Rich Sweeney, at Common Tragedies, writes about three common characters that populate some of the industrial/bureaucratic commentary over cap-and-trade carbon permit systems: hoarders, speculators and do-gooders.
A hoarder may be a low-carbon intensity electric generator seeking to bid up the cost of carbon permits to drive up costs for rivals and drive up the price of power in the region. A speculator is a financial player — for example a Wall Street bank or a hedge fund — with perhaps complex multi-market holdings that would benefit from high prices or otherwise tightly constrained carbon permit markets. Do-gooders are simply folks willing to buy and hold carbon permits as a way to hasten reductions in carbon emissions.
Sweeney notes a few good reasons not to be too worried about these characters. While on the one hand the inherently political nature of the program raises concern about program stability (aka “regulatory uncertainty”), on the other hand if things start going too badly, too quickly expect politicians to intervene. Such a possibility will quash most extreme hoarder, speculator, or do-gooder strategies. In addition, a number of simple program design choices can limit the likelihood that these kinds of strategies could disrupt the market or undermine program goals.
Still, it is worthwhile to think through the possibilities. Sweeney’s post provides a place to start thinking.