A global warming debate yesterday at New York University between Senator John Kerry, a Democrat, and former congressman Newt Gingrich, a Republican, may have disappointed spectators hoping for a brawl. Gingrich unexpectedly agreed with his opponent that climate change is an “urgent” problem that demands action, and the debate morphed into a squabble about what to do next. Kerry stressed the need for strict national and international emissions standards, which Gingrich dismissed as needless bureaucracy; he called, instead, for tax breaks to foster private-sector innovations and solutions.
At the moment, Newt has actuality on his side. Free-market economists going back to Adam Smith have lauded capitalism because it doesn’t wait for anybody, especially politicians and lawyers, to figure out how a market works most efficiently. An “invisible hand” pushes self-interested consumers to make decisions that benefit society as a whole. It’s like magic, but actually this libertarian construct characterizes much of how emerging emissions trading markets operate. These markets are either “compliant,” meaning that businesses must meet certain emissions reductions under the Kyoto Protocol, for example, or “voluntary,” meaning that individuals and businesses pay for emissions-reducing technology without any obligation to do so. It’s not exactly the laissez-faire world that Smith envisioned, but the now-lucrative trade in greenhouse gas credits and offsets has evolved largely without government standards and protocols. But is Newt right? Is this best?
The business press has done a decent job in recent months to at least begin to answer this question, and it has uncovered problems nearly everywhere that emissions are traded—mostly the result of a lack of government oversight and regulation. But it’s too early for reporters to cap their pens, because growth in the various trading schemes shows no signs of slowing—and there is still much we don’t know. What’s more, as many recent articles have stressed, individuals, households, and businesses are not waiting for national governments or the United Nations to iron out all the details of emerging markets. Especially not when there is “big money at stake,” as the Wall Street Journal columnist Alan Murray put it. The Clean Development Mechanism (CDM), the emissions market created by the Kyoto Protocol, and the Emissions Trading Scheme (ETS), the market created by the European Union, don’t do a great job of monitoring the use of the emissions credits they allot, but there are still $28 billion worth of credits in circulation worldwide. In the United States, the Bush administration has been slow to regulate emissions, but nevertheless consumers voluntarily spend $100 million a year, according to one BusinessWeek estimate, to “offset” their share of greenhouse gases from travel, home electricity, and other day-to-day activities.
So to some extent, the free market is working. There is evidence that cap-and-trade credits (compliance markets) and voluntary offsets are producing environmentally and economically positive results. But there is also plenty of evidence that it doesn’t always work.
An article titled, “Is the global carbon market working?” in the January issue the journal Nature, touched off a widespread evaluation of whether or not credits and offsets actually do anything to reduce total global emissions. The CDM was designed to encourage developing countries to invest in pollution-cutting technology. The emissions reductions (compared to a baseline) that come from that technology can then be converted to credits that are sold in the developed world (where, theoretically, it is more expensive to reduce emissions) to cover the cost of the new technology and more. But Kyoto does not specify what activities may be undertaken to earn credit.
As a case in point, Michael Wara, who authored the Nature article, reveals that the largest volume of credits, almost 30 percent of the market, come from capturing and destroying HFC-23, one of six greenhouse gases listed under the Kyoto Protocol. The problem, according to Wara, is that HFC-23 is cheaper and easier to trap than carbon dioxide or methane, and polluters use that advantage to earn a disproportionate amount of money in CDM credits. For example, Wara writes, polluters have sold €4.7 billion in credits for collecting HFC-23, but if the buyers of those credits had invested directly in trapping HFC-23 in the developing world, they could have accomplished the same reductions with only €100 million. Therefore, Wara argued, the Kyoto agreement needs different protocols to regulate each greenhouse gas individually—carbon credits for carbon capture, methane credits for methane capture, and so on. He concludes that the global market is not enough to stem the impact of global warming. The open market, Wara wrote, will not push countries like the China and India to make serious investments in low-emissions economies; rather, more stringent regulation will be needed.