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Color me less than shocked that people are gaming the carbon credit system, creating unintended consequences that actually hurts the environment.
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Me too. On the other hand, I would like to see some scheme in this general direction actually work. Do you know of better ways?
I don’t know. But has the market ever produced positive change on environmental issues?
The market will do whatever we give it an incentive to do. If it’s not doing what we want it to do, we need to adjust the incentive (and keep adjusting until we get the results we want). It’s a lot easier to let the market find the problems with our initial plan, and then fix those problems, than it is to try to think of every eventuality in advance.
Or at least, that’s the ideal. In the real world, every attempted “adjustment” is going to get hacked to pieces by monied interests or simply blocked at the gate by the same.
In other words, the problem with markets isn’t that they can’t be used to accomplish positive environmental ends. The problem with markets is they tend to exist in (perhaps necessarily) societies where money holds far too much power, and that power blocks positive environmental ends.
Not sure where that leaves the prospective reformer, though. It’s not as if monied interests are any less capable of co-opting a non-market mechanism such as a more direct regulatory regime.
If the regulator is well-funded and supported by the State, then they become very difficult to co-opt. It wasn’t until Reagan started defunding US regulators, slashing their staff, deliberately placing industry shills in their leadership, and Congress began passing laws both privatizing regulatory functions and realigning regulatory(and accounting) institutional incentives with those of industry actors instead of the State that the US regulatory bureaucracy began to break down and be co-opted.
A good example of incentivized co-option in the field of private regulation are the ratings agencies, who aren’t paid for their ratings by the general investor or by the stock markets that rely on their assessments, but rather by the companies that they are rating. Moody’s et al have no incentive to provide accurate ratings of financial products because their revenue is entirely reliant on the goodwill of the very people who produce those financial products for sale.
Eh, this isn’t really a market failure, it’s a regulatory failure. People found a loophole in a program intended to reward good behavior. The fact that it’s a market-based regulation has added all sorts of complications to this, but the underlying problem has fairly little to do with the carbon credit market as such. If it was just a straight subsidy the same thing would’ve happened.
So being too cynical about this seems to be pretty dismissive of the whole idea of progressivism. You engineer institutions which try to make life better, if they don’t work you try to modify it. That’s just how it goes.
A regulatory failure is a market failure. Markets don’t exist without States, and as the State is the ultimate market-maker, the nature of that market is necessarily the result of how the State relates to it, i.e., it’s “regulatory regime” regarding the market.
In this case, a cartel of States established a market by creating the Clean Development Mechanism to award carbon credits. The incentives for the market they created were flawed in that they did not appropriately consider the set of behaviors this market would reward. In setting the “price” for different emissions, they did not consider the possibility that some actors might deliberately produce cheap but harmful emissions purely for the purpose of “destroying” them to gain the huge amount of credits awarded for doing so. In making the market, they created no real regulator or arbitration mechanism to administer it, merely creating a largely powerless, rotating chairmanship which awards credits for specified activities. So the market was flawed from the beginning; first it did not consider the full range of behavior possible, second it established a regulator (the CDM) which lacked the ability to issue judgements on what comprised “good” behavior in the market it oversaw, and third it failed to establish a court where disputes over what met or violated the spirit of the treaty could be litigated. These market flaws are necessarily also regulatory failures in that the States involved abandoned their responsibility to police the market they had created.
A market failure occurs when a market is not clearing due to some inefficiency in the pricing mechanism. This is clearly not happening here, as the market is spontaneously reacting to the regulatory scheme in a rational way.
If you start calling every event where a regulatory system causes market output to be skewed away from what we want a “market failure” you are basically redefinining the phrase into meaninglessness.
But has the market ever produced positive change on environmental issues?
Whale oil shortages.
The gas price spikes over the past few years have driven down miles driven and total carbon output in the United States.
Making bad fuels more expensive can work out well for the environment.
But has the market ever produced positive change on environmental issues?
The trading system for acid rain precursors like SO2 was a spectacular success.
Ban the construction of new coal burning plants. Post a schedule for the closure of extant ones. When said dates arrive, show up with dynamite. Done.
We’re getting there.
Check out page 9
Dean Baker (“Beat the Press” blog at cepr.net) has a discussion of the same NYT article. He links to something he wrote that predicted this kind of thing could happen and seems to outline a different method which wouldn’t permit gaming.
One big problem a lot of carbon credit systems have is that they betray their purpose from the get-go. The point of carbon credits is to establish a market that correctly includes the destructive potential of carbon in its price. Most carbon credit systems, however, hand out huge numbers of waivers and “free” credits that, naturally, favor those actors who receive them; distorting the market not only by putting downward pressure on the price, but also by giving certain firms an advantage within the market. The neo-liberal laissez-faire approach taken towards these markets -the idea that all governments need to do is establish them and then they will naturally take care of themselves- is distortionary in its own way of course. States establish markets and States WILL regulate them whether they want to or not; the only question is whether they will do so consciously and deliberately in pursuit of a clear objective(Housing and Education after WWII), or unconsciously and haphazardly as a result of industrial lobbying(Financial derivative markets over the last 30 years and “deregulated” markets in the US generally). So the first step is to establish a carbon market that accurately prices Carbon, favors no actors over others, and in recognition that participants will try to game the system and the politicians who legislate it, establishes a well-funded regulator with powerful incentives to enforce fair dealing in the market instead of colluding.
The second necessary fix, and the one most relevant to the article, would be including relevant experts in the process of drafting your carbon market. What these 19 factories are doing here is exploiting a loophole in the structure of these carbon markets that exists because no one considered the production and destruction of this gas could be used to game the system. Perhaps if chemists with expertise in the field of industrial emissions had been included in designing this carbon market, that loophole would never have existed.
Carbon, favors no actors over others, and in recognition that participants will try to game the system and the politicians who legislate it, establishes a well-funded regulator with powerful incentives to enforce fair dealing in the market instead of colluding.
Any idea how you manage to do this?
Especially in setting up the incentives to maintain a universal system without waivers and the like?
We are seeing a version of this here in Canada.
The dirty little secret is that Canada has been the leading bad guy on the climate change file – we actually work harder to undermine consensus on action than anyone.
The abomination known as the Harper government has withdrawn us from Kyoto (although we had zero chance of coming anywhere near it). The current plan that the government keeps touting is a 17% cut in emissions from 2005 levels by 2020 (a fucking far cry from Kyoto’s 6% cut from 1990 levels, especially given that Canada was among the leaders in emissions growth since signing Kyoto).
The government has done sweet fuck all – not raised a single pinky – to do anything to curb emissions even since the new Copenhagen accord, so even the very modest (and insufficient) new targets seem unattainable – especially since the holocaust known as the Alberta tar sands continues with unabated development. You can imagine my surprise when the government just released a report this week indicating that Canada was halfway to meeting its targets.
I mean, in light of ZERO action taken (although there has been some provincial action), and the fact that correspondingly, Canada’s emissions continue to grow (largely because of the tar sands development), how could this be?? Accounting.
Canada has reassessed the credits it is giving itself because of its large forest reserves. Ok, so it isn’t exactly like these forests just popped up. They’ve always been there. But now we are crediting them as carbon sinks, which allows us to take no action, and still get credit for reducing emissions. Unbelievable.
You can imagine my surprise when the government just released a report this week indicating that Canada was halfway to meeting its targets.
Listening to Tory MP Michelle Rempel spinning this as another victory for Conservative policies was the most nauseating thing I’ve heard since the last time I heard Michelle Rempel.
I have to respect the Canadian Tories in a grim, twisted way. They had a goal (govern like their heroes, the American Republican Party) and an obstacle (if we simply adopt their platform, we will never win) and they devised and executed a way around said obstacle (stealth into office using whatever lies we can, and obfuscate the purposes of our legislation once there.)
It’s been a bit impressive to watch. Also impressive was watching the Liberals decide Michael Ignatieff was the one to lead them to victory.
“With the expertise of the American financial industry, we can soullessly leverage profit save the environment in a market-friendly manner!”
And the demand for recyclable packaging leads to rainforests being cleared to grow sisal. Funny old world, innit.
Recycling is an extremely flawed system.
One can probably argue it provides no overall positive gain for the environment.
Yet I feel incredibly guilty if I throw away a bottle.
It would be much better if it was called reclamation and ALL waste was sorted at the point of ultimate disposal.
Everyone seems to forget that there are two R’s that come before it.
Actually, this talk by Susan Freinkal about plastic is really good. The Q&A has an interesting bit where the speaker says she doesn’t go to environmental groups, she mostly speaks to industry.
Making a market in pollution is like giving Montgomery Burns the idea to clean the ocean.
Little Lisa’s slurry for everyone.
I thought carbon credits granted the right to release gas, not payment for cleaning it up.
Are they refunding credits for cash as they clean up waste gas?
This also sounds like one fo the most obvious unintended consequence in recent memory.
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