Monday, February 23, 2009

Another Free Market Fix Fails - Carbon Trading

It was a nice idea. Bring the free market and environmentalism together and let them solve global warming through - carbon trading.

The idea is that major emitters are given a carbon emissions quota. If they don't meet that quota, they're allowed to sell (trade) the surplus. If they exceed their quota, they can avoid fines and penalties by purchasing unused quotas from cleaner companies.

The cap and trade scheme treats carbon as a commodity of trade and it works, sort of, except for one little snag - any commodity price can plummet. From The Guardian:

All this only works as the carbon price lifts. As with 1924 Ch√Ęteau Lafite or Damian Hirst's diamond skulls, scarcity and speculation create the value. If permits are cheap, and everyone has lots, the green incentive crashes into reverse. As recession slashes output, companies pile up permits they don't need and sell them on. The price falls, and anyone who wants to pollute can afford to do so. The result is a system that does nothing at all for climate change but a lot for the bottom lines of mega-polluters such as the steelmaker Corus: industrial assistance in camouflage.

"I don't know why industrials would miss this opportunity," said one trader last week. "They are using it to compensate for the tightening of credit and the slowdown, to pay for redundancies."

A lot of the blame lies with governments that signed up to carbon trading as a neat idea, but then indulged polluters with luxurious quantities of permits. The excuse was that growth would soon see them bumping against the ceiling.

Instead, exchanges are in meltdown: a tonne of carbon has dropped to about €8, down from last year's summer peak of €31 and far below the €30-€45 range at which renewables can compete with fossil fuels.

Like medieval pardoners handing out unlimited indulgences, governments have created a glut. Reformation must follow. Wanted - a modern Martin Luther to nail a shaming truth to industry's door: Europe's whizz-bang carbon market is turning sub-prime.


susansmith said...

Well sort of. Cap and trade only works when there are hard caps in place for all, and not of the intensity target sort.

The Mound of Sound said...

I think this recession reveals the difficulty in prescribing hard caps to emitters whose economic activity can vary immensely according to market forces. That's compounded by scam trading to render the whole thing almost unmanageable.

That's why I think carbon taxes are the viable option. You produce, you pay. You cut, you save.

Or we all could, as Gwynne Dyer predicts, ultimately end up with wartime-style carbon rationing.