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Jo Nova in The Australian: Carbon credits market is neither free nor worth anything

Credit to The Australian for printing both points of view. Published as an Op-Ed today.

Carbon credits market is neither free nor worth anything

THE paradox du jour: people who like free markets don’t want a carbon market, and the people who don’t trust capitalism want emissions trading. So why are socialists fighting for a carbon market? Because this “market” is a bureaucrat’s wet dream.

A free market is the voluntary exchange of goods and services. “Free” means being free to choose to buy or to not buy the product. At the end of a free trade, both parties have something they prefer.

[Those who know what real free markets are know that an emissions trading scheme is not and never can be a free market. The “Carbon-Market” is a market with no commodity, no demand, and no supply. Who needs a “carbon credit”? The government entirely determines both supply and demand.]

A carbon market is a forced market. There is little intrinsic incentive to buy a certificate for a reduction in carbon dioxide emissions. It says a lot about the voluntary value of a carbon credit that when given the option to pay $2 to offset their flight emissions, 88% of people choose not to. A few do it as a form of green penance to assuage guilt, and others do it for their eco public relations campaign or branding.

To create demand for emissions permits, the government threatens onerous fines to force people to buy a product they otherwise don’t need and most of the time would never even have thought of acquiring. Likewise, supply wouldn’t exist without government approved agents. Potentially a company could sell fake credits (cheaper than the real ones) and what buyer could spot the difference? Indeed, in terms of penance or eco-branding, fake credits, as long as they were not audited, would “work” just as well as real ones.

Despite being called a commodity market, there is no commodity: the end result is air that belongs to no-one-in-particular that has slightly-less-of-a-trace-gas. Sometimes it is not even air with slightly less CO2 in it, it is merely air that might-have-hadmore-CO2, but doesn’t. It depends on the unknowable intentions of factory owners in distant lands.

How strange, then, that this non-commodity was at one time projected to become the largest tradable commodity in the world – bigger even than the global market for oil. In 2009, Bart Chilton, chairman of energy markets at the US Commodity Futures Trading Commission, estimated global carbon markets would be worth $2 trillion within five years.

The UN may claim that carbon is “tracked and traded like any other commodity”, but if I buy a tonne of tin, I either get a tonne of tin or I get $20,000 because I onsold it — someone, somewhere gets the goods. If a bulk shipment of coal arrives empty, buyers notice. Fraud is easy to spot.

Unfortunately, fraud has been a big, ongoing problem with emissions trading. This market needs auditors, and the auditors need auditing (the top two auditors in the EU emissions trading scheme were both suspended in 2009 for irregularities).  The EU has already lost €5bn to carbon-trading VAT fraud. The mafia are laundering money in Italy through renewables schemes, and after one tax loophole was closed, market volume in Belgium dropped by 90%.

The carbon market also depends on the honesty of people claiming: “We wouldn’t have built that dam without that carbon credit.” How would we know? The Xiaoxi dam in China was already under construction two years before the owners applied for credits “to build it”.

Since an ETS exists by government fiat and has no intrinsic value without it, it is technically a fiat currency rather than a  tradeable commodity. Supply and demand is set by bureaucrats in the EU. If the price is too high, politicians will issue more credits, and if it’s too low they will delay them (as the EU is planning to do). Bureaucrats can also give exemptions to trade-affected industries (or their friends, and to their fans in marginal seats).

Those who say that a carbon market is “like” other derivatives markets are wrong. Derivatives markets are sometimes quite disconnected from actual products such as pork bellies or gold bars, but eventually the supply and demand for real goods will determine the price. In some places the size of the derivatives market exceeds that of the commodity market, but that’s a reason to question those schemes, not to set up a market in an atmospheric nullity or something as frivolous as an “intention” not to build a dam.

So, who profits from the carbon market? The brokers in a carbon market –  like large financial institutions such as Deutsche Bank, UBS, Morgan Stanley, CBA, Citi, HSBC, Macquarie, – make money on every trade. The global carbon market turned over $176bn in 2011. These groups have been lobbying for a market, not a tax, and the reasons are obvious.

Most of the key factors in a carbon market are misnamed. The market is not free. An essential plant fertiliser is called pollution. The aim of the market is not to make clean energy but to change global temperatures by an amount that rounded to the nearest degree, equals zero*. The US has no market but has reduced emissions (largely thanks to shale gas), while any reductions in EU emissions were largely due to falling GDP. Yet the government wants to join the EU scheme.

Ironically, the reason for having any carbon scheme at all comes from monopolistic research. There are virtually no grants specifically available for sceptical scientists, but funding galore for unsceptical ones.

We need a free market in science before we even discuss the need for a free market in carbon.

[The people who demand a free market in CO2 apparently don’t give a toss about the lack of one in scientific research. Who amongst the carbon market lobbyists and politicians argues that we ought to be funding skeptical scientists? To get a fair hearing in a court, we know we have to fund both sides. Monopolies don’t work in business, and they don’t work in science either. May the best researcher win!]

But don’t hold your breath – the global warmers prove to be mostly global hypocrites.


Reproduced with permission (though it retains a few edits and phrasings that didn’t fit in the final copy see [..]).

*Pace, Matt Ridley for that expression.

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