This paper has no association with the author's former employer the CSIRO. No such affiliation should be associated with the author in regards to this paper or its citation. Posted on RePEc with permission of the journal editors of New Political Economy. Please cite as: Spash, Clive L. (2010) "The Brave New World of Carbon Trading" New Political Economy vol.15 no.2 forthcoming.Here are a few excerpts from the paper's conclusions (direct link to PDF):
While carbon trading and offset schemes seem set to spread, they so far appear ineffective in terms of actually reducing GHGs. Despite this apparent failure, ETS remain politically popular amongst the industrialised polluters. The public appearance is that action is being undertaken. The reality is that GHGs are increasing and society is avoiding the need for substantive proposals to address the problem of behavioural and structural change.The Australian government is pursuing a proposed ETS to reduce its emissions by as much as 25% by 2020. In my own research (PDF) I have shown that the ETS (or any other set of policies) cannot achieve the ambitious emissions reduction targets set by the Australian government. One can understand the political sensitivity of a researcher at a government agency saying the same.
More from Spash's conclusion:
Perhaps the most worrying aspect of the ETS debate is the way in which an economic model bearing little relationship to political reality is being used to justify the creation of complicated new financial instruments and a major new commodity market. In 2008 the financial sector was in a global crisis having manipulated bad debts and mismanaged its own finances to the point of requiring international banks to seek government bailouts. Yet ETS proposals place a new multi-billion dollar market in the hands of the same people and organisations. Recent experience illustrates how market players continually seek new ways to profit from adapting institutional rules, and regulators struggle to keep-up.Strong stuff. One thing is certain: In trying to suppress Spash's work the Australian government guaranteed that it would receive a much wider reading that it would have otherwise.
There is also something incongruous in governments proposing to host financial markets in their own countries for competitive advantage on the basis that their institutions are well regulated, secure, trustworthy, have good labour and environmental standards, and so on. The incongruity is because they then wish to buy products (i.e., offsets) from countries which clearly fail to meet the same standards. The justification that this is cheaper, least-cost or economically efficient can only be supported if standards are the same across countries. Basic environmental and social standards clearly do matter more than price across all traded commodities, otherwise we might as well, for example, buy shoes made cheaply using unpaid child labour. Non-equivalence is more than a matter of an accounting system to equate units of some physical product (even if this were possible). Such matters are far from irrelevant to how ETS is designed and operated.
A key weakness of an ETS compared to alternative policies—taxes or direct regulation—is that an excessive baseline or regulatory loophole in any one nation or sector eliminates the need for genuine reductions elsewhere. The more complex the scheme and the greater its scope, the greater the potential for a weak link. National carbon markets allow poorly regulated sectors to gain, just as international carbon markets are susceptible to rewarding countries with lax regulations and poor enforcement.
An ETS can in theory provide a similar incentive as under a tax by pricing of all units of pollution. This is meant to encourage development of pollution control technology so as to reduce abatement costs. However, the major difference from a tax is that the revenue stream need not go to government, depending upon how the scheme is established and run. For example, if the government gives all existing polluters permits for free then the public purse gains no revenue; instead polluters can sell the permits on the open market and so avail themselves of a windfall. This adds an incentive for polluting parties to form lobby groups in order to influence policy design to avail themselves of such gains.
The billions of dollars now being generated in trading carbon and offsets has created a powerful institutional structure which has many vested interests whose opportunities for making money rely on maintaining GHG emissions, not reducing them. The transaction costs inherent in these markets are actually being seen as a source of economic growth rather than a deadweight loss to society. Once created, how politicians will cut the market by 80 percent—even within the 40 years they are allowing themselves—is hard to imagine. After all, the reason for emissions trading is that corporations and the technostructure proved too powerful for the political process to establish a tax or direct regulation in the first place.
The framing of the whole issue of human induced climate change is highly important to how it is addressed. There seem two opposing characterisations. On the one hand, financiers, bankers and major polluters argue we must bravely face the new opportunity for markets to innovatively show how the most intangible of objects can be bought and sold, reaping vast financial gains and stimulating economic growth. On the other hand, society can realise that ever increasing material throughput based upon fossil fuels has led to serious environmental problems, and failed to address social inequity, so that a change in economic structure, institutions and behaviour is now necessary. Clearly the former is dominant and perhaps we must await a financial emissions trading crisis and increasing environmental disasters to reverse that situation.
In Aldous Huxley’s Brave New World, the drug ‘soma’ offered inhabitants of a future Earth the means to distract themselves from addressing life’s problems while supporting the established social and economic order in the promotion of happiness through hedonic pleasures. Today emissions trading promises a painless way to avoid human induced climate change which will leave the growth economy unaffected in its pursuit of happiness through materialism. The reader is left to judge illusion from reality and the desirability of the society created.