January 26th, 2010
Hydrogen Convergence via Cap and Trade Arbitrage
As readers and twitter followers know, we at the ebTDesign Forum do not believe that “cap and trade” is the best way to reduce carbon output and avoid climate change. We believe that hydrogen convergence is a more pro-growth alternative that provides much needed protection for the consumer. However, we do acknowledge the potential benefits of cap and trade arbitrage.
“Arbitrage” is the financial engineering practice of taking advantage of market differences to produce short-term profits. In this case, the United States could attract foreign direct investment for hydrogen infrastructure projects in return for carbon credits that could be used in the investor’s home market. Since carbon credits would be assessed internationally, the United States Congress need not take action for this strategy to work.
For those that are new to the climate change debate “cap and trade” is a market approach for controlling carbon output. It is also called by some more simply the “carbon market.” The assumption is that climate change is a global process that can be accelerated by the emission of carbon byproducts. Thus, carbon emitters are penalized and carbon reducers are rewarded.
Cap and Trade arbitrage would pit countries that are slow to react to the growth of the global carbon market against the need to fund carbon reduction applications like hydrogen convergence. Traditionally, this arbitrage was meant to be played out between rich countries and poor countries. However, this doesn’t take into account the post-Globalization landscape and the political risk associated with emerging economies.
Zachary Alexander
Concepts: arbitrage, cap and trade, hydrogen, political risk