Will Carbon Trading End Up like the Subprime Mortgage Crisis?

Nicolas Loris / January 30, 2009

Vincent de Rivaz, CEO of the UK arm EDF energy, made an interesting but frightening comparison when talking about trading carbon credits under the European Union’s cap-and-trade program:

We like certainty about a carbon price. [But] the carbon price has to become simple and not become a new type of sub-prime tool which will be diverted from what is its initial purpose: to encourage real investment in real low-carbon technology.

We are at the tipping point where we … should wonder if we have in place the right balance between government policy, regulator responsibility and the market mechanism which will deliver the carbon price.”

This came immediately after “the Guardian revealed that steelmakers and hedge funds were cashing in ETS carbon credits obtained for free, causing the price of carbon to plunge. The price of carbon has slumped from €30 a tonne to below €12, leading to a tail-off in clean-technology offset projects in the developing world.”

A similar trading scheme would like occur in the United States if we adopt a cap-and-trade plan to reduce carbon dioxide, as suggested by California Rep. Henry Waxman, chair of the Energy and Commerce Committee.

But the reality is the ebbs and flows of the market are causing a number of hiccups in the EU’s carbon trading plan. As a result, electricity prices are up, windfall profits are plentiful, and carbon reduction is negligible.

Do we really want to enter into our own version of carbon trading, which could result in a rendition of environmental subprime mortgages? Look at where subprime lending got us. Now imagine adopting a carbon trading system on a global level. Carbon trading undoubtedly fails the cost-benefit litmus test: Very high cost, very little (if any) benefit.

There’s also the possibility that carbon trading will be fraught with corruption, manipulation, noncompliance and mismanagement, especially if the government is running the show. In fact, the more I think of it, the more it does remind me of the subprime mortgage crisis.