ENVIRONMENT - CARBON FUTURES MARKET FAILURE
futures Market failure
Alarms over global
warming are making strange bedfellows. Greenies are snuggling up with
the bond traders while those free marketers plead with governments to
set a starting price for carbon emissions.
A prized wit and leader
of the Chicago School, the late George Stigler, observed that we cannot
know the price of cheese on the moon until someone bids for it. What
makes carbon emissions any different?
Once the trading
starts, the carbon traders won’t differ one iota from their
counterparts in cocoa futures or speculations on the exchange rate for
this time next year. Out of carbon trades will sprout carbon futures
which will bloom into carbon derivatives.
This is the era of
financialisation. Zillions tumble through Wall Street with an insatiable
appetite for your super, pensions and savings. As William Burroughs
remarked: they don’t want your money; they want all your money.
Since these dealers
play with fictitious capital, it is no surprise that one of the keenest
analyses of what they do comes in a work of fiction. Tom Wolfe set his
1988 novel, Bonfire of the
Vanities, in an earlier and far smaller wave of Wall Street frenzy.
Its protagonist is
cross-examined by his six-year-old daughter. Her playmate has just
boasted that her father employs 80 people publishing books. Not to be
outdone, the trader’s cherub races to demand: “Daddy … what do you
“Well, I deal in
bonds, sweetheart.” That is no answer for a child: “What are bonds?
What are deal?” He makes it simple. He raises the money to build roads
“You build roads and
hospitals Daddy? That’s what you do?”
He has to admit that
that is not exactly what he does. He just helps to build them.
Again, he must disappoint her. He just raises the bonds for other people
to build them.
Her mother intervenes.
She invites their child to imagine that a bond is like a piece of cake
that daddy keeps handing around until he has gathered “enough crumbs
to make a gigantic cake” of his own. When he snaps back, their
honey-bun begins to cry.
In 2000, the Greenies
knew better than to applaud a trade in water licences. Their sale
increased usage while the traders made it rain money.
Carbon traders promise
to offset emissions. But the less carbon, the fewer trades become
possible, and he fewer golden crumbs to accumulate. Carbon trading
threatens to end in tears among environmentalists – though not at
McBank. Can it be an accident that the home of McBank had the world's
17 May 2007
The conversion of the
Coalition to a national carbon market is another reason to scrutinize
this free trade solution to death on earth. Will it enrich the traders
more than reduce CO2?
A spokesman from the
230 or so academic economists who, last week, called for action to
reduce greenhouse gases voiced his doubts about the efficacy of carbon
trades. He preferred a tax because the revenue would go to the
Taxes cuts are more to
the government’s liking in an election year. And that is what one
carbon market already delivers. The mechanism for this transfer of
revenue is explained in a new book, Voluntary
Carbon Markets, by three senior staff at Ecosystem Marketplace,
published by Earthscan and with a Foreword by Al Gore.
They begin with the
boast that “turning units of pollution into units of property” is
“magic at work”. Did they mean a slight-of-hand trick?
In discussing the NSW
Greenhouse Gas Abatement Scheme launched on 1 January 2003, the authors
give the game away:
So, carbon trading can
reduce government revenues, not add to them. This triad of enthusiasts
for carbon trading bear witness to why it is a sub-optimal solution to
anything except transferring money.
support a carbon market because they believe that markets are the most
efficient method for achieving every human wish. Some promoters of the
market admit to its occasional failures. Here, for instance is what the
god-father of the market theory, Friedrich-August von Hayek, wrote about
managing environmental costs in The Road to Serfdom (1944):
“Nor can certain
harmful effects of deforestation, or of some methods of farming, or of
the smoke and noise of factories, be confined to the owner of the
property in question or to those who are willing to submit to the damage
for an agreed compensation. In such instances we must find some
substitute for the regulation of the price mechanism.”
1 June 2007