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We had during an earlier evaluation and analysis of the cap and trade solution had pointed out that it has three primary problems i.e. feasibility, scalability and the efficiency of capping solutions. http://bit.ly/4kzzIz
But it seems a bigger problem than the above 3 that is dogging the cap and trade economics at its infancy is Accountability. Today the frauds and manipulations in the Carbon economy tend to give an edge to the carbon emmiters against the regulators which has taken the world by surprise and storm. The trap to milch the system has been well and truely set by the oil and coal lobby , despite some anxious times it faced, and intense lobbying it had to do. Today the politicians of the G7 are running helter skelter to meet their demands and keep economic costs down, the jobs from melting away, and the emissions from clouding the air. With the EU ETS making the first move into Carbon trade even ahead of the U.S. the trap has been sprung in Europe and the hunter has become hunted.
Not that it bothers the G7 politicians too much. They are thick skinned enough to show concerns and continue to do nothing and savvy enough to use the adminstration and the bureaucrats pass on the cost to the people. The people are prosperous enough and though they may protest to some extent they will never take to the streets and pay the higher energy costs dutifully.
We have already seen it once in the case of the U.S. housing mortgage sub-prime crisis,where taxpayers paid billions to clean up a system without a murmur and shall possibly see it again in the form of carbon trading in a coming decade.To understand what is happening we must go into the history of virtual economics that is milching the system and understand its far reaching implications. See the blogpost of 27th September "The 4 Forces of Globalization, Issue 04 " and understand how the financial innovation concepts introduced during the Reagan era brought about the concept of virtual economics which in turn made the theory of holding real money in your vault look like having change in your pocket.
The Cap and Trade economics is a product of such virtual economics and is tearing apart Europe orderly monetary system even in its early stages. The few people who are implementing it are understanding its implications of late but still don't know how to get out off the trap. Let us first understand what the Cap and Trade is.
The Cap and Trade consists of two core principles. The first is the Carbon Permits
which are issued to the countries on the basis of their installed capacities. This is the first area of wrangling between the nations where each country gets its permits to release emissions , based on their industrial capacities.
The internal distribution is then done by the country.lready within the EU ETS, Poland and Slovakia has won the European Court Ruling against the European Comission to allocate larger emission allowances to its fossil fuel powered energy industry. It is understood that all other East european members in Europe shall follow suit shortly. Australia haggled and got far more permits than it deserved in the Kyoto round of discussions which many nations have still not forgotten or forgiven.
Now these permits are given to the countries, so that they distribute it amongst their emitting industry free or auction them to the industries and thereafter register them in the derivatives market NYMEX as emission or carbon permits that are marketable commodoties. The second level of manipulation or fraud
starts here. Companies lobby hard to get these permits as they are free and bring in enormous cash profits as to them, as they can sell these permits to others through London Exchange or NYMEX the Chicago based Carbon Exchange and make maximum profits. Mittal Arcelor was recently reported to have earned mega profits equivalent to nearly half a billion Euros by capitalising unused carbon permits it had got free as it claimed that it had already reduced emissions by over 30 % in one year, and is expected to reduce another 20% by next year. Strange that it happened, only after Carbon trading was introduced and free permits were issued.
British utility companies as reported by BBC got billions of Dollars as free permits and booked super profits, but that did not stop them from increasing energy prices taking advantage of the Carbon price fluctuations and fleecing the customer in name of emissions cut.
Still worse are the frauds that have reared their ugly head all over the world. An Australian Company recently cut down virgin forests in Indonesia, profited from selling of costly rainforst wood grown over hundred of years and then started palm oil plantation in that location and claimedcarbon credits for green cover through commercial plantation. A 38 million Pound fraud was unearthed last year on evasion of VAT while claiming Carbon credits by 6 people arrested in U.K. The porus laws of a virtual economy give space for both innovation and fraud. This is what caused the subprime mortgages market to collapse last year. This is what will cause the Carbon markets to crash. Can Asian economies with billions to feed afford speculative and risk prone markets of Cap & Trade.
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