Miscalculations can be costly. Betting on carbon regulation may have seemed like a sure thing in the 1990s as scientific and, seemingly, political consensus grew around the need to regulate greenhouse gas emissions. Yet, more than a decade of inaction—and the collapse of international negotiations as well as domestic efforts to cap carbon—has proven the perils of the business. Richard Sandor, founder of the Chicago Climate Exchange, a voluntary trading regime for CO2, and a founding father of carbon markets, sold out for $600 million this year. Brokerage CantorCO2e closed its U.K. carbon desk in July, consolidating those operations in the United States and effectively ending its physical presence in the world's most active carbon market, in Europe. "Carbon is a relatively small part of what we do in terms of revenue," said CantorCO2e CEO Josh Margolis. "Diversity is our friend."
And the U.N.'s Clean Development Mechanism market itself may come to an end in 2013—bringing to a close the $20.6 billion trade—without a new set of commitments by the global community on how to extend the Kyoto Protocol's provisions, according to the U.N.
A closer look at the primary U.S. effort—the Regional Greenhouse Gas Initiative of 11 Northeastern states—may clarify. Regular auctions to sell the right to pollute, or allowances, have netted nearly $676 million for the states and emissions have dropped to roughly 120 million metric tons of CO2—34 percent below the cap for 2009, according to a report from Environment Northeast. The price of an allowance is under $2, hardly a massive economic burden on either electric utilities or electricity users.
Yet, there have been problems. Politicians, such as the governor of New York, have raided RGGI auction funds—supposed to be spent on energy efficiency improvements and rebates to electricity users—to remedy budget shortfalls. And the bulk of the emissions drop is not a consequence of a price on carbon or the cap—as theory would hope—but rather a byproduct of the mild winter in 2009 paired with a collapse in the U.S. economy—both of which reduce the demand for electricity and therefore the amount of CO2 pumped out to create it.
The great-granddaddy of all emission markets—the U.S. Environmental Protection Agency's Acid Rain Program—‚shows how vulnerable such a trade can be to the whims of government. Thanks to regulatory reforms begun under the Bush administration beginning in 2005, that market has collapsed—with allowances that once traded for $1,550 per ton in 2005 now trading for just $10.
In the end, the only thing that matters is whether any carbon market actually reduces emissions of greenhouse gases. The answer so far: Not yet. The European emissions trading scheme, the largest in the world, "has reduced emissions by just 2 percent compared to the projected levels without ETS," according to a 2010 report from the U.S. Climate Task Force. "Moreover, if the effects of the 2008-2009 financial meltdown and recession are taken into account, the data show that the ETS has had little if any independent effect on European [greenhouse gas] emissions."
And that brings up a question cap-and-trade's critics love to ask: If it can't reduce emissions, what is a carbon market really for?
This article originally appeared at The Daily Climate, the climate change news source published by Environmental Health Sciences, a nonprofit media company.