From the Chicago Climate Exchange (CCX) website

“Chicago Climate Exchange (CCX), launched in 2003, is the world’s first and North America’s only active voluntary,legally binding integrated trading system to reduce emissions of all six major greenhouse gases (GHGs), with offset projects worldwide. CCX Members are leaders in greenhouse gas (GHG) management and represent all sectors of the global economy, as well as public sector innovators. Reductions achieved through CCX are the only reductions made in North America through a legally binding compliance regime, providing independent, third party verification by the Financial Industry Regulatory Authority (FINRA, formerly NASD). The founder, Chairman and CEO of CCX is economist and financial innovator Dr. Richard L. Sandor, who was named a Hero of the Planet by Time Magazine in 2002 for founding CCX, and in 2007 as the “father of carbon trading.” CCX emitting Members make a voluntary but legally binding commitment to meet annual GHG emission reduction targets.Those who reduce below the targets have surplus allowances to sell or bank; those who emit above the targets comply by purchasing CCX Carbon Financial Instrument® (CFI®) contracts.”

Does anyone else notice the incredible similarities between the financial disaster we are currently attempting to correct and this “carbon credit exchange”?  The ongoing sub-prime debacle was triggered by the collapse of over leveraged, securitized debt instruments whose value tanked when the underlying assets decreased in value.  These “financial innovations” CDOs, CMOs and the like turned to toxic waste on the balance sheets of once mighty investment firms; Bear Sterns, Lehman Brothers.  And unlike carbon credits, these financial instruments had real, tangible assets with admittedly depressed, but non-zero valuations  backing them.

On to the bubble in the making …

Just like the housing bubble, the carbon credit bubble is based on the assumption that the underlying asset; in this case carbon credits; will continue to increase.  With ever expanding global markets driving demand for fossil fuels to ever higher rates of consumption, this would be a reasonable assumption. (Provided the underlying science is valid.)  However, unlike a physical asset such as a home, the value of a carbon credit represented by CXX and it imitators is pure fiction; a creation of governmental edict with no intrinsic value.  Carbon caps derive their market not from the intrinsic value of  land and structures, as in the case of a home, but from the simple fact that governments have decided greenhouse gas emissions must be reduced.  Much like a fiat currency, carbon credits are worth what their issuers say they are worth.

Like any exchange, seller and buyer in a carbon credit swap arrive at mutually agreeable prices to exchange goods, in this case the “right” to emit a particular quantity of greenhouse gasses.  The value of these “rights” is dependant on the regulatory environment mandating the kind and magnitude of reductions.  Where these government mandated emissions reductions can not be accomplished by process modification, credits are purchased to meet the imposed goals.

But what happens when the underlying asset suddenly decreases in value?  Declining home values in the United States, which dropped by more than 25% in a 12 month period, brought on the current economic panic that is causing such havoc in the global financial markets.  Almost overnight, portfolios on major investment houses and banks became worthless.

What could cause a similar, precipitous decline in carbon credit values?  The possibility that greenhouse gas emissions are not responsible for global warming would be one such driver.  Recent evidence suggests that the importance of man-made impacts on the global environment have been grossly overstated.  If these studies are true, they would be the impetus for wholesale repeal of greenhouse gas emission limits making the cap and trade credits worthless. 

As was the case with the housing bubble, pension funds, investment houses, mutual funds, the so called “green” funds and any individual investor would take a beating. 

Unlike the housing bubble, the carbon credit “financial innovations” of Dr. Richard L. Sandor, “Hero of the Planet” and ”father of carbon trading.” will be worthless.

Much like the “science” on which the entire scheme was based. 

Please contact your Representatives and Senators and demand they enact legislation to stop this madness before we need $700,000,000,000.00 to bailout the “carbon traders”.

The Good

Sorry, there is no good in this headlong rush to socialism.

The Bad

Yesterday, the Senate stuffed the “Emergency Economic Stabilization Act of 2008″ H.R. 1424 with enough pork to open a Sonny’s Bar B-Q.  Larding on another $100 Billion or so in earmarks, our illustrious senators punted this pig without lipstick to the House for “consideration” and passage.

A funny thing happened on the way to socialism. A few high minded Congressmen decided the taxpayers deserve more than the scant consideration this bill received in the Senate.  A critical bloc of more than a dozen lawmakers who voted against the bailout measure Monday were prepared to support the new bill if a few key provisions were added including:

• the initial pay-out under the plan be sharply limited
• last-minute pork projects added by the Senate be stripped from the bill.

“We have a critical mass,” said Rep. Steven C. LaTourette who voted against the bill Monday. He had talked to 14 other members willing to support the new version of the bill if the amendment he authored was accepted.  “Our core group is sufficient to take care of the margin to pass this bill, if our amendment is ruled in order and passed,”  Rep. LaTourette declined to identify the other lawmakers he said were prepared to switch.

Mr. LaTourette’s amendment limits initial Treasury Department spending to $250 billion and requires congressional approval if more funds are needed.  In addition, it strips spending items included in the Senate bill, including special provisions benefiting rum producers and the NASCAR stock-racing circuit.

The Ugly

The core of the Wall Street rescue package proposed by Mr. Paulson remains intact. Packaged within a 450 page “novel length” bill, this work of financial fiction would allow the Treasury Department to buy up to $700 billion of now-worthless mortgages and mortgage-related securities. This is the toxic debt clogging the books of the nation’s banks and financial firms.  A fundamental, untested and hotly debated assumption by Mr. Paulson assumes banks will not lend and therefore consumers and businesses will be unable to borrow until this debt is removed from their books.

Mr. Paulson contends the resulting aftershocks would be felt in retirement pensions, savings plans, paychecks and payrolls across the country.

Lawmakers say they have improved the original three-page Paulson blueprint, adding several layers of oversight; some relief for homeowners struggling to meet mortgage payments; strict limits on executive pay for those who participate in the plan; and an ownership stake for the federal government in the companies being helped. If and when the U.S. housing market recovers and the mortgages gain in value, the government stands to recoup at least some of the money spent.

The Really Ugly

The “new and improved” plan still has the taxpayer holding the bag.  The wizards of Wall Street, the geniuses in the mortgage brokerages and the best and brightest in the bond rating agencies get off with no downside risk to their retirement plans, stock options, compensation plans.  Mr. Paulson’s concern that the resulting aftershocks will be felt in retirement pensions, savings plans, paychecks and payrolls across the country is right on the mark.  Only problem, those most affected are those least culpable.

So we are back to square one. Privatized profit; socialized risk.

Nice try but no thanks. 

Don’t you dare dump $700,000,000,000.00 in unsecured debt on my kids and grand kids just because you folks in the Senate and House want to adjourn and begin your re-election campaigns.  It’s time to stick around and cleanup after yourselves.  Create a real bill; with real enforcement provisions;  needed changes to accounting rules; restrictions on “exotic” financing arrangements; in short the type of oversight we taxpayers expect from our hired help!

With any luck at all,  Congress and the Senate will stay in session another week or two and craft a real bill. (which takes time.  Who reads 450 pages of dry, financial policy in 24 hours?)  They can then return home and face the wrath of the voters who I can only pray will retire the lot of them.

God knows just about ANYBODY could do better than the current crop of “legislators”.

Contact your Senators and Representatives and tell them to stay in town until they get this right.