Cap And Trade Final Paper

THE CARBON EMISSIONS ORGANIZATION: A CASE STUDY OF AGENCY-FORMATION

JASON KROCHAK CRISTINA ORDONEZ JOSHUA BLOOM BRANDON COOPERMAN

I.

STRUCTURAL FRAMEWORK

The Carbon Emissions Organization (CEO) will be a private, not-for-profit entity whose primary purpose is to regulate greenhouse gas emissions in the United States. The mission of our organization is to eliminate the publicizing of pollution and internalizing of revenue; to preserve the sanctity of the environment; and to promote innovation in alternative energy. From an administrative standpoint, the Environmental Protection Agency (EPA) will designate CEO as the organization responsible for setting emissions standards and monetary sanctions for associated breaches, developing a mechanism to define and measure units of output with consistency, devising standards that are sensitive to different regions and different industries, and conducting individual audits to ensure compliance.

II.

COMMITTEES

It is important to have committees assigned with various roles so that our organization has an internal, hierarchical structure. The Cap and Trade Organization will consist of four committees that report to the board of directors. The sub-committees will be used to delegate responsibilities within the organization including both the creation of new standards as well as the enforcement of existing standards. All committees will be headed by a board member. The oversight board and the five sub-committees are listed and defined below.

Oversight regulatory board The board of directors will consist of five members, each appointed by EPA leadership. These board members will each serve a four year term, and be eligible for re-appointment for another four year term. The Board will have staggered end of term years so that at most only two members’ terms end in the same year. These Board members will be responsible for the hiring of the remaining staff members who will be professionals from fields including accounting, science and engineering. These remaining members will be hired and fired by the Board according to majority vote.

Emissions expert committee Member of this committee will be hired by and serve at the discretion of the board of directors and will set measureable standards that are sensitive to regional and industry differences.

Auditing Standards Committee This committee will be made up of members with significant public auditing experience as well as scientists that understand the technology required to quantify and verify carbon emissions. This committee will be charged with writing the auditing procedures that will be used by public accounting firms to audit companies’ carbon emissions. This will be accomplished through recordkeeping, on-sight testing, and independent verification from third-parties. This committee will also attempt to standardize the methodologies that companies use to quantify their carbon emissions via a required installation kit.

Sanctions Enforcement Committee This committee is charged with the task of creating appropriate sanctions as well as enforcing them on companies that pollute more than their available carbon credits allow. To incentivize the trading of carbon credits in the open market, sanctions must be set at a rate above the market price of a carbon credit, so that firms seek market solutions to their carbon pollution.

Technical Advisory Committee This committee will consist of mostly scientists that will be charged with advising companies on new methodologies to reduce carbon emissions, such as carbon sequestration projects, or carbon offset projects like afforestation initiatives. Also, this committee will look to create alternative methods to measure carbon pollution that can be better applied to companies that do not pollute necessarily from an individual factory.

Innovation Committee This committee will assess how effective the current programs and standards are and will look to improve upon them. This committee has an important task of keeping the standards up to date and changing them appropriately so that the program does not become obsolete.

III.

SANCTIONS

Sanctions play an important role because they will incentivize companies to stay within the boundaries of the program and to trade in the carbon markets for additional credits if they exceed their carbon emissions levels.

The Sanctions enforcement committee will determine the

appropriate sanctions and will enforce them on companies that are to be penalized. Sanctions

revenue will be used to help fund the organization. This could be used as an abuse of power as the people creating the sanctions are receiving the revenues from them. However, the sanctions enforcement committee will create the standards and the sanctions will only have the objective of achieving the carbon reductions goals set forth by the government.

IV.

SEC ROLE

The SEC will play an important role in monitoring the trading of carbon on the public, commodity exchanges. Derivative trading will most likely emerge as companies create appropriate hedging strategies and will also need to be supervised by the SEC. The SEC must buy-off on our auditing standards and carbon emission measurement standards in order for them to authenticate the trading of carbon credits in an open market. Therefore, a close relationship with the SEC must be formed so that both organizations have a mutual understanding of the proposed procedures. This will most likely involve monthly conferences with the SEC to obtain feedback on our proposed procedures.

V.

ADDITIONAL CONSIDERATIONS

From a framework perspective, we examined the structural workings of similar programs and considered the requisites for our own effective policy structure. In the course of our analysis, it became particularly clear to us that this cap and trade program needs to function under the auspices of a private entity rather than a public one – for several reasons. First, we feel that the successful implementation of this program partially resides in its ability to circumvent the type of partisanship that patently overwhelms good-faith efforts to enact change. Time and again we see

political, social, and economic agendas beset by partisan lobbying and the political banter so associated; unfortunately, these agendas almost always result in inaction and the status quo.

The very nature of an elected representative is such that his actions and decisions are necessarily supposed to advance the public interest and the public good. Decade after decade of partisan lobbying and institutional corruption, though, has taught us that this does not always happen. In an effort to curry favor with their constituencies, better position themselves for future political endeavors, advance a particular ideology, or simply foil a counter-party agenda, elected representatives often act and decide contrary to their ostensible civic duty. Needless to say, public entities are plagued by these dueling motivations and interests all the time. On the other hand, with a private entity structure, we can effectively mitigate the parasitic nature of lobbying and focus on substance over semantics.

A second major issue from which the private entity structure emerged as the more sensible choice is compensation. Public entities are often bound by modest governmental compensation scales that have been rigidly conceived to meet budgetary requirements and serve –at least in spirit – as a pro-forma nod to the American taxpayer. Therefore, the financial compensation under public entities is not particularly flattering, especially to elite talent who demand much more -- and can get it elsewhere.

Private entities, on the other hand, are not bound by such compensation schemes largely because they function independently of government. So whereas the viability of a publicly-organized cap and trade program may be somewhat undermined by an inability to attract value-adding talent

under government-regulated compensation, private entities avoid this problem -- they have the latitude to pay whatever they want to attract the very best.

Indeed, a private entity of this ilk will invariably be tied to other public programs and government-sponsored entities. It will probably also receive government funds in advance of offsetting revenue generated by the program itself. With this in mind, the cap and trade program needs to be deliberately crafted to avoid simply becoming a government puppet under the guise of an independent private entity. If this happens, then the program will effectively lose its independence and expose itself to the partisan lobbying described above.

Admittedly, public entities have their benefits – not the least of which include greater budget allocation, government backing, greater public exposure, etc. We are confident, however, that a cap and trade program is better suited in the private sphere for the reasons outlined above.

VI.

REVENUE GENERATION

The CEO will generate revenue from four sources. First, the majority of revenue will be collected when companies purchase emissions credits from the organization. In the case that a company needs more credits than they were allowed to purchase from the CEO, they will have to buy or trade for them on the open market. The CEO will institute a small tax on these subsequent transactions. This will serve the dual purpose of providing funds as well as encouraging companies to develop the necessary technology to avoid needing to purchase more credits and therefore avoid this tax. A third source of money will come from the fines companies

are required to pay as punishment for exceeded their limit on allowable carbon emissions. This fine amount will be double the market rate for purchasing additional credits in order to deter companies from surpassing their allowable limit. Additionally, this fee will be adjusted monthly in response to changing market conditions. Lastly, since the CEO will be designated by the EPA as the organization responsible for operating the cap and trade system, the EPA will budget some of its government funds to be allocated to the organization. We anticipate that initially the EPA allocation to this entity will be greater due to the lack of purchased credits, fines, and taxes when the program is first set in action. These “start-up” funds the EPA provides will then disappear and be replaced by a smaller amount of annual allocations. This will ensure that the CEO maintains its independence as a private entity.

VII.

ECONOMIC IMPLICATIONS

The proposed bill to reduce Carbon emissions will become part of the Clean Air Act since the CEO would be a subsidiary of EPA. A major concern with the introduction of a cap and trade carbon program is the economic impact it will have on states, businesses, and individuals. This bill will affect the cost of energy production, which is a necessity for most Americans. The creation of carbon costs on business will be considered an overhead cost that will be passed down to the consumer via higher prices. This is especially concerning for low to moderateincome households who will be most affected by the cost to reduce carbon emissions.

In order to reduce these costs, the carbon reduction program will develop a phase-in system to gradually reduce emissions without causing huge market fluctuations. This phase-in program will be similar to the Acid Rain Program of the 1990s. There will be two phases over the course

of ten to fifteen years that will establish the long-term emission reduction targets. A long-term phase-in will give companies time and flexibility to adjust their operations, invest in new, innovative technology, and become more environmentally friendly. The two reduction targets also create the foundation for the distribution of carbon allowances (in the form of credits). Each year the CEO will set a ceiling and floor price on carbon allowances that will gradually guide companies to reduce carbon and ultimately achieve the target emission reduction. The ceiling will provide businesses with flexibility to gradually reduce carbon emissions because there is a set high cost; in other words, firms do not have to worry about the price of an allowance rapidly increasing in price. Minimizing price uncertainty will allow firms to better evaluate when it is most cost effective to reduce their carbon footprint. Allowing firms to minimize costs of reducing carbon, which will help keep consumer prices low. The floor will provide firms with incentive to improve processes and reduce carbon. The lower prices drop, the more likely that it will be more costly for firms to reduce emissions than to buy allowances. The floor will ensure that prices remain high enough to motivate firms to take carbon reduction initiatives. The cap and trade system is the best alternative to control costs, eliminating any large market fluctuations, while still provoking firms to cut carbon emissions.

In the cap and trade program, the CEO will distribute to each business a set number of allowances for each year. Some firms, like those that heavily use fossil fuels, will receive more allowances to help keep costs low. This should keep the price of energy from increasing too high, helping low and middle-income families. This will also allow heavily carbon dependent states, like West Virginia, from suffering the effects of increased costs. After the initial allowances have been distributed, firms can acquire more allowances from open market trading or from the government’s auction for allowances. The auction will be a major revenue generator

for CEO. Part of the money from the auction will be used to offset agency costs. The rest of the money will provide tax plan options that will help offset the costs of higher energy to low and moderate income households. The money generated would become a tax credit to all households below a certain adjusted gross income level. This option is the best way to directly help low income households manage the increased costs associated with the reduction in carbon emissions.

VIII. CONCLUSION

Perhaps the most difficult part to creating a viable agency that seeks to advance a specific agenda is the ability to appease all of the players involved and effect change notwithstanding competing interests. Needless to say, a careful consideration of the structural, economic, and political implications of far-reaching programs such as this one is an absolute requisite; even then, the prospects for successful implementation can be somewhat difficult to gauge.

Specifically

regarding cap and trade, there can be no quick-fix and no perfect strategy proposals simply because we are venturing into uncharted waters – at least for the United States. But while the creation of a viable, innovative program may be a big challenge, it is nonetheless a challenge that must be met by those of us who care to work through it and change the status quo.