Calls for Simplicity, Transparency Should Shift From Football to Climate Policy

Posted January 5, 2010 at 2:30pm

Last summer, the Senate Judiciary Committee held a hearing on how to improve the current NCAA method for picking a college football champion. It seems that several Congressmen, at least one state attorney general and even President Barack Obama believe the current system lacks the simplicity and transparency necessary to produce fair and accurate results.

[IMGCAP(1)]This logic is ironic, given Washington’s recent efforts to impose a far more complex system to address climate change: cap-and-trade. If federal officials believe simplicity and transparency are critical for selecting a champion in college football — and a new one will be crowned on Jan. 7 — shouldn’t the same criteria be applied in setting policy for something as important as striking a balance between controlling greenhouse gas emissions and economic growth? Especially since the stakes are so much higher?

Our recent financial meltdown was caused in part by a mortgage system that became convoluted — completely detached from financial responsibility and rigorous standards. The system produced a tidal wave of subprime mortgages and other complex financial tools. Derivatives and credit default swaps took on a life of their own and took away the transparency that’s expected in a well-functioning market.

The mortgage market problem, as well as the Bowl Championship Series debate, holds serious implications for Washington’s work on a federal emissions policy.

Under the legislation passed last year by the House and the bill still being debated in the Senate, American energy producers would have to obtain permits to emit greenhouse gases, primarily carbon dioxide. These permits would be a government-created commodity that could be bought and sold in an emissions market just like mortgages or any other commodity. In effect, this kind of cap-and-trade policy would create a trading system that would open the door to the same kind of reckless behavior by Wall Street and others that Washington is presently railing against.

A few months ago, the Commodity Futures Trading Commission held hearings on “excessive speculation— in energy commodities markets. As the U.S. public witnessed when the housing bubble burst, commodity markets involve a futures component and various hedging schemes that enable Wall Street opportunists to game the system at the expense of Main Street. And emissions permit trading would certainly include the creation of risky financial tools like the derivatives, hedges and credit default swaps that contributed to our recent economic crisis and the scandals associated with it.

Case in point: The cap-and-trade system in place in the European Union has demonstrated that the potential for fraud and abuse is enormous. Though it has failed to reduce emissions, it has created the opportunity for traders and others who can game the system to enrich themselves. In the process, energy costs for consumers have actually increased.

In light of these facts, the American people would be better served if Congress focused more on creating simplicity and transparency around climate policy versus the pigskin.

This Thursday night — the national championship face-off — marks the climax of the 2009 college football season. But the real high-stakes games — the Senate’s deliberations over the climate bill — have yet to even hit their full stride.

The BCS system may be complex, but it doesn’t hold a candle to the complexity of cap-and-trade. Fortunately, there are more effective approaches to dealing with climate change. Congress should start with those. A simple carbon tax with proceeds used to reduce other taxes is a far superior option — one that would draw widespread cheers.

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