Thoughtlessness typical of climate-change politics is nowhere more evident than in the free ride given until recently to proposals for tradable emission credits.
Tradable credits are simple in concept. A producer of greenhouse gas able to cut emissions below some target level earns marketable credits for the extra reduction. An emitter unable to make required cuts buys credits instead. A market thus develops in which to arbitrage compliance with emission limits, such as would be imposed by the troubled Kyoto Protocol on Climate Change. And the market's essential liquidity grows out of the activity of traders, who buy and sell credits for profit.
Cap-and-trade schemes like this can be valuable. They make regulated systems more flexible than they would be otherwise and therefore more efficient. Their pitfalls, however, shouldn't be ignored.
Camouflage
Trading schemes too frequently serve as free-market camouflage for regulatory excess. No cap-and-trade mechanism can repair the damage of overregulation. Regulatory systems hostile to production don't redeem themselves economically by making a relatively few traders rich. Trading, essential as it is to business, captures rather than creates economic value. Real value comes from the productive economic sectors, such as manufacturing, most frequently targeted and heavily affected by regulation.
The Kyoto proposal is no exception to this. Its carbon-emission limits would slam energy-consuming value creators in industrial economies while its emission-trading scheme opened a market for regulatory chits. This is not a formula for sustained growth of worldwide economies. But offering a cap-and-trade system lets politicians appear to heed economic imperatives while garnering support from opportunists. No one should forget that, while it was still master of the trading universe—and prolific generator of accounting fiction—bankrupt Enron Corp. was an enthusiastic Kyoto fan.
Do world leaders really want to turn their presumptuous fight against global warming into the type of temptation some traders can't resist? If the question came up last week in Milan at the Ninth Council of the Parties to the United Nations Framework Convention on Climate Change, it didn't make the news. Maybe it was precluded in the US by reports of yet another trading scandal, this one involving mutual funds.
A bitter lesson of recent years is that trading requires comprehensive oversight. For international trading, the oversight must be international.
Europe, which is hurtling toward Kyoto implementation, offers reasons to doubt that international governance is up to the challenge. The European Union says Russia's refusal so far to ratify Kyoto won't stop its effort to manage the climate. That effort, the European Climate Change Program launched in March 2000, includes an emissions-trading system set to start in 2005. Covering nearly half of all EU emissions of greenhouse gases, the system will create lavish trading opportunities. A lot of money will change hands. Can EU oversight ensure the system's honesty?
It's not irrelevant to this question that the EU's auditor last month refused for the ninth consecutive year to certify union accounts, most of which it found to be unreliable. It's not irrelevant that the union has yet to resolve a scandal involving slush funds and misrepresentations estimated to be worth hundreds of millions of dollars at Eurostat, its statistical reporting agency. It's not irrelevant that a fraud scandal only 4 years ago precipitated overhaul of the EU's executive body, the European Commission.
Scandals like these are hardly unique to the EU. They're a hazard of international governance. Money creates temptation wherever it accumulates. And the intrigues of multilateral relations contribute little to the precision of financial accounting. The oversight trading needs don't come naturally to the institutions of international governance in Europe or anywhere else.
Inviting abuse
The fact remains that, under Europe's plan or the Kyoto treaty if it's ever ratified, money flowing from emissions trading would invite abuse by scofflaw traders and regulators. That prospect deserves priority attention it so far hasn't received.
A unilateral step in the right direction came last month when the US Department of Energy omitted tradable credits from its proposed guidelines for voluntary reporting of greenhouse gas emissions. With that precursor to a cap-and-trade scheme missing, US companies and officials can focus on the benefits and costs of emission cuts. Kyoto deliberations would benefit from such an approach.
