A great article here on Richard Sandor, CEO of the Chicago Climate Exchange, and emissions trading schemes (a subject we've written a lot about recently):
[T]he trading of greenhouse gas allowances, also known as carbon trading, may be capitalisms best answer to the problem of global warming. To avoid a dangerous degree of climate change, many scientists say, greenhouse gas emissions worldwide will have to be cut by 50 to 70 percent over the next 50 years. The only hope of achieving that, short of an unforeseen technological breakthrough or the passage of draconian environmental laws, is to inspire radical change in the economic system. In a carbon-trading scheme, you must pay to pollute: price tags are placed on greenhouse gas emissions and then the market (not the government) essentially figures out the cheapest, most efficient way to reduce them. The beauty of carbon trading, Dan Dudek, chief economist at Environmental Defense, a nonprofit advocacy group, explained to me, is that it takes a primal human impulse greed and redirects it toward saving the planet rather than destroying it.
Maybe it's nit-picking, but greed as a "primal human impulse" is a myth that bugs me. Didn't surplus originate in the Neolithic? A couple of hundred thousand years after humans evolved?
In any case, I still don't "get it" (a terrible sin around here, no? ;-). In a world of hideous wealth imbalance, how does putting a price tag on ecological devastation not allow the already wealthy to carry on polluting? Unless, of course, that price tag is calculated according to a scale that makes it unaffordable. In which case, isn't this just "draconian environmental laws" by another name?
I'll never fully understand economics, which possibly makes me unqualified to criticize. On the other hand, sometimes outsiders can see basic faults that people immersed in complex systems miss.
Why is this better than a carbon tax? Wouldn't the effect be the same?
Gyrus: The idea is that you can scale back the amount of carbon used over time and the market will find the most efficient ways to make the cuts.
JN2: I actually think a mixed model (of a stiff carbon tax, combined with a cap and tradable quotas meaning strong incentives, an absolute target and market forces employed all at the same time) seems like the most interesting idea.
It's also important to note this isn't an entirely positive article:
"In the three years that CCX has been in operation, criticisms from environmentalists have only grown. This is particularly the case with CCXs standards for using agricultural offsets, in which carbon is sequestered in farmland soils and then sold for emissions credits. Agricultural offsets are notoriously difficult to measure and quantify, and a less-than-rigorous program is essentially a way of introducing overvalued emissions allowances into the trading system. Advocates of carbon trading like Environmental Defense have worked hard to develop stringent protocols for soil sequestration, while others, like David Doniger, the climate policy director at the Natural Resources Defense Council, remain skeptical of the whole concept. The problem with these kinds of offsets is that weve never found a way to separate the wheat from the chaff, Doniger told me. There is a constant tension between quality control and high participation rate. And its usually quality that goes in the toilet."
As for why does the market system work, probably becuase it supports a bottom up method of reduction in which multiple strategies can be employed to reduce emissions. No suggestions or over all plans are enforced companies are free to use existing reduction technologies, offset their losses by preserving forests in sub-tropical areas, or inventing new means of power reduction plus they are given the incentive to innovate becuase cost reductions in emissions gives them an edge in recouping costs on the trading market. but as the article shows the CCX is also a light regulatory scheme compared to the restrictions in the Kyoto Protocol and additionally Europe and especially England's government mandated carbon markets are full of loop holes, dodgy, and are rather bad. The Economist recently pointed to a loophole in the British market in which companies are actually paid to pollute more.
"In a world of hideous wealth imbalance, how does putting a price tag on ecological devastation not allow the already wealthy to carry on polluting?"
Well the market is open to anyone, if you wanted to make the cost of polluting higher then you could buy the emissions vouchers yourself in fact when it comes to fishing qoutas which are sold at auctions each year, many conservation groups buy up all the qoutas for whales and other types of fish. Hence it's well with in your power to simply hord vouchers and it might also be a good long term bet to whole up a huge surplus and sell at a later date.
a couple other things. That NYT article goes into a regional exchange being built in Maine and also if you go through the CCX dailies from 2003 to 2006 one of their contracts has gone from 0.95 to 4.40 which means if you had made a long term bet your investment would have quadrupuled in value.
It's perhaps worth noting that "cap-and-trade" works for planetary pollutants, but not local ones. CO2 or CH4 reduced anywhere benefits all of us anywhere. But reducing emissions of lead, dioxin, cadmium. etc., in one place, only to increase them in another place, is unjust. This is a worthy tool for the tool kit, but not a panacea. I only note this because, especially in economics, we often fall for the myth of panaceas, or intellectual monocultures.