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Climategate: The Big Picture

There is a financial empire being built on top of AGW, one that we've already begun to discuss on PJM. The basics are simple. If you accept that CO2 is the problem, then steps need to be taken to reduce CO2 emissions, which many developed countries have attempted using "cap and trade" schemes. In cap and trade, you use the law to require companies in developed countries to reduce their CO2 emissions, or to buy carbon offsets if they can't.

Where do carbon offsets come from? Simply enough, some authority must certify that someone else has either reduced their CO2 output, or has agreed not to do something that would increase CO2 output they would otherwise have done. For every ton of CO2 you don't emit, you get a certificate that you can sell on the carbon market to someone who needs permission -- an indulgence -- allowing them to emit a ton of CO2.

But what about the details? Who has the authority to certify? And how do you measure CO2 not emitted? The opportunities for graft are vast. There isn't much that is easier than not building a facility that therefore doesn't emit CO2. Convince an inspector that you really would have built that facility, or simply that you built a modern efficient plant where you might otherwise have built a dirty inefficient one, and you're entitled to a credit.

Once you have the carbon credit you need to sell it, which means there must be a market -- a role filled in part by the Chicago Carbon Exchange (CCX). The CCX, which was started with seed money from both government and private non-profit sources, is most emphatically a for-profit firm that functions like any commodity exchange. If you have a story about the carbon you aren't emitting and need it certified, the CCX can certify it -- for a fee. Then the CCX will help you sell it -- for a commission. If you need to buy carbon credits, the CCX will match you up with a buyer -- for a fee -- and sell you the certificate (and charge you a commission).

All of this is reasonable in theory, because after all what you're doing is letting the market set a price for the carbon reductions, just as it sets a price for the fuels burned that lead to carbon emissions. In practice, it's at least utterly opaque -- the CCX is a U.S. corporation, but it is wholly owned in England, and draws its ability to act to certify CO2 reductions through a UN-chartered NGO out of Geneva. The principals are people who have banking experience with Goldman Sachs and strong political connections with the Democratic Party, through Chicago and through Al Gore.

It is, of course, purely a coincidence that this market, which simply doesn't exist without the legal requirement that companies reduce carbon emissions, is closely connected with the politically connected people who are pushing for carbon restrictions by law and treaty.

As we saw during the Copenhagen meeting, the one outcome of the meeting was an agreement that allowed the carbon markets to continue. But now consider what would have happened if Copenhagen had gone through and the agreement had been made. The carbon markets would continue, of course, but now nearly every industrial operation in nearly every developed or under-developed or undeveloped country -- for all practical purposes, all manufacturing, power generation, or transportation -- would need to establish its carbon impact, and buy or sell the appropriate carbon credits. Every one of which would result in paying fees and commissions to the carbon exchanges, as well as the governments involved and the UN.

The owners of the carbon exchanges wouldn't be as rich as Croesus -- they would be so rich they could hire Croesus as a houseboy.

There is a third story, and maybe the biggest story, in the political connections and political pull that make the carbon markets work.

Seeing the Big Picture

So what is the big picture?

First, there were the true believers, like James Hansen, whose belief in the need to eliminate industrial civilization far predates the global warming explanation. (There is a side story to be told there as well. What do the true believers really believe? What do they advocate as ways to reduce humanity's environmental impact?) These true believers seem to be quite willing to ... adapt their scientific results to make sure that people on the outside are as frightened as possible.

There is another, larger group, who may or may not be true believers -- who can know what is in another man's heart? -- but who don't seem to worry too much about their own carbon impact, like Al Gore. (Oh, he buys indulgences from his own company, which is one little mercy -- he could conceivably instead say he would have built a bigger house with more carbon impact, and claimed a carbon credit.) A fair number of these people, though, seem to be set up to make an immense pile of money off the carbon markets, and they all seem to have impeccable political connections. This larger group makes sure that the true believers get big grants, and travel to conferences in Gstaad and Tahiti, and have well-financed platforms from which to speak.

It's that second group we most need to watch. In the old Soviet Union, these people -- the Communist Party members who received positions of power -- were called the nomenklatura. They weren't necessarily the true believers (in fact, a lot of the true Communists, like Beria and Trotsky, ended up dead or in Siberia), but they could mouth the slogans, pass on the Communist Party line, and play the system to get positions and power, dachas, and access to the "special" stores that always had sausage, green vegetables, and toilet paper.

And, of course, there is a third group: the rest of us. We are expected to pay the increased carbon offset costs quietly, cold in our darkened rooms, but warm in our hearts because we're saving the planet.