Regulations have many side effects. One is the risk of causing petrification by creating a vested-interest group that will oppose alternative approaches to achieving the desired outcome. The type of regulation is irrelevant: it’s equally true for environmental regulations that set up trading schemes, like carbon cap-and-trade. You can’t create a group of people holding “emission credits” worth millions of dollars, and expect them to welcome new technologies or regulations that undermine their “investment,” whether that investment was really in technology, or simply lobbying. Once such groups are created, regulatory flexibility declines, and petrification takes hold.
Back in 2007, my colleagues and I warned about this when cap-and-trade was on the table here: “Permit holders will see value in further tightening of caps, but will resist efforts outside the cap-and-trade system that might devalue their new carbon currency.”
Lo and behold, look at what’s happening in Europe, where carbon permit values have plunged (again), and alternative approaches are being considered:
There is an unwillingness across the European Commission generally to stick with the existing climate policy,” said Henry Derwent, the Geneva-based president of the International Emissions Trading Association. “We have to be clear where that leads…
“Once the EU has adopted a cap-and-trade mechanism as its main policy tool then indeed it is important that other regulatory interventions in the form of overlapping directives are avoided,” said Imtiaz Ahmad, an executive director at investment bank Morgan Stanley in London. This is necessary to give “investors in greenhouse gas abatement technology … confidence that the cap-and-trade system will function in a robust manner with the price setting the incentive signal.”
So that’s how it works: rent-seekers lobby government for environmental trading programs, and amass paper wealth in the form of permits. If the exercise turns out not to work (i.e. the price isn’t stable, effective, or economically sustainable), permit holders and their bankers lobby the government to shore up their program with self-defeating things like price floors and ceilings, at the expense of potentially better alternatives.