Copenhagen cap-and-trade agreement might never be reached

As Members of the US Congress continue to talk hopefully of a cap-and-trade system for the United States, the United Nations is now preparing to host its annual Climate Change Conference in the hope of eventually establishing a worldwide cap-and-trade scheme. But recent political and diplomatic developments, to say nothing of the climate-science scandals in England, New Zealand, and the United States, cast doubt on the likelihood and even the workability of such a scheme.

On Tuesday, the English-language Copenhagen Post first reported on multiple cases of securities fraud involving the Denmark CO2 Quotas Register, the world's largest. Two days later, NASA's James Hansen delivered to the London Times his opinion that a cap-and-trade scheme was inherently flawed and would never serve the intended purpose. Now an insightful analysis by Sean Higgins of Investors Business Daily suggests that Russia, and other countries who accumulated vast emissions credits after their economies went into recession or depression, may scuttle any cap-and-trade deal unless they are allowed to preserve the credits they say they earned under the Kyoto Protocol.

Any cap-and-trade scheme, or emissions-trading scheme as it is sometimes known in the Commonwealth of Nations, is intended to "internalize" what any market system regards as an "externality." An externality is any cost to someone other than the parties to a given transaction or other action in the economy. Pollution is the classic externality, as its costs fall upon the polluter's neighbors, or even on the larger population, moreso than on the polluter himself.

Economists recognize four ways to treat externalities: regulation, litigation, taxation, and cap-and-trade. The United States has ample experience with the first two, and has tried to implement the third, without much success. Cap-and-trade is the preferred system under the Kyoto Protocol, which the United States never ratified, but Russia and many other countries did ratify.

Cap-and-trade begins with the acceptance of a certain level of pollution, however defined, usually with the understanding that that level will be set lower over time. Then each economic actor is given a quota of pollution that he may or may not put out. If he pollutes less than this quota, then he accumulates credits that he may sell to someone who pollutes more. In that manner, those who pollute more, pay more, and those who pollute less or even manage to abate pollution that they did not cause, get credit for this.

At first, this might seem an ideal "market-oriented" solution. But who sets the overall quota? Who sets the quotas for individual actors? Can any amount of pollution, from any given source, be considered negligible? This is no idle consideration. Visitors to the homes of famous persons, which homes are preserved as "whole museums," are often warned not to use the stairway hand rails, for fear that their body oils will harm the wood. The reason is simple: an amount of damage that might seem negligible from one actor alone becomes significant and problematic in the aggregate. This little-noticed problem raises another issue that a number of commentators have half-jokingly referred to already: in the case of carbon dioxide and hydrocarbon gases (even granting the premise), shall the quota-setting authority set a quota for the simple privilege of breathing? Or, shall dairymen be assessed for the amount of methane that their cows emit as a waste product of digestion?

Worse yet, neither the Kyoto Protocol nor any other cap-and-trade system under discussion takes economic growth or recession into account. Recent analyses reveal that American "carbon emissions" have declined sharply, entirely on account of the American recession. The Japanese have had the same experience. But the Russian experience dwarfs any such decline. According to IBD, when the Soviet Union collapsed, its industrial base collapsed with it. Emissions fell. Then, when factories began to re-activate, they often did so with much more modern technology imported from the United States and Western Europe. In the process the Russians have now accumulated 5 to 6 gigatons' worth of emissions credits.

Those credits expire in 2012, with the Kyoto Protocol. Russia wants those credits carried forward. And that, many diplomats and other experts say, might well queer the deal in Copenhagen--especially since Russia is not the only country having such a surplus of credits, a surplus due entirely to a special circumstance of near-total economic collapse, and a rebuilding that was either delayed, done with more modern technology, or both. The reason: Russia, and other countries similarly situated, might flood the cap-and-trade market with their credits, thus driving down costs and resulting in an increase in emissions overall. But if the extensions are denied, then the Russians might walk away, and take other nations with them.

Earlier this week, James Hanson raised another objection. Quite simply, he does not think that nation-states that have not had such a drastic experience should be allowed to buy the right to continue, in his eyes, to contribute to eventual anthropogenic global warming (AGW) that he continues to view as a real threat.

They are selling indulgences there. The developed nations want to continue basically business as usual so they are expected to purchase indulgences to give some small amount of money to developing countries. They do that in the form of offsets and adaptation funds.

What Dr. Hansen would make of a situation in which Russia or any other country would "clean up" (financially speaking) by "selling indulgences" worldwide, no one has yet asked him. Furthermore, Hansen might or might not have been aware of the breaking scandal concerning the Denmark CO2 Quotas Register. This cap-and-trade exchange is the world's largest, because registration is simply easier in Denmark than elsewhere. The problem: some of the registered companies are defunct. Other registrants have given false addresses. Yet they were still awarded credits, though several celebrated cases have lately resulted in arrests.

One commentator on the Copenhagen Post article made this observation:

How could a market that is based of fraudulent science (see climategate e-mails) be anything but a fraud itself?

These considerations might ruin any chances of any sort of agreement on a cap-and-trade system from Copenhagen, even among those who still accept the AGW premise--which itself is in increasing doubt after the recent allegations of scientific fraud and favoritism by the concept's foremost proponents.

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