Trading failure

The climate summit at Copenhagen has begun,and at the end of the lengthy discussion and negotiation,we will probably have some idea of how serious the worlds governments are about its changing climate and what the methods are that they are likely to use to do something about it. One of those methods,it is likely,will be to use a variant of the cap-and-trade mechanism that Europe already uses for greenhouse gases,and the US for sulphur dioxide. In this system,a cap,a maximum,is set on the amount of a gas that a country can emit; permits,rights to emit that gas,are then assigned to different industries and companies; and those permits are then traded,so that efficiency improvements can be driven by the market for permits.

The system has two great advantages: first,it has been seen to work in reducing emissions; second,it isnt untested,adapting it elsewhere is easier. But its significant problems have been thrown into sharp relief by reports that ArcelorMittal,the steel combine,will gain as much as a billion pounds from the European version of cap-and-trade. How? Essentially,they lobbied successfully for more permits than they needed and then hoarded them. Negotiators in Copenhagen must ask the question: can we afford to introduce systems so susceptible to rent-seeking? What methods could reduce the discretion available to policy-makers?

The international dimensions of cap-and-trade are also problematic. On the one hand,in the absence of international agreements,you get situations like ArcelorMittals: where a multinational company could threaten to move manufacturing to a non-capped location in order to pressure government into giving it more permits. On the other hand,in any international cap-and-trade system,developing countries may get short shrift,their industrialisation held hostage to pollution elsewhere. While some form of linkage for already existing cap-and-trade systems is a likely outcome of the meeting,the news from Europe is that it is not a panacea. And it strengthens the argument that cap-and-trade is not as simple or effective an idea as a straightforward,comprehensive carbon tax.