The Unintended Effects and follies of the Cap and Trade System

The unintended effects from an artificial market to aimed at reducing carbon emissions, this excerpt from Julian Glover of the Guardian (bold highlights mine),

``Set up to price pollution out of existence, carbon trading is pricing it back in. Europe's carbon markets are in collapse.

``Yet the hiss of escaping gas is almost inaudible. There's no big news headline, nothing sensational for TV viewers to watch; no queues outside banks or missing Texan showmen. You can't see or hear a market for a pollutant tumble. But at stake is what was supposed to be a central lever in the world's effort to turn back climate change. Intended to price fossil fuels out of the market, the system is instead turning them into the rational economic choice.

``That there exists something called carbon trading is about all that most people know. A few know, too, that Europe has created carbon exchanges, and traders who buy and sell. Few but the professionals, however, know that this market is now failing in its purpose: to edge up the cost of emitting CO2.

``The theory sounded fine in the boom years, back when Nicholas Stern described climate change as "the biggest market failure in history" - a market failure to which carbon trading was meant to be a market solution. Instead, it's bolstering the business case for fossil fuels.

``Understanding why is easy. A year ago European governments allocated a limited number of carbon emission permits to their big polluters. Businesses that reduce pollution are allowed to sell spare permits to ones that need more. As demand outstrips this capped supply, and the price of permits rises, an incentive grows to invest in green energy. Why buy costly permits to keep a coal plant running when you can put the cash into clean power instead?

``All this only works as the carbon price lifts. As with 1924 Château 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.”

No this isn't a market failure but a false/pretentious market that was meant to fail.

Why? Some arguments from Vincent Gioia (bold highlight mine),

``They argue that emissions trading does little to solve pollution problems overall, as groups that do not pollute sell their conservation to the highest bidder, not the worst offender...

``Another problem as The Financial Times noted in an article on cap and trade systems "Carbon markets create a muddle" and "...leave much room for unverifiable manipulation". The paper actually conducted an in-depth study of the carbon credit business and made some very revealing findings". Their investigation found:

■ "Widespread instances of people and organisations buying worthless credits that do not yield any reductions in carbon emissions.
■ Industrial companies profiting from doing very little – or from gaining carbon credits on the basis of efficiency gains from which they have already benefited substantially.
■ Brokers providing services of questionable or no value.
■ A shortage of verification, making it difficult for buyers to assess the true value of carbon credits.
■ Companies and individuals being charged over the odds for the private purchase of European Union carbon permits that have plummeted in value because they do not result in emissions cuts...

``There is also the issues of what do those selling carbon credits do the reduce carbon dioxide emissions and are proponents of the idea merely using the global warming fanatics to line their pockets and do so-called environmentalists scam the system for political advantage...