Thursday, June 07, 2007

Emissions Trading Schemes

The proposed policy framework to address climate change will eventually include some type of trading system. Unfortunately, a patchwork of systems exist currently and, to the best of my knowledge, they have not been overly successful. In my opinion, for these schemes to be successful they will need to be administered with clear definitions of what can be traded, open to everyone, and not-for-profit. If it made like a regular commodities exchange it may be efficient in an economic sense but could be hijacked by speculators like crude oil trading.

Another serious issue that needs to be addressed is the negative and/or unexpected outcomes of regulation. The Economist has an excellent piece, titled Perverse Incentives, that outlines how production of certain refrigerants that damage the ozone actually carbon credits to sell in Europe. The article is not technical but you would have to read it in it's entirety to fully understand what is going on. Basically the Montreal Protocol and the Kyoto Protocol are overlapping in this area creating a loophole of sorts.

Overall, any regulatory scheme will need to have an enforcement/verification mechanism and be clearly defined and flexible to keep up with changes and provide everyone with equal opportunity to participate. Unfortunately, massive regulatory schemes usually become bureaucratic quagmires and results are difficult to measure. If politicians are serious about tackling the issue then a system not based on existing methods will be proposed. Otherwise we'll end up with a new version of the tax code.

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