Cap and Trade in Practice

How to get paid for laying off workers.
The world's carboncrats are beavering away this week on a vast new global cap-and-trade scheme that President Obama wants the U.S. to join. But before we do, maybe Americans should understand how this already works in practice. Union workers, take note.
The Kyoto Protocol of 1997 required signatories to reduce their carbon emissions, and the European Union in 2005 launched its own cap-and-trade system. The program sets a limit on carbon emissions, and companies are issued free carbon allowances that they can buy or sell based on their emissions needs.
Fast forward to this month's news that Corus, Europe's second-largest steel producer, is shuttering a giant U.K. steelmaking plant at Redcar, cutting 1,700 jobs. Corus blames the recession that has cut steel demand and says the British government hasn't done enough to help it.
Whatever the truth of that, there's little doubt that cap and trade made the closure much easier. The decline in steel production means European steelmakers have surplus carbon allowances. According to Carbon Market Data, a European research firm, in 2008 Corus had the second largest surplus of EU carbon allowances—7.5 million.
The EU is looking for ways to drive today's depressed allowance price of about $21 apiece back up to former highs of about $50, so Corus has the potential for a $375 million windfall. By closing Redcar's annual capacity of three million tons of steel, Corus will produce six million fewer tons of CO2. That means more carbon allowances, which could translate into about $300 million a year if credits hit $50. Corus is essentially being paid to lay off British workers.
Corus will also profit if it moves the production to India. As part of Kyoto, the United Nations created the Clean Development Mechanism to encourage Western companies to invest in developing-world factories. Participants are financially rewarded based on the amount of carbon they "save" with more efficient plants.
Corus was bought in 2007 by Tata, India's largest steel company. The Indian steel industry is set to more than double production to some 124 million tons a year by 2011-2012. Were Corus to move production to a "clean" Indian factory, it could receive hundreds of millions of dollars annually from the Clean Development Fund. The kicker is that none of this results in fewer carbon emissions. A Corus plant in India might be more efficient by Indian standards, but it will be no more efficient than Redcar.
We should add that all of this is precisely what Kyoto envisioned. The idea is to tax Western industry and then send the proceeds to developing countries as an incentive to join the anticarbon crusade. But unless governments close their borders to foreign investment, business will flow to where the carbon tariff is least punishing. China and India understand this, which is why they won't agree at Copenhagen to anything that reduces this advantage.
The Corus story also shows that cap and trade isn't really a free market. Markets develop to efficiently allocate resources and capital. Carbon cap and trade is a government-rigged market, in which carbon allowances are dispensed based on political influence. Such a system is ripe for manipulation, and Corus is merely the latest example.
To summarize: Cap and trade is a scheme that would impose heavy carbon taxes and allowances on U.S. industries, which would then have an incentive to move overseas themselves, or to sell those allowances to overseas companies that could use them to become more competitive against U.S. companies. Like the 1,700 Brits at Redcar, American workers would be the big losers.