ETS = Market Failure

I don't know about you, but I worry about the Emissions Trading Scheme. The idea of it. That it is the best way to stop our atmosphere from changing back to what it was before life on earth....

Good old Wikipedia defines the ETS like this:

Emissions trading is a market-based approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants.^[1]

A central authority (usually a governmental body) sets a limit or cap on the amount of a pollutant that can be emitted. The limit or cap is allocated or sold to firms in the form of emissions permits which represent the right to emit or discharge a specific volume of the specified pollutant. Firms are required to hold a number of permits (or carbon credits) equivalent to their emissions. The total number of permits cannot exceed the cap, limiting total emissions to that level. Firms that need to increase their emission permits must buy permits from those who require fewer permits.^[1]

The transfer of permits is referred to as a trade. In effect, the buyer is paying a charge for polluting, while the seller is being rewarded for having reduced emissions. Thus, in theory, those who can reduce emissions most cheaply will do so, achieving the pollution reduction at the lowest cost to society.

Yes I know, already the shutters are clanging down. Who wants to read this stuff...

And that's the point. It is a very complex market system that is being devised, which is motivated by money and profit. The very motives that are intensifying the human contribution to the problem. It disturbs me that so many environmentalists are supporting the ETS, and giving credibility to it. Especially here in New Zealand.

Where is the economic evidence that controlling the impact of externalities such as carbon emissions is more effective by charging for it than by direct regulation? Economic theory suggests that by charging a tax equivalent to the social cost of the externality the demand curve will shift to where the socially acceptable quantum of permissible damage lies.

But that's the theory. Consider the various tragedies of the commons. Look at what intensive sheep farming did the NZ highlands (removed vegetation and let the soil wash away into the sea). Look at what diary farming is now doing to our rivers. Even though we can see those changes we seem powerless to do anything about it. Rivers are being damaged in front of our very eyes. But we are told the Resource Management Act and the market will fix it. Yeah right.

We can't see what we are doing to our atmosphere. But we know it's changing. That the level of Carbon dioxide and methane is increasing. Interestingly we do know what the earth's atmosphere was like in the past. See this blog: Thinking about Air Composition. This shows how much carbon dioxide was in our atmosphere long ago. When it did not sustain life. It charts changes to our atmosphere, which, through plant life over millions of years, took carbon dioxide from the atmosphere, and turned it into soil, coal and oil. Returning oxygen to the atmosphere.

This process is reversing now.

Economic theory states that for a free market to work efficiently there must be perfect information to the market. You'd think there was enough information in the NZ market for farming to sort out its act when it comes to rivers. But even if there was, there is still the desire to maximise return and profits over the short term - no matter what the environmental cost is.... human nature....

Economic theory is just that. Theory. Milton Friedman's economic theory is essentially that the market is the most efficient way to allocate resources. His supporters argue - many of them in ACT - that the theory has not been applied rigorously enough to work properly - that it should be applied to housing, health, education, unemployment, retirement, science. The list goes on.

All down to money.

But given the financial turmoil created by the lack of regulatory oversight of the derivative markets, why should we be confident that creating a trading scheme for carbon emissions - with all sorts of derivatives and securities and issues - will be any more successful?

Can we really trust the merchant banks to be able to manage something as esoteric as carbon derivatives, and something as important as the air we breath?

I'm one of the majority who believe that economic rationalist theory is wrong for social welfare, health, and education, and for things like community building. And I have no confidence that it is the best or most responsible way to address environmental issues.

The emission trading scheme is to environmental protection what the trickle down policies of the New Right were to social welfare reform. The invisible hand of the market cannot be relied upon to maintain the life-supporting qualities of our water and air.