Monthly Archives: June 2009

In my discussion of the Cap & Trade scheme for carbon dioxide equivalent (CO2E) emissions (greenhouse gases) proposed by U.S. Reps. Henry Waxman, D-Calif., and Edward Markey, D-Mass. (the American Clean Energy and Security (ACES) Act of 2009), I argue that the two key issues are (1) the size of the overall quota and (2) the enforcement of the rule that without a permit, you cannot emit.

Prima facie, the scheme looks tough.  The Discussion Draft Summary of the American Clean Energy and Security Act of 2009 reads: “The draft establishes a market-based program for reducing global warming pollution from electric utilities, oil companies, large industrial sources, and other covered entities that collectively are responsible for 85% of U.S. global warming emissions. Under this program, covered entities must have tradable federal permits, called “allowances,” for each ton of pollution emitted into the atmosphere. Entities that emit less than 25,000 tons per year of CO2 equivalent are not covered by this program. The program reduces the number of available allowances issued each year to ensure that aggregate emissions from the covered entities are reduced by 3% below 2005 levels in 2012, 20% below 2005 levels in 2020, 42% below 2005 levels in 2030, and 83% below 2005 levels in 2050.”

In fact, the scheme is a total con.  It permits the US to increase CO2E emissions until 2020.  The escape mechanism used – carbon offsets or carbon credits – suggests that for the period 2020 – 2050 also, the supposed intent of the Act – to reduce CO2E emissions in the US – will be neutered. 

Standard and Poor’s on Thursday, May 21 2009, issued the following statement: “Standard and Poor’s has revised the outlook on the United Kingdom to negative from stable. — The  AAA’ long-term and  A-1+’ short-term sovereign credit ratings were affirmed. — The outlook revision is based on our view that, even factoring in further fiscal tightening, the U.K.’s net general government debt burden may approach 100% of GDP and remain near that level in the medium term.

Is this good news for the UK or bad news? Both the UK’s long-term sovereign credit rating (reflecting the probability of sovereign default in the medium and long term) and its short-term sovereign credit rating (reflecting the probability of sovereign default during the next year) remain at the highest possible levels, AAA and A-1+ respectively. However, the negative outlook is bad, even if it is not bad news. Based on past behaviour, there is a one-in-three chance of a sovereign moving from a negative outlook to a one-notch downgrade.

The fact that one of the three leading credit agencies is publicly hinting at less than complete confidence in the solvency of the British sovereign is not in and of itself terribly significant any longer. Following their incompetent and deeply conflicted performance in rating structured products, the credibility of the rating agencies is badly impaired even in those domains – sovereign debt and the debt of large corporates – where they have not made complete asses of themselves.

Even though the credibility and reputation of the rating agencies is in tatters, the fact that they have not yet been written out of the regulations and rule books governing the investment behaviour of many institutional investors means that a downgrade would still affect market demand for UK sovereign debt. This will probably raise the funding cost of the UK sovereign somewhat.

But even without the input from the rating agencies, it would have been clear that the UK is about to exit its AAA status. It shares this fate with most of the other G7 countries. In two or three years, Canada  may be the only G7 country left to have an AAA rating. France could conceivably join Canada.  There is nothing too shocking about this.  Not that long ago, Japan’s sovereign rating was on a par with Botswana’s (I thought that was rather unfair on Botswana).

I will expand on the case of the UK in what follows, saving a more detailed consideration of the US fiscal predicament (which is much worse than that of the UK) for a future post.

Maverecon: Willem Buiter

Willem Buiter's blog ran until December 2009. This blog is no longer active but it remains open as an archive.

Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.

Willem Buiter's website

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