Carbon, carbon everywhere...is trading a means to an end?

Much has been made about carbon trading as a means of reducing CO2 emissions recently, but what is it and how does it help?

I have read a few articles about carbon trading, this one by Australian economics correspondent Peter Martin is a fairly clear explanation of the theory and the ideas behind it.

There are many more articles on the web, but a lot of them seem to require a good grounding in the financial jargon and technology that goes along with futures and derivatives markets.  As with so many ideas and principles involving governments and economists, once the financial markets get involved there seem to be a large number of people looking to get rich by distorting the original scheme beyond recognition. Much of the recent credit crunch and near collapse of the banking system is due to exactly such behaviours.

The theory is that the best way to promote change is to put a framework in place and then let the free market go to work on it.  The problem with this approach is that establishing such a framework that is robust and not subject to distortion caused by the ingenuity of those seeking ever more involved ways of making money is extremely difficult.  It is at this point that governments tend to abdicate their responsibilities.  Governments trying to explain such complexity to their constituents are up against it - many of the members of the government don't understand it in sufficient detail themselves.

Another problem with such an approach is verifying the basis on which carbon emissions are verified.  You can't see CO2, so measuring how much any individual enterprise is emitting relies on measuring their energy usage and calculating the equivalant amount of CO2 produced.  Then one has to figure out how much of that energy came from fossil fuels versus renewable sources.  As I'm sure most people are aware, even if we wanted to buy our energy entirely from renewable resources today there isn't nearly enough to go around.

It's all very well selling permits, but how do you know whether the system is being operated properly.  Wherever money is involved there will always be those willing to play fast and loose with the rules.  Regulating such a system globally seems nigh on impossible to me.  One non-profit organisation that is participating in the market by offering a certification scheme is The Gold Standard, based in Switzerland.  I don't yet understand how they are accredited to do this work - other than acting as a neutral 3rd party with a collaborating set of participants.

The CO2 emissions control is driven by the theory that such emissions are contributing to climate change.  This may or may not be true, but if nothing else it helps drive the move away from finite resources of fossil fuels towards more sustainable sources of energy.  That has to be a good thing, but how do we determine what are acceptable levels of CO2 emissions?  This is an arbitrary number plucked out the air.  How do we determine who is allowed to emit how much?  Who issues the permits?  How do we monitor and control the market?  Who plays the role of central authority?  Who do we entrust with the role of verification?  What happens if someone goes into carbon debt and then goes bust before they've bought new permits?  These are a set of very complex problems, with the solutions open to abuse and obfuscation.  What happens if we later determine that we need to reduce CO2 emission further?  Do existing permits have a lifetime attached to them?

Personally I think this scheme will prove to be unworkable - but that won't stop a lot of people spending a lot of time and money trying - and a few people getting very rich along the way through the usual market speculation.