Goldman Sachs: Friend of Planet Earth

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Dean Baker
Truthout, December 14, 2009

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Okay, I have now said something nice about Goldman Sachs. And, there is actually some truth in this title.

Some people have pointed out that Goldman Sachs is one of the main forces lobbying for the cap and trade system of carbon permits that lies at the heart of the House approved bill to combat climate change. Under this proposal, a certain amount of carbon permits would be issued each year. These permits would allow oil companies, utilities, and other manufacturers to emit a set amount of carbon dioxide each year.

The total amount of carbon dioxide emitted in the country would be restricted by the amount of permits issued. Some amount of permits would be grandfathered – handed out to coal burning utilities and other major emitters. The rest would be auctioned off to the highest bidder, raising revenue for the government. Both the auctioned and the grandfathered permits could be resold in the secondary market. This gives an incentive for large emitters to reduce their emissions, since they can then profit from selling their permits to others.

Many environmentalists have objected to the permit system arguing that a direct tax on carbon emissions would be easier and cheaper to administer. This is probably true. They have also pointed out that Goldman Sachs and other Wall Street firms have been major proponents of the cap and trade system. They argue that these firms stand to make billions off the permits.

This is absolutely true, but the story is actually not as devious as some seem to believe. While there can be bubbles in carbon permits, just like there can be bubbles in wheat, corn, Internet stocks or anything else traded in markets, there is no reason to believe that carbon permits are especially susceptible to bubbles, or that this has anything to do with Goldman’s interest in the system.

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.

How should the rest of us feel about giving Goldman $8 billion a year, and the financial industry as a whole $25 billion, to needlessly shuffle paper when we could have accomplished the exact same outcome with a simple carbon tax?  We should be disgusted, but we should also recognize reality.

Matched against the combined power of the oil, gas, coal, and auto industry, the enviros don’t stand a prayer. Members of Congress and presidents don’t worry that they won’t get re-elected because the environmental groups are unhappy with them. They do worry that they won’t get re-elected because the big industry lobbies are unhappy with them.

In this case, Goldman and the Wall Street boys are providing an essential countervailing force to the global warmers. And, fortunately for us, they are willing to accept their payoff as a contingency fee. If they don’t win a cap and trade system, then they go home empty-handed. 

So, the basic story is in fact disgusting. We will have to needlessly shell out tens of billions each year – money that could go to productive purposes – to Wall Street banker types. This is the money that we must pay to buy their support and lobbying power. But the alternative is watching the global warmers defeat efforts to restrict greenhouse gas emissions. Maybe in ten or twenty years the balance of power will have changed enough that we don’t need to make payoffs to Goldman, but at that point the question will be moot. So hand over your money to the bankers and remember to thank them for saving the planet. 

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.