Next Bernie Madoff? Emissions Cap-and-Trade Aids the Corrupt, Hurts the Little Guy

The American people have had enough of convoluted, indecipherable financial schemes and the opportunists who exploit them. The public is understandably angry about Wall Street's exploitation of Main Street, and yet our political leaders are setting the stage for another complex trading market, ripe for corruption. The future Enrons and Bernie Madoffs of the world would like nothing better than to see the U.S. impose a new market for carbon emission trading.

The cap-and-trade system being touted on Capitol Hill would create a multibillion-dollar playground that would, once again, create a group of wealthy traders benefiting at the expense of millions of average families—middle to low-income households that would end up paying more for food, energy, and almost everything else they buy.

Enron executives—before their well-deserved fall—did little to conceal their lust for cap-and-trade. In 2002, the Washington Post reported that "an internal Enron memo said the Kyoto agreement, if implemented, would do more to promote Enron's business than almost any other regulatory initiative outside of restructuring the energy and natural gas industries in Europe and the United States."

Promoting the bottom lines of opportunists is not the job of policymakers. Assisting the staggering 2.6 million American workers who lost their jobs in just the last four months should be. With our nation struggling through the worst economic crisis in over 70 years, Congress shouldn't risk further economic damage by pushing a risky carbon emission mitigation scheme. There are far better alternatives for dealing with climate change.

Albert Einstein once observed that things should be made as simple as possible but no simpler. The corollary is that policies should be made no more complex than necessary. Cap-and-trade, however, is excessively complex.

President Obama has pledged to use cap-and-trade to reduce U.S. carbon emissions 80 percent by 2050, and projects over $3 trillion in revenue from the auction of emissions permits to domestic companies. And the carbon trading system outlined in the draft bill released by House Energy and Commerce Committee Chairman Henry Waxman on Tuesday calls for an even more aggressive target—a 20 percent reduction in U.S. greenhouse-gas emissions by 2020. But even a casual look at Europe's existing cap-and-trade program provides ample reason to believe that it just won't work.

European governments and industries, in an attempt to stave off the economic impact of cap-and-trade, have found plenty of ways to game the system. Governments have freely handed out emissions allowances. Meanwhile, European consumers have suffered as energy rates have increased. Homeowners in Germany are paying 25 percent more for electricity now than they did before the implementation of cap-and-trade.

The European legal system encourages a "wink and nod" approach to regulation; to date, ours does not.

In contrast to the burdens borne by European households, traders have been reaping the benefits of emissions trading with little regard for the environmental concerns cap-and-trade is supposed to address. The emissions permit market has constantly fluctuated. With the price of carbon up or down by an average of 17.5 percent per month and with daily price shifts as great as 70 percent, European companies have been left to simply guess at how much their environmental compliance costs might be each month. Consequently, investors have been reluctant to invest in these businesses and there is little incentive to invest in new technologies.

As a result, UNCCC data show that the European emissions rate under cap-and-trade increased by 3.5 percent from 2000 to 2006 while U.S. emissions increased by only 0.7 percent.

Washington has little reason to expect different results here. Emission trading has the potential to be the next sub-prime housing market, the next Enron, the next blow to our already weakened economy.

The U.S. unemployment rate is verging on double digits. Taxpayers are being forced to shoulder the burden of a $1 trillion-plus stimulus bill. Yet, the administration and some in Congress are still pushing a high-risk carbon trading strategy—a flawed approach likely to put even more Americans out of work.

Environmentally or economically, it just doesn't make sense.

• Read more about Bernard Madoff.
• Read more about global warming.

William O'Keefe, chief executive officer of the Marshall Institute, is president of Solutions Consulting Inc.