Memo to America: Don’t do carbon trading!

The United States must learn from Europe’s mistakes – not repeat them


Senator Harry Reid has repeatedly denounced opposition to carbon trading as “dangerous.” Senator Reid is wrong. It is the House and Senate climate and renewable energy bills that are dangerous. Fortunately, the recent elections and the ongoing dissension at the Cancun climate summit could bode ill for carbon trading, any successor to Kyoto – and renewable energy standards.

Carbon trading is wrong on so many levels. First, there is a growing realization that the small changes we are seeing in Earth’s climate are entirely consistent with well-established, long-term natural climate cycles, and that CO2 (a minor trace gas in the atmosphere) has a trivial effect on climate.

Second, many studies have shown that plans to slash fossil fuel use, even if fully implemented, would have a trivial impact on the trajectory of climate – perhaps a tenth of a degree by 2100. And that assumes carbon dioxide really is the driving force in climate change. If it’s not, we get zero benefits, at a huge, economically devastating, wealth-redistributing price tag.

Third, most of the authoritative economic studies on carbon trading demonstrate clearly that its costs always greatly exceed any conceivable benefits. As far as I know, the UK’s Stern Review is the only major study that concludes “the cost of inaction exceeds the cost of mitigation” – and Stern has been comprehensively and authoritatively refuted. The recent collapse of the Chicago Climate Exchange further underscores the corruption, futility and would-be profiteering inherent in all carbon trading schemes.

A number of commentators, including notably former UK Finance Minister Lord Nigel Lawson, have argued that if any action is called for in the face of climate changes, adaptation is the best and most proper precautionary approach – as and when the need emerges. It is also far cheaper than mitigation, avoids massive up-front costs to deal with a highly speculative problem, and improves our ability to respond to the natural climate changes and extreme weather events that have always battered human civilization.

If we want to reduce emissions (and the case for doing so is increasingly doubtful), then trading in carbon dioxide molecules is simply a bad way to do it. Those who are still tempted by the Siren call of carbon trading should look at the EU’s Emissions Trading System (ETS).

The ETS has clearly failed to reduce emissions. Indeed, the ongoing recession has done a much better job. However, as studies by the London think-tank Open Europe ( and other respected analysts have documented, the ETS has created massive unintended consequences and perverse incentives that have imposed great costs on European economies, consumers, taxpayers and employers.

ETS/ carbon trading also depends enormously on initial conditions, which are set by bureaucrats, and it creates a huge lobbying industry, as businesses seek to influence the conditions to enhance their competitive advantage. Consider these fundamental questions.

Who measures the emissions? What is the cut-off point for the minimum emissions that trigger mandatory trading for emission credits? What grandfather rights do we offer to existing emitters?


About the Author: Michael Goetz