Using Carbon Taxes as Economic Stimulus

There are so many things wrong with New York U.S. senator Kirsten Gillibrand’s piece from the Wall Street Journal.  Let’s start at the beginning:

In this turmoil, it may seem hard to imagine a financial market poised to deliver significant growth. However, a rising number of investors and financiers see one in the trading and reduction of carbon. According to financial experts, carbon permits could quickly become the world’s largest commodities market, growing to as much as $3 trillion by 2020 from just over $100 billion today. With thousands of firms and energy producers buying and selling permits to emit carbon, transaction fees for exchanges and clearing alone could top nearly half a billion dollars.

If Congress establishes proper oversight of a carbon market, New York’s financial talent, expertise and institutions are uniquely suited to provide the tools and innovation for a new commodities market of this size. Firms wishing to invest over the long term will need to turn to our financial sector to create the emerging products and provide the capital that would allow them to make green energy investments.

An infrastructure is already beginning to form, as entities like the New York Stock Exchange, J.P. Morgan Chase, Goldman Sachs, and the new Green Exchange are developing carbon trading platforms or expanding their environmental trading desks. There are nearly 100 funds already focused on green investments.

So, we’ll create a market to enrich one area of the country by making another area pay up.  Obviously, the senator has a responsibility to her constituents, but robbing Peter to pay Paul isn’t my idea of a constructive, long-term solution to the economic woes of New York.  Not to mention the fact it’s unfairness of the highest order.  She’s advocating the utilization government to redistribute wealth in the name of “global warming.”  As I’ve stated before, the “climate change” push has become more of religious movement than a scientific one.  You’ve got to look at the total sum of the fallout the created by enacting policies of this nature, and weigh it against what we know about climate change and man’s contribution.

Ms. Gillibrand continues on:

We must allow the market to provide the ability to customize products. These customized contracts are essential for firms to adapt to the new regulations, hedge risk, and raise capital. New York’s financial industry is already the global leader for existing customized commodity products and would be exceptionally well positioned to provide the legal and financial expertise necessary for these new products.

Some have suggested that we mandate exchange trading of carbon-related derivatives, effectively requiring standardization of all derivatives. In order to trade on an exchange, a derivative contract must be highly standardized. As a result, such a requirement would effectively ban customized derivatives.

This sounds a lot like credit default swaps for “mortgage backed securities” to me.  The notion that further government regulation of securities will ensure we don’t embark on a similar situation as the mortgage crisis is laughable.  Especially considering that government, through Fannie and Freddie, helped establish a market for the troubled bundled mortgages. I’m comfortable in theorizing that if trading had been done with standardized credit default swap contracts backed by a clearing house like the Chicago Mercantile Exchange, our financial system wouldn’t have experienced the tumultuous times it’s experienced over the last couple of years.  The CME’s track record speaks for itself.

One serious error – “cap and trade” – compounded by another – government encouragement of non-standardized financial products.  One can only hope that Senator Gillibrand fails in enacting the entirety of this terrible policy.

Correction: Instead of trading mortgage backed securities at an exchange, I should have said that credit default swaps, which are basically insurance on the MBS’s, should be traded in a standardized manner on an exchange like the CME as opposed to having the government try and further regulate a vast array of differently structured contracts.  The correction has been made in the body of the post.  I apologize.

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