Understanding Cap & Trade

Cap & Trade is an outgrowth of the Carbon Dioxide/Global Warming Hoax. No logical scientific explanation has ever been made to correlate carbon dioxide with global warming. In spite of this, an arbitrary assumption has been made that carbon dioxide emissions from the burning of fossil fuels should be controlled.


The Cap & Trade program is an international governmental effort to control carbon dioxide emissions. For Western Europe, the intention of the European Union (EU) is to reduce carbon dioxide emissions by 20% from 1990 levels, in the next 30 years. The mandatory scheme applies to 11,000 industrial installations, including power plants and major chemical facilities across all 27 member states, plus others. For our explanation, A hypothetical example will be used to explain how Cap & Trade works. The example involves the EU, because more data is available from that region.

Assume that there is an electrolytic steel manufacturer in Belgium. Electrolytic steel is produced by melting recycle steel from automobiles and other sources. The melting uses electricity. To generate the required electricity, our example company uses a steam turbine powered by the burning of coal. The coal burning liberates carbon dioxide.

Our example company burns sufficient coal to generate 10,000 tons of carbon dioxide per year. The EU Commission has "capped" the plant to emit only 9000 tons of carbon dioxide per year. This means under normal operations our example company has three options. It could reduce production of steel to require only enough coal to emit 9000 tons of carbon dioxide, invest in alternate energy equipment to capture carbon dioxide or reduce coal use by substituting wind, solar, etc. to reduce carbon dioxide emission, or lastly purchase from the EU Commission a "right" to emit the extra 1000 tons of carbon dioxide. Of the three choices, the obvious best one is the cheapest, and assuming there is no intention to decrease production of steel, that depends on the comparative prices of installing new equipment or purchasing the "rights".

In addition to the arbitrary and mandatory cap of carbon dioxide emission on our example company, the EU also sells the additional "rights". It has been said that a "rights" price of between $68 and $135 would be required, if industry as a whole is forced to shift into a new low-carbon footing. However, the actual price per ton of carbon dioxide in 2011 was $23, and more recently down to a new low of $5.20. This means that our example company could buy a 1000 ton "right" for $5200 per year. This is obviously a cheaper way to go for our example company than to try to purchase new equipment. The EU still gets $5200, but nowhere near the $23,000 they obtained in 2010 or the desired $68,000 to $235,000.

Why has the carbon dioxide "right" price dropped so low? Two reasons. Industrial production is down in the EU, because of the recession. In addition, the EU has flooded the market with "rights" through many free offerings of a political nature. To increase the carbon dioxide "right" price, the EU is proposing to delay the sale of 900 million "rights" originally scheduled for sale in 2013 to 2015 for four years. In 2013 just over 50% of the 2.1 billion metric tons of "rights" provided by the EU will be sold, with the remainder allocated free of charge. Note that even at the low price, this is almost $5.5 billion going into the coffers of the EU commission.    

One might ask why the EU doesn't lower the cap levels of carbon dioxide emission for individual producers. This would automatically require more "rights" purchasing and simultaneously increase the "rights" price. The answer is political objection. There are a number of countries with significant coal production and coal usage, of which Poland is a prime example. In addition, the chemical company conglomerate strongly objects, because it would increase its energy cost.

In spite of these difficulties, the Cap & Trade scheme will likely continue to progress, because it is a sidestep to direct taxation and still accomplishes feeding large amounts of unjustifiable tax money into EU coffers. The UK, which is not part of the EU has ignored the Cap &Trade issue and applied a direct tax of $7.90 per ton of emitted carbon dioxide on the production of electricity consumed by certain industries, including chemicals.

Note again that all of the above is based on an unjustified theory that carbon dioxide emissions are responsible for global warming.

Natural Gas Exports

    With the introduction of new technology to release natural gas from shale, the US suddenly finds itself with a surplus of natural gas. As with any commodity, price has fallen with increased availability and natural gas has become a product of export interest. Is said that more than 20 natural gas export facilities are now being proposed in the US. This development has created some consternation, especially among basic chemical companies.
    Large chemical complexes, such as Dow and DuPont, manufacture many chemical products to be used by other industries, such as paint manufacturers. The chemical companies also manufacture various plastics themselves. One of the basic raw materials is ethylene. The traditional source has been from petroleum with steam cracking of light hydrocarbons and cracking of petroleum residues. However, some natural gas contains a significant concentration of ethane, which justifies its separation and dehydrogenation to ethylene. With cheap natural gas, this latter process is economically preferred.
    Dow Chemical and others are taking advantage of cheap US ethane by constructing US plants to dehydrogenate it to ethylene. However, development of a natural gas export business would decrease the availability of natural gas in the US and increase its price. This would obviously be a disadvantage to ethylene manufacturers, such as Dow. Because of this, Dow, Celanese, Eastman Chemical, and Huntsman have established a coalition named America's Energy Advantage, which will obviously lobby against export of natural gas. In effect, they want trade restriction.
    It is also interesting that prior to this development, chemical companies have been strong proponents of free trade and have profited there from. They have manufactured many of their basic products outside the United States and have imported them duty-free for further conversion to more complex materials. Therefore, these chemical companies are now speaking in contradiction. On the one hand, they want free trade in order to bring into the United States foreign produced materials duty-free. Simultaneously, they want to restrict natural gas exports.

    The National Association of Manufacturers (NAM) apparently sees the inconsistency of this position and comes down on the side of supporting natural gas exports. This has upset Dow, who then left the NAM. The American Chemistry Council (ACC) apparently has views similar to NAM, and said last year it would oppose any legislation that attempts to restrict export of natural gas. Dow is also threatening to leave the ACC.
    While I find the controversy interesting, I am much more concerned with its basis. That is, it is apparently assumed that the federal government has the right to restrict exports of natural gas. While the federal government may take that right, it would be completely inconsistent with the implication of the Constitution on private property. The production of natural gas is private property, and the government has no right to control it, unless it's a matter of national security, which it obviously is not.
    If the federal government involves itself in this controversy and comes down on the side of restricting exports, I strongly hope that those organizations who had intended to go into the natural gas export business will sue the federal government in federal court, and if necessary carry the case to the Supreme Court.

Chu Leaving Department Of Energy

     Hooray!
     Jeff Johnson reports in the February 11 issue of Chemical and Engineering News that Sec. Chu is resigning as Secretary of Energy in the Obama Administration. He is said to be returning to academia, where he belongs.
     I have previously called for Sec. Chu's resignation, in spite of the fact that he has been a "good soldier". He has been following to a T Obama's program on energy, which is to replace all fossil fuel use with sustainable forms, such as wind and solar. This is a ridiculous notion. God made fossil fuels for our appropriate use. Appropriate means common sense, which is to reduce any collateral damage as we gain.
     As human beings we were made to breathe air and take advantage of its oxygen content to sustain life. Simultaneously, we exhale carbon dioxide, which for some unaccountable reason has achieved a reputation of being bad. I have nothing against wind and solar energy, but oil, natural gas and coal are available for our use. To suddenly ignore their presence and go to less efficient sources of energy, which will convert the United States to a third world country, is mind-boggling. Enough said about the ridiculousness of the Chu/Obama energy program.
     The next question is why would Obama want to denigrate fossil fuels and go to the so-called sustainable forms? Who knows? We can't read the man's mind, and he has not revealed his reasons. However, the more obvious answer is that he is ignorant on the subject of technology and economics. His background is that of a community organizer. He has devoted his life to becoming a wonderful orator, and he has succeeded. That's where the danger lies. He doesn't know what is talking about, but his oratory skill allows him to sell anything, no matter how silly it may be in the true light of day.
     But we were really talking about Sec. Chu. C&E News says he came from a strong background in scientific research - he was the 1997 Nobel laureate in physics for his work on methods to cool and trap atoms with laser light. Does that qualify him to be Sec. of Energy? His background is research. A research scientist is supposed to find new materials or new production methods which could be of benefit to society. By himself, a research scientist can bring nothing to economic fruition. There must be engineering mockups to determine practicality of production, calculations of economics to determine whether the new material or process will be economically feasible in comparison with the existing materials or processes. It must involve funding and engineering for the building of manufacturing facilities, and it must involve marketing programs and logistics to get the materials or processes in the hands of users.
     Chu knew nothing of this. He knew nothing of these myriad details. He obviously had only the simple approach of agreeing with Obama that "wouldn't it be nice" and let's throw taxpayer money at it. In that program, Chu was remarkably successful. He made the obtaining of permits for extracting fossil fuels from federal lands significantly more difficult, so that the sustainables would have less competition, and he spent $36 billion of stimulus funds on sustainables. These two items are regarded as achievements? Look at it in fact. Reduction of availability of fossil fuels makes energy more expensive. This is one of the reasons why gasoline is $3.60 a gallon. Is it also an achievement to spend money? He hasn't gotten anything in that expenditure. The Natural Resources Defense Council, an environmental advocacy group lauds him for doubling US use of wind and solar energy. Is that really an advantage? Look at the cost.
     So Chu is going back to academia. That's where he belongs and should have stayed. He has aided Pres. Obama in doing irreparable damage to a practical US energy program.

Ethanol in Gasoline

     Jeff Johnson in the November 26 issue of Chemical Engineering News reported on continuing the Congressional mandate for ethanol to be added to gasoline.
     Congress originally set up a Fuel Standard requiring that 13.2 million gallons of corn-based ethanol be added to gasoline in 2012 and part of 2013.
     Ethanol production for use as a motor fuel uses about 45% of the US corn crop. Because of the drought in the US this past summer, corn yields plummeted to a 17-year low. The corn harvest was 13% below the previous year and over the past three years, the price of corn has nearly doubled.
     In view of the above, nine governors, 26 senators, and 50 members of the House of Representatives, as well as many livestock, poultry and other farmers who depend on corn for animal food, requested the EPA to waive the congressionally requirement.
     Apparently, the EPA has power to grant this waiver but has refused to do so. While the EPA has power to grant this waiver under the law, it says congressional requirements for the waiver have not been met, and waving the requirement will have little if any economic impact.
      Rather than to concentrate on the position of the EPA, it seems that Congress should be doing its job of recognizing that the original mandate was in error and should be corrected by either eliminating it or modifying the Renewable Fuel Standard.
      Notice that we are now in February and that the whole issue seems to be dropped, in spite of the fact that it is still completely relevant. Present consternation is on Congressional budget cuts, and subsidies for ethanol production are a significant portion thereof. We have ample energy sources in the US, without the use of ethanol. If the ethanol subsidy is eliminated, which it should be, then there is an obvious controversy in that the present Fuel Standard still requires 13.2 million gallons of ethanol being added to gasoline.