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Does the Climate Bill Have a Chance?

May 9, 2010

By Chip Jacobs

In the toxic air of Los Angeles is a primer on human nature as we debate a national cap-and-trade for greenhouse gases.

During the 1990’s, Southern California manufacturers, weary of decades of stern regulation, wanted a new way to shrink their emissions of sky-smudging, health-damaging oxides of nitrogen and sulfur. Their answer was the planet’s first smog cap-and-trade system. Its name was awkward — the Regional Clean Air Incentives Market, or Reclaim — but its implications seismic. Industry finally had flexibility in achieving its cuts, and a motive to reduce more than their yearly pollution cap. They could sell unneeded “credits” for profit!

Though environmentalists caterwauled about corporate sellout, the anti-smog officials were on board. For years, they’d been sandwiched between federal clean air mandates and industry accusations that they had crippled the region’s manufacturing muscle with overzealous rulemaking. Why not allow the market to be the magic?

Leading this vanguard environmentalism was Anne Masters Sholtz, a 30-something Caltech economics professor and aspiring emissions-broker. Her brokerage, which used the Web and advanced software to match trades, lined up heavyweight clients and enlisted marquee financial institutions as trade clearinghouses. Sholtz bought a spectacular hillside estate, won niche celebrity, and had a seemingly blue-sky future in the mecca of whiskey-brown air.

The problem is the system was vulnerable. During California’s electricity brownouts in 2000 and 2001, speculators made a killing off the boutique, $90-million-a-year market by hoarding credits the utilities needed to run full time. By then, Sholtz had twice fleeced the system.

In 1996, she misappropriated roughly $2 million in credits belonging to Chevron, then Mobil Corporation and another client and sold them to Southern California Edison. A few years later Sholtz lulled another client, a New York-based trading outfit called A.G. Clean Air, into believing she owned credits the company needed to complete a lucrative trade with Mobil. In truth the credits weren’t available.

Predictably, local regulators were in the dark about both episodes until industry complained to them. As her case illustrates, and Europe’s cap-and-trade scandals corroborates, even the best-intentioned oversight is laps behind sophisticated schemers, be they full timers or just desperate like Sholtz. Concoct a market anywhere, whether for beads or subprime mortgages, and they’ll show up.

Two House Republicans today are moving to unseal court records of Sholtz’s federal prosecution in a ham-fisted effort to hurt President Obama’s chances for a carbon market. If there’s chicanery with smog, imagine a trillion-dollar greenhouse market, they say. But the Sholtz case is too important for politicization, because global warming is a global threat now.

I’m against Obama’s plans because a more straightforward carbon levy seems more cost-effective and less contrived. Yet cap-and-trades can work, as they generally have in L.A., as long as we remember that to make a commodity out of something is to arouse temptation.

To read the entire New York Times “Room for Debate” discussion of this issue, click here.