Monday, April 23, 2007

How carbon markets work

According to many politicians lining up behind the idea of greening the economy, cap-and-trade carbon markets are an ideal market-based solution to the problem of carbon emissions and, far from hindering the economy, promise economic opportunity instead by rewarding carbon efficiency with credits to sell as a sort of added value asset to a company's stock. Of course, by themselves markets would never in the first place have come up with the idea of trading something so intrinsically valueless as regulatory room for carbon outputs unless an artificial value had been forced on it through regulated scarcity, so calling it a market-based solution is a bit of corruption of idiom designed to confuse and mislead. Nevertheless, market actors will naturally respond to incentives even if they are artificial and arbitrary in making, and it is this characteristic of markets that political actors hope to steer to a desired effect. One must first suppose, of course, that the politicians who hope to be in charge of the carbon market regime will be somehow more immune to corruption in the allocation of carbon caps than they are in their use of language to promote it.

But it turns out in any case that, as a proposition, economic opportunity itself is of far more interest to politicians as an abstract quality relating to vote potential than it is to businesses acting in the market. Businesses, we find out, are far more interested in financial opportunities instead. So what's the quickest and easiest path to carbon efficiency and realize the financial opportunity of marketable space under an emissions cap? As this post in the National Review shows, the most efficient method is to just stop making things, or stop making things in countries that impose caps and move production to countries that don't.

Now, in Galicia, a manufacturer announced that last year it earned more from selling credits than ceramics (reminding me of an email I once got in which a French pharma company announced that selling credits was where its future lies, not pharmaceuticals).

Their statement was couched in terms of thanking the government for generously (that is, "over-") allocating ETS credits to them (for free, as industry lobbyists already demand of Congress), and noted that with the credit price having skyrocketed (before collapsing) they were able to reap a windfall by selling what the government had given them. They lamented that the price collapse, however, indicated this wasn't, er, sustainable.

Buried in this however was the phrase that, taking that price spike into account, they had decided to "equalibriate" their operations so as to maximize profits with an ideal mix of selling allocations and using them by, well, using electricity to make stuff...which is to say they also went into the business of making nothing, dedicating more of their operations to the task, which is far less labor intensive. That is, they found it more profitable to partially shut down, to idle workers.
Political interventions in the market are designed to promote political objectives — it would be naive to suppose that they are actively calculated with genuine understanding or regard for the market at the same time. Even if an effectively unchecked exercise of control in any aspect of the market did not result in at least some corruption counter-productive to the scheme's intent — an unlikely prospect — its exterior and pre-eminent motives will result in perverse consequences for the market.

Paying people to make nothing is just the cost of doing business in the green economy. It's a sound scheme only as long as the money to pay for it is made from nothing as well. To be sure, there are financial opportunities at least in the green economy, but real economics will trudge on its implacable way without it.