Carbon trading market may collapse

One reason why it is imperative to start planning for how to deal with the worst possible effects of global warming is that there is a very significant possibility that no greenhouse gas mitigation will take place, and we will end up in an extremely high GHG world. One reason we should start planning for this outcome is that the current leading global abatement mechanisms, rooted in the Kyoto Accord, seem on the verge of a catastrophic implosion.

The devil is in the details, but the short version of the story is that the "carbon trading market," which currently involves corporations trading "carbon offsets" to the tune of over $50B a year, is beset by suspicions that many of the carbon reductions that these corporations are supposedly paying for are not taking place, because of fraud, mismanagement, and lack of oversight. An investigation by the Financial Times a couple of months ago revealed:

• 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.

In theory, the idea behind the carbon market is that it is more cost effective and economically rational shut down the most polluting sources first. In principle, a liquid market in carbon credits will allow the world to shut down GHG polluters in order of inefficiency, which generally means that gross polluters in third world countries are often selling their "offsets" to first world corporations. To put it schematically, the market is designed to allow a company like HSBC or Google, say, to pay some Chinese coal-fired power plant to shut down in exchange they can continue to pollute. The reasoning is that it costs the global economy less to shut down a superannuated Chinese power plant than it does to shut down a major Western bank.

All of this works only if there is a legitimate, liquid, and nonfraudulent global market. But these conditions, alas, do not hold. To put the matter graphically, what seems to be happening is that the companies that are selling the offset are simply pocketing the money from the market and then continuing to pollute along their merry way. This in essence amounts to a giant defrauding of the environmental goodwill of generally first world (especially European) companies by generally third world companies, with a willfully blind eye being turned by the governments in these latter countries.

What this means is that not only is GHG abatement not being effectuated by the market, but also, concomitantly, that the credibility of the carbon market itself may well soon collapse. Just imagine the political fallout as it emerges that European companies have paid billions to Chinese and Indian companies, which have simply pocketed the money without abating a thing. The bottom line is that, absent an effective apparatus for global governance and enforcement -- something ideologically opposed by the libertarian right in the United States, and by nationalists in most countries -- the chances for an effective market in emissions abatement seems vanishingly unlikely to emerge.

(It's worth noting that it's not clear that the central government of China, which appears to be the guiltiest country, actually has the authority to prevent the fraudulent behavior of the companies that are selling the credits. Local party bosses in the provinces are largely masters of their domain, and if they are tolerating this kind of fraudulent behavior on the part of their region factories -- many of which they have personal stakes in -- it's not clear that Beijing has either the appetite or the capacity to force them to change. Another reason why planning for the worst is the safest thing to do.)