The Howling Wilderness of Carbon Credits

By Chuck Spinney, The Atlantic

One of central causes of the financial meltdown was the lack of transparency in the complex derivatives, like bundled mortgages and credit default swaps.  Advocates of global warming would have us to believe that they can construct a transparent carbon emissions trading scheme that will provide market incentives to reduce the emission of greenhouse gases.  

At the center of this trading scheme is the idea of a carbon credit, which is a generic term for any tradable certificate or permit representing the right to emit one ton of carbon or carbon dioxide equivalent. Think of a carbon credit as property in a free market economy -- Ayn Rand, meet Global Warming.

Excessive Carbon emissions (like smoke from a steel mill or a coal fired power plant) can, in theory, be offset by buying carbon credits.  But the calculations involved will make bundled mortgage derivatives look like second-grade arithmetic, and, as Terry Macalister reported in the Guardian on 4 Feb 2011, carbon credits are very vulnerable to fraud and theft, so traders are wary of them, to say the least [emphasis added]:

Attempts to end the chaos inside Europe's emissions trading scheme (ETS) stumbled today when the market reopened, only for minimal trading to take place.

Traders were said to be worried that business could remain polluted by the theft of carbon credits in Austria and elsewhere that forced a shutdown of the scheme on 19 January, at the estimated cost of £90m in lost business.

The European commission has called on national carbon registries to beef up their IT security systems, but has upset traders by declining to publicly reveal the minimum standards now required.

The ETS is seen as a vital tool in the fight against climate change and the fraud is a setback to attempts to sell the cap-and-trade scheme to the US, Australia and elsewhere. ....[cont.]

I asked my good friend Marshall Auerback, an expert on the machinations of Wall Street who has degrees in philosophy and law, if he could elaborate on this vulnerability.  He responded as follows:

And here's another story, which should make one VERY wary.  The person who developed the credit default swap, Blythe Masters from JP Morgan, is also behind the creation of this carbon capture program.  Leave it to Wall Street to find a way to extract an economic rent from pollution!

The Emissions Trading Scheme (ETS)  amounts to nothing more than a privatisation of the commons asset which we call the atmosphere. The ETS would create private property relations over public space.  In Europe, it's been a colossal failure. The EU introduced what was known as the Clean Development Mechanism, which was an offset system allowing polluters in Europe to invest in emissions-reduction infrastructure in poor and developing countries and then use the "offsets" to avoid undertaking more costly emission reductions in Europe.

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[ Regarding Blythe Masters, see How the Exxon Valdez Spill Created the Credit Default Swap and Keiser Report: Fiat Food ]