Kevin Drum

Wall Street and Carbon Trading

| Tue Dec. 15, 2009 12:18 AM EST

One of the criticisms of cap-and-trade from the left is that it would create a gigantic new market in carbon trading that would allow Wall Street players like Goldman Sachs to generate a huge new asset bubble to replace the late lamented housing bubble.  After all, why else would Goldman have a legion of lobbyists working overtime on Capitol Hill to try and get cap-and-trade passed?

Dean Baker pours cold water on this theory today, but then says this:

The reason for the interest is much simpler. The outstanding value of carbon permits will almost certainly run into the trillions of dollars once the system is fully up and running. The annual trading in these permits and various derivative instruments (e.g., options, futures, swaps of various types) is likely to also run into the trillions of dollars, perhaps tens of trillions.

A market that trades $10 trillion a year would generate $25 billion a year in revenue, if fees and commissions average 0.25 percent. If Goldman can capture 30 percent of these trades by getting in on the ground floor, then it stands to generate more than $8 billion each year in revenue from carbon trading. This is enough to explain Goldman's enthusiasm for cap and trade — it's all about as clear as it can possibly be.

I've seen estimates like this before and I've never quite understood where they come from.  Here's a back-of-the-envelope guess about the size of the U.S. carbon market:

  • Total annual U.S. emissions come to about 6 billion tons of CO2e (carbon dioxide equivalent).
  • Most of the permits for these emissions will simply be allocated and used.  At a guess, maybe 20% of them will be traded on the open market.  That's 1.2 billion tons.
  • Another guess: each permit will trade hands four times a year.  That's 4.8 billion tons.
  • Price per ton on the European market is currently about $25/ton, so let's use that as a rough price guideline.
  • Bottom line: the total value of the carbon trading market comes to $120 billion.

There's a lot of guesswork there, so here's another data point: in the first half of 2009, the European ETS carbon market traded 3.1 billion tons of CO2e worth about $50 billion.  That comes to $100 billion per year for a market a little bit smaller than the U.S. market.  So that checks.

In other words, something in the neighborhood of $100 billion seems like a decent guess for the size of the U.S. cap-and-trade market.  Over time, as allocations decrease and trading increases, that will go up.  But in the near and medium term, it's going to be in the range of $100-200 billion, not $10 trillion, netting traders commissions of about $500 million or so.  That's just the basic trades, of course, but the derivative market for carbon ought to be simple commodity stuff like options, swaps, and futures, not the rocket science credit derivatives that fueled the housing bubble.  I don't have a good feel for how much that expands the market, but if it's 4x then commissions will come to $2 billion or so.  If Goldman gets 30% of that, they're looking at $600 million, which is about 1% of the $50 billion or so they book in revenue every year.  Not exactly a super gigantic new market for them.

Still, even $600 million is worth lobbying for.  And anyway, this is all rough guesswork and I might be way off. But I'm still curious where the trillion dollar plus estimates have come from.  They just don't seem to be in the right ballpark to me.

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The Death of the Public Option

| Mon Dec. 14, 2009 9:02 PM EST

It looks like both the Medicare buy-in and the public option are dead:

After a meeting among Senate Democrats today, Indiana Senator Evan Bayh said it looked like the proposed Medicare expansion would be dropped. “The general consensus was that we shouldn’t make the perfect the enemy of the good and in order to get all the insurance reforms accomplished and a number of other good things in the bill,” dropping the Medicare expansion “would be necessary to get the 60 votes,” Bayh told reporters.

Earlier, two top proponents of the public option, Senators Jay Rockefeller and Tom Harkin, said they would be willing to give up the public option to win passage. Harkin said he’d also be willing to forgo the Medicare expansion. The senators’ statements suggested a deal might be close. Harkin, an Iowa senator and chairman of the Senate health committee, and Rockefeller of West Virginia both said it was time to focus on what needed to be done to get a bill passed.

“This bill, without public option, without Medicare buy-in, is a giant step forward toward transforming American health care,” said Harkin. “That’s reality, there is enough good stuff in that bill that we should move ahead with it.”

Apparently CNN confirms this.  So in the space of a few days we seem to have gone from more than I expected to less than I expected.  I always figured we'd at least be able to get a public option trigger included, but if this report is right we're not even getting that.  Sic transit etc.

Twitter Mini-Storms

| Mon Dec. 14, 2009 8:56 PM EST

I have a Twitter feed that I update very rarely (though MoJo makes it look a little more active than it is by automatically creating a new tweet every time I publish a blog post).  Normally, I get maybe one or two new followers per day, but every once in a while I get a mini-storm of new follow requests.  This weekend, for example, I suddenly got several dozen for no apparent reason.  Why does this happen?

POSTSCRIPT: OK, I have it.  After several minutes of arduous research, it seems that at 6:16 pm on Saturday Matt Yglesias tweeted about my Matt Taibbi post.  At 6:17 pm I got a follow request, and over the next five hours I got 32 more.  So apparently Matt is the instigator here.

Anyway, my Twitter feed is at http://twitter.com/kdrum for anyone interested in following it.  But bewarned: I still don't post much on it.

Copenhagen: The First Week

| Mon Dec. 14, 2009 3:33 PM EST

David Roberts has a good short summary of the first week of the Copenhagen talks (even shorter summary: lots of sound and fury signifying nothing much) and says this is the only really big story to emerge so far:

The one significant new feature of this treaty round is the emergence of a distinct voice for small island nations and the poorest states—the folks for whom climate change is an existential, not just economic, problem. Inside the talks, this manifested in the tiny island state of Tuvalu’s call for a new, post-Kyoto treaty that would require mandatory reductions not only from rich countries but from the biggest and fastest-growing developing nations, including China and India. It would also set 1.5 degrees C as the target for limiting the rise in global temperature, rather than the 2 C agreed upon in previous talks (and still maintained by big emitters). This amounts to the first big public eruption of the simmering tensions between major developing countries and their smaller/poorer brethren. Whereas China and India want to shelter their economic development above all else, Tuvalu, well, might go under water soon.

Read the whole thing.

Ad Update

| Mon Dec. 14, 2009 2:42 PM EST

In case you're interested, here's an update from the LA Times on efforts to turn down the volume on TV commercials.  As near as I can tell, it's the exact same story we all read six months ago.  Anna Eshoo's bill is still winding its way slowly through Congress; it's still wildly popular with ordinary people; it's still being opposed by Republicans; and the ad industry is still "working to address the problem," with progress expected any day now.  Just thought you'd like to know.

Obama and the Bankers

| Mon Dec. 14, 2009 2:22 PM EST

Speaking of Obama and Wall Street, here's the latest.  After last night's attack on "fat cat bankers" on 60 Minutes, Obama held a White House meeting with top financial CEOs today that the Wall Street Journal said "was expected to clear the air between the president and the financial sector."  Good to hear!  The New York Times added this:

Mr. Obama, who has faced criticism from Democrats and Republicans alike for being too close to Wall Street, called Citigroup, Goldman Sachs and 10 other big banks to the gathering as anger over last year’s bank bailouts continued to percolate. The president will address the size of salaries and bonuses, an official said, as he seeks to impress upon bankers that they have a “special responsibility” to consumers.

“We have to get them off the sidelines and get them to play a more active role in our economic recovery,” Rahm Emanuel, the White House chief of staff, said on Sunday. “They play an essential role in helping the economy grow.”

Look: bankers are going to keep making lots of money as long as the financial sector makes a lot of money.  That's just the way the business world works, and all the jawboning in the world won't change that.  If Obama really wants bonuses to come down, he needs to propose regulations that will shrink the profitability of the financial industry.  If he does that, bonuses will come down naturally.  If he doesn't, they won't.  He'll get — at most — a bit of short-term posturing designed to relieve public pressure until everyone forgets the whole thing and bankers can go back to business as usual.

So: fewer meetings and more regulations, please.

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Taibbi, Round 2

| Mon Dec. 14, 2009 1:44 PM EST

Matt Taibbi is a hard guy to defend.  He exaggerates, he misinterpets, and he uses bad language.  Sometimes he gets his facts wrong.  If I knew what was good for me, I'd just leave it at that and jump on the bandwagon that says his brand of journalism is beyond the pale.

But I'm an idiot, so I won't.  For example: Taibbi says that what unites Obama's economic team is that they're all proteges of Robert Rubin.  I've already said that I think this is a bad interpretation, but Taibbi's underlying point is still a good one: this is a very mainstream group that's overly sympathetic to Wall Street and unwilling to push for really substantial regulatory reform.  Ezra Klein defends them this way:

What unites not only Obama's economic team, but his whole White House, is not its emphasis on rich people. It's the emphasis on people accustomed to dealing with Congress....It's rather difficult to say what these people do and don't believe, as their whole world is finding 218 in the House and 60 in the Senate, and every word, action and policy brief is squarely aimed at that goal.

That leaves two questions worth asking about them: First, are they more or less liberal than the 218th most liberal congressman and the 60th most liberal senator? Second, are they good at their jobs? That is to say, are they good at bringing 218 congressmen and 60 senators into line behind reasonably good policy?

I'm just not sure this works.  It does matter what these people do and don't believe.  Speaking for myself, I'd really like to know whether we have a progressive administration that's hemmed in by Congress or if we have a mainstream administration that pretty much agrees with the 60th most liberal senator in the first place.  If it were the former, we'd at least be hearing leaks that they wanted to propose hard-hitting regulations but eventually decided not to on tactical grounds.  But we haven't.  The regs that came out of the White House earlier this year were mostly pretty soft, and there was very little sense that anyone in the West Wing had been arguing to open the negotiations with Congress from a more forceful starting position.

Now, I suppose one argument is: who cares?  "We don’t want to tilt at windmills," Obama said last June, and hell, maybe he's right.  But that takes things too far.  It suggests that Congress has all the power and Obama virtually none.  I agree that Taibbi should have emphasized Congress, and congressional Republicans in particular, more than he did, but surely it makes a difference if the president stakes out  a courageous position in the first place?  If he gets the public on his side, that's got to count for something.

But he never really even tried, and I think that's largely due not to political considerations, but due to the fact that his team didn't really want to stake out a more audacious position.  Neither did Obama.  He reappointed Ben Bernanke with barely a second thought, after all, which certainly suggests that he's basically OK with Bernanke's general view of the economic world.  And while it's true that in one sense there's nothing new here — Obama was pretty obviously a fairly mainstream guy all throughout the election — he's also the guy that promised at every opportunity to change the way Washington works.  He's the guy who met with bankers and made sure we all knew that he told them he was "the only thing between you and the pitchforks."  He's the guy who tells 60 Minutes that he didn't run for office "to be helping out a bunch of fat cat bankers on Wall Street."  He may be mainstream, but he's certainly doing his best to sound otherwise.

So sure: Congress is a problem.  But so is the White House.  So is the Fed.  So is the SEC.  And that's the whole point.  They're all problems.  Taibbi chose to illustrate this colorfully, and sometimes that color gets in the way of a coherent narrative.  But dammit, at least he's telling the story, and there are damn few others who are even trying to tell it in popular, long-form venues.  As soon as they do, maybe we can all toss Taibbi on the ash heap and take turns raining down curses on him.  Until then, he's what we've got.

History is Rhyming

| Mon Dec. 14, 2009 12:52 PM EST

The LA Times reports today that the Obama administration wants to expand the war in Afghanistan to include drone attacks on Pakistani cities the size of San Francisco:

The prospect of Predator aircraft strikes in Quetta, a sprawling city, signals a new U.S. resolve to decapitate the Taliban. But it also risks rupturing Washington's relationship with Islamabad.

The concern has created tension among Obama administration officials over whether unmanned aircraft strikes in a city of 850,000 are a realistic option. Proponents, including some military leaders, argue that attacking the Taliban in Quetta — or at least threatening to do so — is crucial to the success of the revised war strategy President Obama unveiled last week.

"If we don't do this — at least have a real discussion of it — Pakistan might not think we are serious," said a senior U.S. official involved in war planning. "What the Pakistanis have to do is tell the Taliban that there is too much pressure from the U.S.; we can't allow you to have sanctuary inside Pakistan anymore."

Boy, those comparisons of Afghanistan to Vietnam just get more facile and ridiculous every day, don't they?

Chart of the Day: The Killing Fields

| Mon Dec. 14, 2009 12:22 PM EST

Via Ezra Klein, here's an estimate from the Institute of Medicine of how many people die each year because they lack health insurance.  The number goes up every year as the population increases and the percentage of people covered by health insurance decreases, so it's probably up to around 25,000 this year.  Seems like we ought to do something about this, doesn't it?

Harry and Joe

| Mon Dec. 14, 2009 1:17 AM EST

Harry Reid, October 27th:

"Joe Lieberman is the least of Harry Reid's problems. I don't have anyone that I've worked harder with, have more respect for, in the Senate than Joe Lieberman. As you know, he's my friend....Sen. Lieberman will let us get on the bill, and he'll be involved in the amendment process."

November 2nd:

Reid’s staff has told anxious liberals that Lieberman has given the Democratic leader assurances that he will not wreck the reform bill because of Reid’s decision to include the public option, according to two sources briefed on the issue.

December 8th:

Sen. Joe Lieberman (I-CT) [...] just gave his Democratic colleagues some breathing room. Lieberman said he's open to both the Medicare buy-in idea, and a separate proposal to extend the private system that insures federal employees to individuals and small businesses.

Today:

Senator Joseph Lieberman (I-Conn.) informed Senate Majority Leader Harry Reid (D-Nev.) in a face-to-face meeting on Sunday that he will vote against a health care bill that includes a public option or a provision that would expand Medicare, a Democratic Senate aide tells the Huffington Post.

I wonder how Reid's lifelong friendship with Lieberman is faring tonight?