Trump just dealt Wall Street a $135 million blow

U.S. President Donald Trump looks on as Broadcom CEO Hock Tan announces the repatriation of his company’s headquarters to the United States from Singapore during a ceremony in the Oval Office of the White House on November 2, 2017 in Washington, DC.

President Trump issued an executive order Monday blocking Broadcom’s takeover of Qualcomm.
Trump said there is “credible evidence” that Broadcom “might take action that threatens to impair the national security of the United States.”

Wall Street banks had been due to make a small fortune from advising on the deal.
President Trump issued an executive order Monday blocking the impending takeover of Qualcomm

In doing so, he also likely sent millions in advisory fees for those working on the bid up in smoke.

Moelis & Co., Citi, Deutsche Bank, JPMorgan, Bank of America Merrill Lynch, and Morgan Stanley were advising Broadcom on the potential merger. Those banks would have shared between $110 million and $135 million in fees if the deal had completed, Jeffrey Nassof, director of consulting firm Freeman & Co., told Business Insider in November when the bid was first announced.


Bank of America, Citi, Deutsche Bank, JPMorgan, and Morgan Stanley were also helping arrange debt financing, while Silver Lake Partners had agreed to supply $5 billion in convertible debt financing.

Qualcomm had resisted the takeover offer, hiring Goldman Sachs and Evercore to aid its defence. Had the deal gone ahead, Goldman Sachs and Evercore could have made between $120 million and $145 million in fees, according to Nassof.

Now the deal has been blocked, Qualcomm’s advisers are likely to see some payout, though it’s not clear how much.

The blow to Wall Street could be temporary, with Trump’s decision to block the deal potentially triggering another round of bids. Intel has reportedly been watching the Broadcom-Qualcomm situation with interest, for example.

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TRUMP: I’m looking at one candidate ‘very strongly’ to replace Gary Cohn as top economic adviser

The race to replace Gary Cohn as the director of the National Economic Council appears to have been narrowed down to one leading candidate.

President Donald Trump said Tuesday that he is “looking at Larry Kudlow very strongly” to take over as his top economic adviser.

“I’ve known him a very long time. We don’t agree on everything, but I think in this case I think that’s good because I want a divergent opinion,” Trump said before boarding Marine One outside the White House.

Multiple reports on Monday suggested that Trump is homing in on Kudlow, who long supported Trump during the 2016 campaign. Kudlow, who has appeared on CNBC since 2001, was previously floated for other economic jobs in the Trump administration.

Separately, a source who has advised Trump on economic issues told Business Insider last week that Kudlow was a leading candidate for the job.

Kudlow, who has been critical of Trump’s approach to trade, recently blasted the president’s decision to impose broad tariffs on imports of steel and aluminum. If he is selected, Kudlow is likely to fill a void of pro-free-trade advocates that has developed in the White House over the past few months.

Trump said Tuesday that Kudlow shifted on the tariffs, despite a recent op-ed attacking the president’s decision to impose trade restrictions on imports of steel and aluminum.

“Hw now has come around to believing in tariffs as also a negotiating point,” Trump said. “You know I’m renegotiating trade deals and without tariffs we wouldn’t do nearly as well.”

A White House spokesperson told Business Insider on Monday there were no personnel announcements at this time.

Kudlow served as a staff economist during the Reagan administration, was the chief economist for Bear Stearns from 1987 to 1994, and has regularly appeared on CNBC since 2001.

The New York Times’ Maggie Haberman and Jim Tankersley reported Saturday that Christopher Liddell was considered the leading candidate for the job. But, Haberman tweeted Monday that Trump cooled on Liddell after a Wall Street Journal editorial blasting the candidate and pushback from other advisors.

Liddell, the White House’s director of strategic initiatives, was previously the CFO of Microsoft and General Motors.

Investors and economists are closely watching the pick, as it could indicate the direction of Trump’s economic agenda, particularly now with trade. Cohn was seen as a free-trade advocate who pushed back on Trump’s desires for large tariffs and trade restrictions, and a replacement favoring trade barriers could set off concern that Trump will lean into his protectionist tendencies.

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AS CLOSE AS IT GETS: Democratic underdog declares victory as special election comes down to the wire

Democrat Conor Lamb is close to pulling off a remarkable victory in Pennsylvania’s 18th Congressional District.

Right now, the race is officially too close to call.

Lamb, however, declared victory in the wee hours of Wednesday morning.

The candidates are separated by several hundred votes and less than 1 percentage point.

President Donald Trump won the district by 20 points in 2016.

Democrat Conor Lamb moved close to pulling off an improbable win, keeping the Democratic momentum going on Tuesday as he led Republican Rick Saccone in the special election for Pennsylvania’s 18th Congressional District.

With more than 99% of precincts reporting, Lamb held a lead of less than 1,000 votes over Saccone.

Saccone would need a real boost in the remaining absentee ballots to leapfrog Lamb. Already, the Democratic Congressional Campaign Committee declared victory for Lamb, with Rep. Ben Ray Lujan of New Mexico, chair of the DCCC, saying the results “should terrify Republicans.”

Just before 12:45 a.m. on the East Coast on Wednesday, Lamb declared victory at his election event.

“It took a little longer than we thought, but we did it,” he said.

Meanwhile, National Republican Congressional Committee communications director Matt Gorman said in a statement that the “race is too close to call and we’re ready to ensure that every legal vote is counted.”

“Once they are, we’re confident Rick Saccone will be the newest Republican member of Congress,” Gorman said.

Polls heading into Tuesday showed a tight race in a district President Donald Trump won by 20 points in 2016, with some showing Lamb, a former Marine and federal prosecutor, ahead significantly. The seat became open after longtime Republican Rep. Tim Murphy resigned from office late last year following an abortion-related scandal.

Republicans went into the day blasting Saccone, a state legislator and Air Force veteran, for running a subpar campaign in a race they increasingly expected to close. Trump still enjoys decent approval ratings in the district and attempted to push Saccone over the top with a weekend visit.

“Conor Lamb is gonna win,” a national Republican close to the race conceded to Business Insider hours prior to polls closing. “I think it’s been a race, since day one, about candidate disparity.”

Results showed a significant shift toward the Democratic candidate when compared to the 2016 election:

View image on Twitter

Another Republican strategist close to the race cited the “disparity between the candidates having an outsized impact.”

“Conor Lamb is exciting, he does break the mold a little bit,” the strategist said. “And he does sound like the kind of Democrat that your typical voter in that sort of district could support. Saccone, unfortunately just has never been able to excite people in the district. His shortcomings were noticed by a handful of strategists early on.”

Lamb has dominated the fundraising battle against Saccone in the special election for Pennsylvania’s 18th Congressional District, which Republicans highlighted as a significant problem for their candidate.

Outside groups had sought to make up the fundraising difference by injecting money and support into the race. The Congressional Leadership Fund, for example, provided 50 door knockers and spent more than $3.5 million on the election effort. The race featured more than $12 million in spending on both sides, with the airwaves flooded with an inordinate number of ads.

Lamb’s performance is of huge concern to Republicans heading into the 2018 midterms, which increasingly look as if they will be a challenging landscape for GOP House and Senate candidates. Traditionally, the first midterm elections under a new president go for the party out of the White House.

“It should serve as a wake-up call to everybody,” one Republican strategist said of the race.

Lamb ran as a centrist Democrat, embracing gun rights, expressing opposition to abortion personally but supporting abortion rights, and saying that he supports a middle class tax cut though he vehemently opposes the Republican tax plan. Saccone pitched himself as “Trump before Trump” and sought to tie himself closely to the president and his agenda, which remain decently popular in the district.

A number of policies were on the ballot as well, by proxy. This was the first major election since Republicans passed their tax overhaul. At the same time, Trump reportedly pitched his steel and aluminum tariffs with an eye on the race, hoping they could help prop up Saccone. But polling showed the tariffs did little to swing votes.

By a weird quirk, both Lamb and Saccone could be members of Congress by January 2019. Lamb and Saccone are both likely to run in different districts if they choose to seek office again because Pennsylvania’s congressional map will be redrawn before this fall’s races.

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Here’s why the Pennsylvania special election result should freak out Republicans

There’s been a lot of either-or argument over what the future of the Democratic Party should be. Should Democrats seek to build a coalition of college-educated suburbanites plus white urbanites and minorities, or should they try to win back blue-collar white voters who have fallen away from the party in recent decades?

In the special election on Tuesday in Pennsylvania’s 18th Congressional District, a place where President Trump won by 20 points in 2016, likely winner Democrat Conor Lamb showed Democrats don’t have to choose. He managed to do three things at once:

Maintain gains that Hillary Clinton made in affluent, educated suburban areas in 2016,

Regain working-class voters who picked Barack Obama in 2008 or 2012 but rejected Clinton in 2016, and

Win over voters who rejected Obama and Clinton in all three elections.

These results should hearten Democrats and scare Republicans, especially when examined on a town-by-town basis.

Consider, for example, Mt. Lebanon, an affluent and highly educated Pittsburgh suburb that’s included in the 18th. Obama took 54% of the two-party vote here in 2012.

Despite losing the state, Clinton improved strongly on Obama’s performance in Mt. Lebanon, as she did in many suburban, well-to-do areas in Pennsylvania. She got 64% of the two-party vote.

On Tuesday, Conor Lamb got 72%.

Now consider Franklin Township in rural Greene County, where the median family income is less than half what it is in Mt. Lebanon.

While this area of Pennsylvania has a Democratic tradition, recent Democratic presidential nominees have done poorly here. Barack Obama got 34% of the two-party vote, and Hillary Clinton got just 28%.

Conor Lamb managed 43% on Tuesday.

That is, he did better than Clinton where Clinton did better than Obama, and better than Obama where Obama did better than Clinton.

Now, imagine that laid out across the country: Democratic candidates holding together the Clinton coalition, while rebuilding the Obama coalition and then adding on some new voters who weren’t part of either.

This result bodes well in places like Orange County, California, and central New Jersey: affluent suburbs where Clinton won in spite of a long Republican tradition. And it bodes just as well in places like eastern Iowa – and other Rust Belt districts like Pennsylvania’s 18th – where Democrats have lost their previous strength.

This is just one election result, though it’s in line with many other special election results where Democrats have strongly outperformed their 2016 results. But it’s one that should make Republicans feel bad about their odds in November – and one that should make Democrats reconsider how much they really need to fight among themselves about the future direction of the Democratic coalition.

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Export orientation, supply-side thinking, and the theodicy of markets

This blog has argued (hardly uniquely) that the focus of the German and Eurocrat policymaking establishment on exports and competitiveness is destructive for the Eurozone's economy. Today, I want to argue that there's an intellectual feedback loop between highlighting export-led growth and the belief that individual, company, or country merit determines economic success. This is very much work in progress, and I'd particularly welcome feedback.

Early in July, Angela Merkel's party, the CDU, held its "Economy Day." The head of the party's economic council began with an excerpt from the Treasury of Teutonic Stereotypes a pronouncement. "Economic success is no gift;" he said, "rather, it must be earned every day through hard work." 

I have a name for this kind of thinking: the "theodicy of markets."  In the study of religion, theodicy refers to the problem of reconciling the existence of evil with the presence of a god both omnipotent and benevolent (here's a moving example).  But Max Weber used the term more generally, to refer to a doctrine that explains and justifies good and bad fortune. He wrote:

The fortunate is seldom satisfied with the fact of being fortunate. Beyond this, he needs to know that he has a right to his good fortune. He wants to be convinced that he ‘deserves’ it, and above all, that he deserves it in comparison with others.

A theodicy, in Weber's sense, explains why people deserve what they get. A theodicy of markets argues that those who flourish in a market economy deserve to do so. The sentiment expressed above is an example: economic success is no gift--it's deserved, because it results from hard work.

Weber's argument--made in the context of religion--is that intellectuals work hard on their theodicies trying to make them logically coherent. The intellectual difficulties they confront drive the development of doctrine and thereby influence action.

In this light, it's worth investigating the intellectual challenges facing the theodicy of markets.

Mapping desert (or merit) onto market outcomes is at best a dicey business, because it implicitly involves endorsing the fairness of the multitude of bargaining situations determining relative prices. (Germany, for instance, is an exporter of luxury cars, demand for which probably has something to do with increased economic inequality in the countries beyond its borders.) To refer to "productivity" as justifying success is just to rename the problem, since productivity is measured with respect to output prices.

More generally, at a very high level of abstraction, success in any endeavour is a joint product of merit (skill and effort) and circumstances. To maintain a claim that success is deserved, prediction of and adaptation to circumstances can be defined as part of the relevant success-generating effort. However, this move requires a very particular conception of circumstances: they must be amenable to prediction and, hence, fairly resistant to change, including change through the vagaries of deliberate human action.  An actor's success under a given set of circumstances would otherwise have to be ascribed in part to some other actor's decision not to change those circumstances, downgrading the importance of desert.  

Now in talking about the concrete issue of economic success such a conception of circumstances is, of course, quite absurd. The circumstances under which economic success is pursued can and do change due to deliberate action. Even Mr Lauk, who told us economic success is no gift, concedes in another context that sanctions on Russia will damage the German economy. So prior economic success was, in part, a "gift" of good relations with Russia (not to mention the purchasing power gifted to Russian consumers by high oil prices). 

So how does one maintain a theodicy of markets in the face of the manifest role of manipulable circumstances?  Consider this remarkable July 2014 statement from Andreas Dombret, a member of the board of the Bundesbank:

[The] strong influence of international trade [on Germany's recovery] worried some observers. Many felt that Germany's reliance on exports was risky, as it exposed Germany to the ups and downs of the global economy. ... 

I have doubts that turning away from global markets would strengthen the German economy. Facing global competition ensures that German companies keep up with technological progress and retain their high productivity. This might come at the price of higher volatility, but to me this seems like a price worth paying.

The first thing to note is how very, very weak this is as a piece of economic argumentation.  To claim that policy of supporting domestic demand is equivalent to a policy of insulating firms from international competition is absurd--indeed, one of the arguments sometimes made against demand stimulus is that its effectiveness is limited when consumers prefer foreign to domestic products. 

Given the flimsy argument, maybe Dombret's statement is better understood as motivated reasoning emerging from an emotional commitment to the theodicy of markets. In particular, it resolves the problem of reconciling merit with the role of circumstances by

Partitioning circumstances under which economic success is pursued into the mutable (domestic demand) and the immutable ("the ups and downs of the global economy").  

Asserting that altering the mutable circumstances would undermine the promotion of merit ("productivity") and should thus be avoided.

One implication of [1] is that there ought to be a strong "elective affinity" between a commitment to the theodicy of markets and support for an export-led demand model. Export performance is the true test of economic merit, precisely because exports are directed into a "global economy" imagined as impermeable to policy manipulation. 

Imagined is the right word here, because of course "the ups and downs of the global economy" are strongly affected by policy decisions in individual nation-states. Or course, this problem could be avoided if every nation-state would accept the self-denying ordinance to ensure the triumph of merit by avoiding demand stimulus. Here's Bundesbank head Jens Weidmann throwing cold water on the idea that external circumstances should be changed in an interview with Le Monde (German, French) last month:

In general I am sceptically inclined to the idea that one can demand a contribution from others to one's own sustainable growth... Growth must instead come through one's own efforts. It is the responsibility not of the governments of neighbouring countries nor of the European Central Bank, but rather of each government to create a domestic environment that supports business innovation and employment.

And here he is in Spain in July:

At the time [of founding the Euro and agreeing the deficit-limiting Maastricht criteria], it was assumed that by constraining governments' ability to fiscally stimulate demand - and by shifting monetary policy to the European level - governments would have no choice but to implement structural reforms, improve their supply side, and strengthen their potential for sustainable growth.

Note the use of the word "sustainable" in both contexts, which seems to me to be another tactic of displacement, analogous to the rejection of demand stimulus, an implicit assertion that the market generates morally appropriate outcomes, at least in the long run (when, of course, we're all dead).

To sum up, then: to sustain the idea that "economic success is no gift" requires some substantial mental gymnastics with deeply destructive consequences for economic policy; in particular, it promotes an unrealistic reliance on export demand. I'd be very curious to hear from readers whether they found this convincing and/or of interest.

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The Basic Income and the Cult of Work

If you have the sort of task like, say Chuka Umunna, you won't need to peer the stop of work. You get a hefty revenue, you're the boss of your own workplace, you are reputable by your peers and considered to be someone who subjects, and first-rate long breaks help punctuate existence at Westminster. If, alternatively, your experience of work is a life of drudge, humiliation and insecurity there's a very good danger your views would possibly differ. The majority of people who work might like the habitual and shape a work day gives them. It might confer a experience of reason and provide a social lifestyles, however on the end of it most of the people would not do what they do in the event that they failed to must. Millions of people paintings genuinely because they haven't any desire.

We live in a society that makes a fetish out of work. One's trajectory thru the schooling system is (supposedly) guided through getting a decent activity at the give up of it. People's engagement with social protection is supposed to be a brief issue with the item of throwing them back into the place of work at the earliest opportunity. And if people are not working, they're feckless and bone idle and made to experience that way - by no means mind how unemployment continually exceeds the number of vacancies. And  what? It's all so bloody pointless. While there are people without jobs, masses of these with them are overworked. Work time too regularly bleeds into home time as paintings masses are impossible to manipulate as challenge piles upon venture. Or at any time the phone threatens to go with a "request" to are available in, shattering your unfastened time and reminding you a while is their largesse. Too many places of work are permanently quick staffed, and the enjoy of work is a dizzying affair of plate spinning and recurring. Life isn't always for enjoyment, it's a treadmill for endless tens of millions who recognize when they reach retirement that they may be too knackered or too unwell to do the things they constantly wanted to. Life is far too brief to be spent and bent in involuntary servitude, in particular when work may be planned and shared out equitably.

I wasn't amazed to discover Chuka's a lot trailed competition to the simple earnings couched as a defence of the cult of labor. Nor that his argument is virtually identical to criticisms previously ventured through Yvette Cooper. That does not suggest it isn't always nerve-racking, or won't be taken critically in some quarters. But severely, just look at the nation of it. Nonsense about fundamental profits meaning humans living off the state, dwelling vacuous, purposeless lives, of "giving up" on creating new jobs, it is a miserable workout in how impoverished the political creativeness can end up. For instance, within the coming wave of automation,

Work could emerge as more satisfying. In the new economic system our most treasured asset could be people. We have emotional intelligence and belief, and the capacity to create, empathise, convince and purpose in abstract approaches. We can make inventive leaps, and we have instinct. In the brand new economic system what's going to have delivered cost is what's devalued today – the emotional labour of being concerned, communicating, developing and connecting.

As if all this is depending on the archaic compulsion of changing our capability to labour for wages or a revenue. Technology need to not be deployed to create extra bullshit jobs so more human beings can spend their quality years doing meaningless, socially vain tasks. It have to be deployed to reduce the running week, to unfold the wealth we create, and to make us free from the need of waged labour. The future has to be something higher than a human being chained to a table, forever. And it totally can be.

What the basic income offers is a guaranteed, no-strings income to all. If cash way freedom and desire, this is precisely what it confers. It lets in humans the selection to spend their time engaged in socially productive voluntary paintings or to take a seat at domestic and play video video games. People have the liberty to indulge their passions. They can engage in entrepreneurial interest with out the hazard of wreck, as individuals, small partnerships or cooperative ventures. They are unfastened to dip inside and out of the education gadget, and achieve this while not having studying time eaten up by using work. And likewise, humans can retire early from paintings, boost a own family, attend to complete-time caring with out worry and insecurity. We understand a fundamental profits can do that, because trials show it.

Yes, there are simple earning and basic incomes. It has its enthusiasts on the right as well as the left. For the previous, knowledgeable as it's far through Californian tech-bro libertarianism, establishing a simple earnings allows for the abolition of social protection and a whole bunch of liabilities agencies shell out for. The basic income is a way of socialising danger, and supporting support a populace at the same time as Silicon Valley capital parasites off its facts. Others favour pitching the simple profits at a totally low stage so it does not intrude on paintings incentives. I.E. The necessity of operating. Left strategies to simple profits must reject both and pitch it at a degree that permits for a comfortable life that reproduces people in all their material, social and cultural complexity.

Would this gift a capitalist economic system severe difficulties of variation? Absolutely, however then we're supposed to be within the commercial enterprise of moving beyond markets and artificial scarcity. If capital desires to survive, it would have to transform the nature of work totally. Without compulsion, abruptly the (potential) employee has the upper hand within the capital/labour relationship. Capital would don't have any choice but to innovate and automate as tons as it possibly can, because to draw personnel, wages, which might definitely grow to be reimbursement for people's time, would must be tons better than they're currently. The conditions of labor might ought to be better. Work might need to end up extra profitable and enriching. And, who knows, due to the fact work could be finished through those who want to be there perhaps it is probably a more first-rate enjoy all spherical. Meanwhile the relaxation of society might circulate away from the economic vital, experiment with new methods of establishing things, and as all and sundry has a guaranteed true wellknown of residing may additionally determine to consign money itself to the museums.

It's this, in the end, which underpins the hostility Chuka and his friends have closer to the simple income. Theirs is not a realistic reputation of research that prove work is ideal for you however a deep seated fear that the precept of a simple profits, once mounted and practiced, is some thing that works towards the very logics of compulsion and class battle capitalism is depending on. And this is motive sufficient to assist it.

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Saving The Planet: Why Cap-and-Trade Is Not Fit For Purpose

A consensus is finally shaping up among international policy-makers. Market-based emissions trading has become the modern world's primary pollution control mechanism, forming a key part of various national and international bodies' commitment to climate change mitigation. The largest such market is the European Union's Emissions Trading System, which accounts for over 90% of the world's carbon market volume, but market trading systems are also a key part of the Kyoto protocol under the Clean Development Mechanism, and looks set to be adopted in China in the near future. Unfortunately cap-and-trade emissions systems are structurally incapable of delivering us from climate change.

To understand why the emissions-trading regime has come to dominate, it is important to understand its appeal. The first step is a government's imposing of a cap on carbon emissions within a country for any given year. Permits are then created up to the level of this cap, with one permit representing 1 tonne of CO2. These permits are then allocated to businesses, which can then trade the permits amongst one another. This trading amongst permit users puts a price on pollution, incentivising businesses to reduce their carbon footprint so as to be able to sell permits to businesses which are more carbon-dependent, which in turn strive to reduce the number they must buy. Thus, the social goal of reducing carbon emissions is internalised into the profit motive. By ensuring that companies can trade permits, the emissions trading system ensures that the emissions reductions will happen at the lowest possible cost. How so?

Let's say there's a shortage of eggs in my village, and the village leader decides to allocate the reduced supply equally amongst the inhabitants. While it may seem fair if everyone in my omelette-loving village has to cut back their egg consumption to 2 per week, this will not affect everyone equally. For example, I would have to close down my pancake house, which caters for both villagers and foreign travellers passing through. A cap-and-trade mechanism would incentivize some people in the village to reduce or cut out their egg consumption entirely so as to sell their egg ration to me. Since the eggs are worth more to me than to others (being the source of my livelihood) this ensures that the total reductions already imposed are achieved at the lowest social cost.

It is easy to see why economists would be drawn to a cap-and-trade mechanism for pollution control. It has that wonderful counter-intuitive feel to it that economic reasoning so often engenders, and it is breathtakingly simple and obviously efficient. With governing agencies setting a limit to emissions per year, businesses can ensure that the most cost-effective way of meeting this limit will be found. Then, year on year, the number of permits can be lowered, ensuring that the economy's total carbon footprint is reduced. Allowing us to continue our energy-intensive consumer lifestyle as well as mitigating climate change, this economic mechanism allows us to have our cake and eat it too.

At least, that's how the story is supposed to go. The problem is that the effectiveness of the carbon markets which have been initiated so far has been…well, let's go with ‘questionable'. In the first phase of the EU's Emissions Trading System there was actually a rise in emissions, whereas in the second phase, the price of carbon credits fell to a level whereby there was little incentive for businesses to adapt their polluting activities. Oscar Reyes, of the Institute for Policy Studies, notes that for the UN Clean Development Mechanism, a combination of the financial and economic recessions linked with poor management of emissions trading "resulted in a 99% percent decline in carbon credit prices between 2008 and 2013". Perhaps ‘questionable' wasn't the right word.

Indeed, very few people today would suggest that emissions trading is fit for purpose. Still, the logic of cap-and-trade seems sound, and indeed there are many explanations for the failure of specific carbon markets which lie outside its economic logic. For example, too many permits were initially given out causing their price to plummet, exacerbated by the fact that permits were often given out free to major polluters as opposed to being auctioned off. Another issue is the creation of a carbon offsets market, which allows companies to gain and trade ‘carbon credits' for reducing expected future emissions. Granting credits based on counterfactuals naturally leads to difficulties and perverse incentives, such as buying a chunk of rainforest in order to claim a credit for not cutting it down. The offset market also allows developed countries to outsource their carbon reductions to poorer, underdeveloped areas rather than pursuing cleaner technologies.

These are all relevant points. But they don't tell the full story. The inconvenient truth is that while cap-and-trade could be designed so as to operate more efficiently, inherent in it are some problems which cannot be reduced to implementation issues. If we are serious about climate change mitigation we are going to have to rethink our policy consensus.

The problem lies in the nature of the incentives an emissions trading market introduces. It is true that businesses have an incentive to reduce their emissions, but it will not be clear how much of an incentive they have to do so. This is because we do not know how quickly or extensively prices will change as a response to fluctuating demand. Fixing the quantity of emissions within an economy will necessarily lead to such price volatility, as we cannot have both price certainty and quantity certainty in a carbon market. This should be relatively clear after a moment's thought. Given a fixed quantity of permits, the price of those permits will depend upon how many people are willing to purchase them, and how much they are willing to spend, i.e. matters outside businesses' control and foresight such as the availability of clean-energy technology and the state of the economy. In short, if supply is fixed, prices will adjust based on changing demand.

This is important, as price signals are hugely significant for businesses when making medium to long-term investment decisions. Investing in green technology and radically reducing one's carbon footprint could be one such investment, but the cap-and-trade system fails to give any clear, stable signal as to whether doing so would be a financially prudent investment. If a business must invest for example 5% of its annual profits for 10 years in making the shift to a low carbon business model, it must have good reason to believe that this money is not being wasted. This cannot be the case today, since no one can say what the cost of carbon emissions will be in 10 years time.

It may be said that the ever-reducing cap on permits will lead to a rise in the price of carbon, as this should (if correctly designed) lead to increasing scarcity. This will result in businesses bidding against one another for fewer permits each year, gradually raising the price in the market. While this is basically true, it misses the point, or rather, two points. The first is that it is not whether it will prove profitable in the long-run to operate with clean technologies that matters - the decision problem for businesses is that they cannot predict how profitable it will be, and when it will start becoming profitable.  Certainly there is some vague, long-term incentive to reduce emissions, but the price signal is not precise enough to be action-directing in the way that climate change mitigation requires. This is especially disappointing since one of the very benefits of harnessing market mechanisms to combat climate change was supposed to be converting a general but diffuse global responsibility to change our ways into specific and calibrated incentives for key actors whose choices of technologies and outputs determine the climactic effects of our personal and social lifestyles.

The other point, or perhaps another aspect of the same incentive weakness, is a variation on the free-rider problem. If I look at the state of the economy while trying to make a decision as to whether to invest in expensive clean technologies, cap-and-trade does not provide me with any incentive to invest. If I think other companies will invest in these technologies, then I can simply wait for them to develop clean technologies at great cost and effort, and then either copy them or just buy the permits made cheaper by their carbon savings. Of course, if everybody acts the same way, carbon will remain expensive, perhaps so expensive that the system would collapse. In which case I still would not be damaged relative to my competitors by refusing to reduce my carbon emissions. As a polluting business it appears that my dominant strategy whatever my competitors do is to carry on as usual. Perhaps some easily and cheaply made reductions might make sense at the margin, but not the radical investments and restructuring that policymakers are hoping for.  

This gets at the heart of the fundamental weakness of cap-and-trade. It applies to the economy as a whole, but some industries, such as electricity generation, emit orders of magnitude more carbon than others, and it is precisely these industries that are least incentivised to adapt their business practices. By explicitly targeting the low-hanging fruit first, cap-and-trade advocates suppose that once the cheapest to remove emissions have been addressed there will be a smooth and automatic progression to removing more entrenched sources of emissions such as air travel or cement production.

The difficulty with this is that the pursuit of minor, short-term reductions which have immediate pay-off may well lead the economy away from the path we need to take to achieve our long-term goal of preventing disastrous climate change. Small short-term gains may involve making adjustments to an existing technology whereas long-term solutions may demand scrapping that technology altogether. Think for a minute about the fixed capital in power plants, chemical refineries, airplane fleets, and so on with their decades long operational lives. Once built, their carbon emissions per unit of output are more or less fixed. Moreover, once they are built it would be very inefficient to build another greener version of the same plant. To succeed in preventing catastrophic climate change it is these large and irreversible investment decisions, not day to day production decisions, that policy makers must strive to influence. Yet cap-and-trade protects high polluters from the need to make radical reforms to their business models by allowing them to purchase permits from businesses that do not pose as grave a climate risk. Thus, cap-and-trade is locking in precisely those industrial technologies and business practices which most need to be changed. The high-hanging fruit will actually become harder to reach.

The question then is what can be done about any of this. We do not have to renounce market mechanisms as a key tool in climate change mitigation. Businesses can and should be incentivised to reduce their carbon footprint. A price on carbon is still necessary – we just need a better of imposing one than that indirectly produced by cap-and-trade. A carbon tax is in some senses the mirror image of cap-and-trade, as it fixes the price of carbon emissions as opposed to theirquantity, thereby addressing the problems I identified. While we cannot guarantee precisely how much carbon would be emitted each year at any particular level of carbon tax, there would be a clear price signal by which businesses can forecast the financial costs and benefits of investing in low carbon technologies and business practices. If a straightforward carbon tax is politically infeasible, a hybrid policy which fixed a minimum price floor for carbon permits would at least be an improvement, by mitigating the uncertainty involved and perhaps the free-rider problem.

Of course, this analysis does not preclude the very real possibility that putting a price on carbon, by whatever means, will not be enough to keep climate change under control. We would be remiss not to use the other, more interventionist tools at our disposal, such as government regulations, punitive trade rules for free-riding countries, and technology development subsidies. We should not be surprised if we truly do face a choice between having our cake and eating it, between consuming our world and living in it.

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