025).

So in the interests of transparency, it is helpful that data firm IHS Markit has put together what it claims is the first global benchmark for carbon emissions pricing. (There’s a news story here from our colleague Nikou Asgari.)

The benchmark, which it plans to calculate daily, launches today using carbon prices based on trading under the three most liquid trading schemes: the EU’s, and two from the US. It uses data going back to 2014 and here is what it looks like at the moment, the weighted average cost of a tonne of carbon coming in at $23.65 today -- or about double what the government in Berlin wants to charge:...

***

... IHS Markit says they plan to add other carbon credit trading schemes once new markets become deep and liquid enough. All of which ought to help governments, and the public, assess what’s a fair price.

The problem is -- as IHS Markit pointed out to us -- that the World Bank thinks the current price is far lower than it ought to be.

So why is the market getting it wrong?...

....MUCH MORE

And from BlackRock's blog:
Introducing Carbon Beta: What pricing carbon means for investors

For the first time ever, BlackRock is enabling all portfolio managers to stress test their portfolios to future carbon price scenarios. Andre and Mike explain why.

Investors already know that the transition to a low-carbon economy matters to their portfolios. But measuring how it matters has been incredibly difficult – until now. In order to answer this pressing question, BlackRock Sustainable Investing has developed a new cutting-edge investment metric called Carbon Beta. Simply put, it’s a way of measuring a company’s sensitivity to carbon prices.

Carbon Beta, which is integrated into our risk and investment management technology Aladdin, is designed to help investors better understand the energy transition. Using Carbon Beta, every portfolio manager at BlackRock can review the impact of future carbon price scenarios on their investment portfolios. This enables us to better understand the risks and opportunities of carbon pricing and deliver our clients solutions aligned with the low-carbon transition.

Carbon pricing gains traction
Why is this metric so urgent for investors? Because carbon pricing mechanisms—such as carbon taxes and emissions trading schemes—have taken center stage in the global policy debate. In order to manage risk and achieve out-performance, investors need to understand the different ways in which carbon pricing policies—and carbon prices more generally—could affect their portfolios.

The idea of pricing carbon and allowing market forces to reduce overall emissions is not a new one. In fact, 57 carbon pricing initiatives are now in effect or scheduled for implementation globally, up from 51 in April 2018. These initiatives currently cover around 20% of global greenhouse gases, more than five times what was covered in 2010. See chart below.

Despite the overall growth in interest, many jurisdictions have yet to take action, and both the amount and set price of emissions covered are still too low to meet the objectives of the Paris Climate Accord. In light of the United Nation’s warning last year–that without dramatic new limits on emissions, global temperature increases in the next decade could produce alarming rates of food scarcity, mass migrations, and instability as soon as 2040–more regulatory attention is warranted.

Anticipating increased carbon pricing activity, some financial institutions and emissions-intensive industries are starting to apply internal carbon pricing in their investment decisions, consistent with risk guidelines provided by the Financial Stability Board’s Task Force on Climate Related Financial Disclosure. This summer, BlackRock and a group of global energy CEOs —including representation from ExxonMobil, BP, Royal Dutch Shell, Total, Chevron and Eni—joined the Pope at the Vatican in calling for economically meaningful prices to carbon to address global climate change. Due to these underlying forces, we anticipate more carbon pricing regulation to be implemented in coming years.

Introducing BlackRock Carbon Beta 
To help BlackRock’s portfolio managers better understand the implications of regulation, we introduced Carbon Beta, a new approach quantifying a company’s sensitivity to carbon prices....

....MORE

Here's a 2009 post;
Climateer Investing on Carbon Trading and Traders

Our preference is "Cap-and-Tax (auction) with 100% Rebate" not Cap-and Trade.

The post immediately below, "Richard Sandor, Barack Obama and the Founding of the Chicago Climate Exchange (CLE.L)" got me to thinking about the carbon markets.
Proponents repeat the mantra that cap-and-trade is a "market based 'solution'". This is, of course, nonsense.

Just as an economist using the tools of science (mathematics) doesn't make economics a science, carbon traders using the tools of markets doesn't make carbon trading market based.

The carbon markets are an entirely artificial construct, beholden to political paymasters for their very existence. Which may be why so many political types are planning to profit from them.
Directly, think Al Gore's Generation Investment Management's investment in carbon project developer Camco or Lord Nicholas Stern's Vice-Chairmanship of IDEACarbon's parent IDEAGlobal or indirectly as a source of campaign contributions for pols still in office, or an unaccountable slush fund in the case of the U.N.

The word artificial led me to think of it's cousin, artifice. Here's the Oxford Pocket definition:ar·ti·ficen. clever or cunning devices or expedients, esp. as used to trick or deceive others: artifice and outright fakery. 

The securities attorneys among our readers will recognize the word from the common state security law usage "...employ any device, scheme, or artifice to defraud".

Coincidence?
Here's the view from Russia, quoted in The Bored Whore of Kyoto:

"I don't know if climate change is caused by burning coal or sun flares or what," said the Moscow-based carbon cowboy. "And I don't really give a shit. Russia is the most energy inefficient country around, and carbon is the most volatile market ever. There's a lot of opportunity to make money."

Here's a former Goldman Sachs trader:

The whole reason for the existence of traders is to make as much money as possible, consistent with what's legal...I lived through this: if you didn't manipulate the market and manipulation was accessible to you, that's when you were yelled at.
-Former Goldman Sachs trader
New York Times, May 8, 2002

Here's Lord Stern at the Bali Climate Conference where the largest NGO contingent were the gang from the International Emissions Trading Association, 336 representatives including lawyers, financiers, emissions traders, consultants, certifiers and emissions trading experts... the IETA made up 7.5% of the 4483 Non-Governmental Organisation (NGO) delegates registered for the U.N. shindig:

“Bali will set in motion a process that will define the structure
of the carbon markets for decades to come”
“By 2020 the global carbon market could be worth EUR 240-
450 billion”
-Sir Nicholas Stern

"This (climate change) is much too important to leave to environment ministers"
-Sir Nicholas Stern
to Finance Ministers basking in Bali

And here's a post from 2007:

"When Britain decided to end slavery,
Wilberforce didn't set up a cap-and-trade system"
That's me, misquoting myself.

Sometimes I find my fellow capitalists repulsive. When they lobby for political favors, then turn around and blandly refer to the result as an example of free markets I don't know whether to laugh, cry or attempt to destroy them. Laughing is probably the healthiest response, world domination the most challenging.

I've been looking for examples to skewer CO2 cap-and-trade.
One thought problem was how to end slavery.
Another was Nuclear weapons proliferation. Think about it.
Mr. Consultant comes up to you and says "The market based system of capping production and handing out allowances to produce nukes, which can then be traded, is the only rational approach".

Don't think too long though, lest you enter "Le Théâtre de l'Absurde". Trust me, the world of Jean Genet and Sam Beckett gets old fast, Pinter and Albee's, faster....

One more. 2011, "Zeitgeist: 2/3 Support Revenue Neutral Carbon Tax As Pew Trusts Pull Funding for Pew Climate Center"