Cap and trade explained

By LISSA HARRIS  |  May 6, 2009

Who gets the money?
Think of cap and trade as a giant Monopoly game about to get underway, with the government holding a stack of carbon permits instead of Monopoly money. To get the permits into the market, the government has a choice: it can either give them away for free, or force companies to buy them at auction. An auction could raise money for tax cuts, which would help ease the burden on ordinary Americans. But power companies want free permits, and they're lobbying fiercely for them. This debate is so hot, the recent ACES bill — the current front-runner among the cap-and-trade bills that have been filed in Congress (see "Generation Green") — wouldn't even touch it. Obama wants 100 percent auctioning, but he's got a fight on his hands.

What about the rest of the world?
With China building a new coal plant every week, it doesn't much matter what the US does. Reducing global emissions without help from India and China is essentially impossible. But if we don't start to rein in our carbon emissions, we can't very well expect them to do so.

How can the clever monkeys on Wall Street screw it up?
If you've never heard of "carbon derivatives," consider yourself informed. They're out there. In places deep, where dark things sleep, eager MBAs are already busy ginning up fancy new hedging mechanisms for gaming the post-carbon economy. Given how asleep-at-the-wheel regulators contributed to our current mess, the Feds might want to keep an eye on that.

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