All That Is Solid Melts Into Air
As this post by James suggests, the intersection of climate change mitigation and the virtualization of capitalism is a potentially dangerous place. If you thought credit default swaps were ephemeral, just wait until utilities, governments, and financial institutions start to sink wealth into tradable carbon credits. Market-based pollution programs are beautiful things from a certain perspective, but the soundness of the traded commodity is always subject to political and legal vagaries.
Last summer, we got a preview of what happens when such a program hits a snag. The DC District Court overturned the Clean Air Interstate Rule, a set of new regulations promulgated by the EPA that required tighter controls on certain utility emissions. The program involved eventually doubling the surrender rate for SO2 allowances, so when the court order came down, the value of future credits tanked. Unless CO2 trading can garner broad political and legal legitimacy, the carbon market may prove to be another brilliantly designed incinerator of capital.
Matt:
Without reference to either the posts by James or the Lovelock “we just need to bury charcoal” solution (always beware slap-your-forehead solutions to problems that many smart people have thought about for many years), the fundamental problem with markets in emissions credits is that the traded entity is entirely a government creation. “Cap-and-Trade” sounds kind of gee-whiz, but all it really is is carbon rationing (the cap part) in which the government allows people to buy and sell the ration cards (the trade part). Because you’re basically trading an artifically-created scarcity, you are constantly vulnerable to any rule change. Since the creation of the scarcity, if it is actually maintained, makes almost all citiziens of the countries that establish the rules materially poorer, there is constant political pressure to udnermine the scarcity, and therefore destroy the value of the ration cards. This is pretty much the dynamic that has rendered the ETS in Europe totally ineffective.
— Jim Manzi · Jan 25, 12:03 AM · #
Jim,
Exactly. James’ post, and the Culture11 article he referenced, were about the trading of increasingly virtual commodities, and “emission not produced” seems to me the virtual commodity par excellence.
The other thing that I should have mentioned last night (it was late) is the constructive antagonism in the Clean Air Act as currently established. Downwind states want to limit the upwind ones, the upwind ones want the rules to be mutually binding, and their mutual suspicion sustains the political will the feds need to maintain that artificial scarcity. International carbon trading, without a global enforcer, wouldn’t even enjoy that useful tension.
— Matt Frost · Jan 25, 01:04 AM · #