THE CARBON EMISSIONS ORGANIZATION:

A CASE STUDY OF AGENCY-FORMATION

JASON KROCHAK
CRISTINA ORDONEZ
JOSHUA BLOOM
BRANDON COOPERMAN
I. STRUCTURAL FRAMEWORK

The Carbon Emissions Organization (CEO) will be a private, not-for-profit entity whose primary

purpose is to regulate greenhouse gas emissions in the United States. The mission of our

organization is to eliminate the publicizing of pollution and internalizing of revenue; to preserve

the sanctity of the environment; and to promote innovation in alternative energy. From an

administrative standpoint, the Environmental Protection Agency (EPA) will designate CEO as

the organization responsible for setting emissions standards and monetary sanctions for

associated breaches, developing a mechanism to define and measure units of output with

consistency, devising standards that are sensitive to different regions and different industries, and

conducting individual audits to ensure compliance.

II. COMMITTEES

It is important to have committees assigned with various roles so that our organization has an

internal, hierarchical structure. The Cap and Trade Organization will consist of four committees

that report to the board of directors. The sub-committees will be used to delegate responsibilities

within the organization including both the creation of new standards as well as the enforcement

of existing standards. All committees will be headed by a board member. The oversight board

and the five sub-committees are listed and defined below.

Oversight regulatory board

The board of directors will consist of five members, each appointed by EPA leadership. These

board members will each serve a four year term, and be eligible for re-appointment for another

four year term. The Board will have staggered end of term years so that at most only two

members’ terms end in the same year. These Board members will be responsible for the hiring

of the remaining staff members who will be professionals from fields including accounting,

science and engineering. These remaining members will be hired and fired by the Board

according to majority vote.

Emissions expert committee

Member of this committee will be hired by and serve at the discretion of the board of directors

and will set measureable standards that are sensitive to regional and industry differences.

Auditing Standards Committee

This committee will be made up of members with significant public auditing experience as well

as scientists that understand the technology required to quantify and verify carbon emissions.

This committee will be charged with writing the auditing procedures that will be used by public

accounting firms to audit companies’ carbon emissions. This will be accomplished through

recordkeeping, on-sight testing, and independent verification from third-parties. This committee

will also attempt to standardize the methodologies that companies use to quantify their carbon

emissions via a required installation kit.

Sanctions Enforcement Committee

This committee is charged with the task of creating appropriate sanctions as well as enforcing

them on companies that pollute more than their available carbon credits allow. To incentivize

the trading of carbon credits in the open market, sanctions must be set at a rate above the market

price of a carbon credit, so that firms seek market solutions to their carbon pollution.

Technical Advisory Committee

This committee will consist of mostly scientists that will be charged with advising companies on

new methodologies to reduce carbon emissions, such as carbon sequestration projects, or carbon

offset projects like afforestation initiatives. Also, this committee will look to create alternative

methods to measure carbon pollution that can be better applied to companies that do not pollute

necessarily from an individual factory.

Innovation Committee

This committee will assess how effective the current programs and standards are and will look to

improve upon them. This committee has an important task of keeping the standards up to date

and changing them appropriately so that the program does not become obsolete.

III. SANCTIONS

Sanctions play an important role because they will incentivize companies to stay within the

boundaries of the program and to trade in the carbon markets for additional credits if they exceed

their carbon emissions levels. The Sanctions enforcement committee will determine the

appropriate sanctions and will enforce them on companies that are to be penalized. Sanctions
revenue will be used to help fund the organization. This could be used as an abuse of power as

the people creating the sanctions are receiving the revenues from them. However, the sanctions

enforcement committee will create the standards and the sanctions will only have the objective of

achieving the carbon reductions goals set forth by the government.

IV. SEC ROLE

The SEC will play an important role in monitoring the trading of carbon on the public,

commodity exchanges. Derivative trading will most likely emerge as companies create

appropriate hedging strategies and will also need to be supervised by the SEC. The SEC must

buy-off on our auditing standards and carbon emission measurement standards in order for them

to authenticate the trading of carbon credits in an open market. Therefore, a close relationship

with the SEC must be formed so that both organizations have a mutual understanding of the

proposed procedures. This will most likely involve monthly conferences with the SEC to obtain

feedback on our proposed procedures.

V. ADDITIONAL CONSIDERATIONS

From a framework perspective, we examined the structural workings of similar programs and

considered the requisites for our own effective policy structure. In the course of our analysis, it

became particularly clear to us that this cap and trade program needs to function under the

auspices of a private entity rather than a public one – for several reasons. First, we feel that the

successful implementation of this program partially resides in its ability to circumvent the type of

partisanship that patently overwhelms good-faith efforts to enact change. Time and again we see
political, social, and economic agendas beset by partisan lobbying and the political banter so

associated; unfortunately, these agendas almost always result in inaction and the status quo.

The very nature of an elected representative is such that his actions and decisions are necessarily

supposed to advance the public interest and the public good. Decade after decade of partisan

lobbying and institutional corruption, though, has taught us that this does not always happen. In

an effort to curry favor with their constituencies, better position themselves for future political

endeavors, advance a particular ideology, or simply foil a counter-party agenda, elected

representatives often act and decide contrary to their ostensible civic duty. Needless to say,

public entities are plagued by these dueling motivations and interests all the time. On the other

hand, with a private entity structure, we can effectively mitigate the parasitic nature of lobbying

and focus on substance over semantics.

A second major issue from which the private entity structure emerged as the more sensible

choice is compensation. Public entities are often bound by modest governmental compensation

scales that have been rigidly conceived to meet budgetary requirements and serve –at least in

spirit – as a pro-forma nod to the American taxpayer. Therefore, the financial compensation

under public entities is not particularly flattering, especially to elite talent who demand much

more -- and can get it elsewhere.

Private entities, on the other hand, are not bound by such compensation schemes largely because

they function independently of government. So whereas the viability of a publicly-organized cap

and trade program may be somewhat undermined by an inability to attract value-adding talent
under government-regulated compensation, private entities avoid this problem -- they have the

latitude to pay whatever they want to attract the very best.

Indeed, a private entity of this ilk will invariably be tied to other public programs and

government-sponsored entities. It will probably also receive government funds in advance of

offsetting revenue generated by the program itself. With this in mind, the cap and trade program

needs to be deliberately crafted to avoid simply becoming a government puppet under the guise

of an independent private entity. If this happens, then the program will effectively lose its

independence and expose itself to the partisan lobbying described above.

Admittedly, public entities have their benefits – not the least of which include greater budget

allocation, government backing, greater public exposure, etc. We are confident, however, that a

cap and trade program is better suited in the private sphere for the reasons outlined above.

VI. REVENUE GENERATION

The CEO will generate revenue from four sources. First, the majority of revenue will be

collected when companies purchase emissions credits from the organization. In the case that a

company needs more credits than they were allowed to purchase from the CEO, they will have to

buy or trade for them on the open market. The CEO will institute a small tax on these

subsequent transactions. This will serve the dual purpose of providing funds as well as

encouraging companies to develop the necessary technology to avoid needing to purchase more

credits and therefore avoid this tax. A third source of money will come from the fines companies
are required to pay as punishment for exceeded their limit on allowable carbon emissions. This

fine amount will be double the market rate for purchasing additional credits in order to deter

companies from surpassing their allowable limit. Additionally, this fee will be adjusted monthly

in response to changing market conditions. Lastly, since the CEO will be designated by the EPA

as the organization responsible for operating the cap and trade system, the EPA will budget some

of its government funds to be allocated to the organization. We anticipate that initially the EPA

allocation to this entity will be greater due to the lack of purchased credits, fines, and taxes when

the program is first set in action. These “start-up” funds the EPA provides will then disappear

and be replaced by a smaller amount of annual allocations. This will ensure that the CEO

maintains its independence as a private entity.

VII. ECONOMIC IMPLICATIONS

The proposed bill to reduce Carbon emissions will become part of the Clean Air Act since the

CEO would be a subsidiary of EPA. A major concern with the introduction of a cap and trade

carbon program is the economic impact it will have on states, businesses, and individuals. This

bill will affect the cost of energy production, which is a necessity for most Americans. The

creation of carbon costs on business will be considered an overhead cost that will be passed

down to the consumer via higher prices. This is especially concerning for low to moderate-

income households who will be most affected by the cost to reduce carbon emissions.

In order to reduce these costs, the carbon reduction program will develop a phase-in system to

gradually reduce emissions without causing huge market fluctuations. This phase-in program

will be similar to the Acid Rain Program of the 1990s. There will be two phases over the course
of ten to fifteen years that will establish the long-term emission reduction targets. A long-term

phase-in will give companies time and flexibility to adjust their operations, invest in new,

innovative technology, and become more environmentally friendly. The two reduction targets

also create the foundation for the distribution of carbon allowances (in the form of credits). Each

year the CEO will set a ceiling and floor price on carbon allowances that will gradually guide

companies to reduce carbon and ultimately achieve the target emission reduction. The ceiling

will provide businesses with flexibility to gradually reduce carbon emissions because there is a

set high cost; in other words, firms do not have to worry about the price of an allowance rapidly

increasing in price. Minimizing price uncertainty will allow firms to better evaluate when it is

most cost effective to reduce their carbon footprint. Allowing firms to minimize costs of

reducing carbon, which will help keep consumer prices low. The floor will provide firms with

incentive to improve processes and reduce carbon. The lower prices drop, the more likely that it

will be more costly for firms to reduce emissions than to buy allowances. The floor will ensure

that prices remain high enough to motivate firms to take carbon reduction initiatives. The cap

and trade system is the best alternative to control costs, eliminating any large market

fluctuations, while still provoking firms to cut carbon emissions.

In the cap and trade program, the CEO will distribute to each business a set number of

allowances for each year. Some firms, like those that heavily use fossil fuels, will receive more

allowances to help keep costs low. This should keep the price of energy from increasing too

high, helping low and middle-income families. This will also allow heavily carbon dependent

states, like West Virginia, from suffering the effects of increased costs. After the initial

allowances have been distributed, firms can acquire more allowances from open market trading

or from the government’s auction for allowances. The auction will be a major revenue generator
for CEO. Part of the money from the auction will be used to offset agency costs. The rest of the

money will provide tax plan options that will help offset the costs of higher energy to low and

moderate income households. The money generated would become a tax credit to all households

below a certain adjusted gross income level. This option is the best way to directly help low

income households manage the increased costs associated with the reduction in carbon

emissions.

VIII. CONCLUSION

Perhaps the most difficult part to creating a viable agency that seeks to advance a specific agenda

is the ability to appease all of the players involved and effect change notwithstanding competing

interests. Needless to say, a careful consideration of the structural, economic, and political

implications of far-reaching programs such as this one is an absolute requisite; even then, the

prospects for successful implementation can be somewhat difficult to gauge. Specifically

regarding cap and trade, there can be no quick-fix and no perfect strategy proposals simply

because we are venturing into uncharted waters – at least for the United States. But while the

creation of a viable, innovative program may be a big challenge, it is nonetheless a challenge that

must be met by those of us who care to work through it and change the status quo.