Past View: Congress Considers Carbon Trading (2008)

Carbon dioxide (CO2) trading is being championed by nearly a dozen proposals floating around Congress during the summer recess, but the failure of Europe's trading scheme is keeping most Congressmen skeptical as the 2007-2008 session approaches.

European Emissions Rising

In Europe, which has the most comprehensive carbon trading system in the world, emissions have risen during the past two years. U.S. emissions have declined. Moreover, economists note, the European trading scheme has enriched certain industries at the expense of consumers and other industries.

When Europe first issued carbon permits, energy prices skyrocketed as industries perceived the allotted amount of permits to be too low and had to find ways of doing business that were less carbon-intensive and more expensive. There was a backlash from European consumers at the higher energy prices.

European politicians then issued more permits to industry, which caused the price of the permits to plummet. At this stage industry had little reason to cut emissions. As a result, the European Union has seen its CO2 output increase rather than decline since the emissions trading scheme came into effect.

"Any time government takes the place of the free market and arbitrarily determines the price or the availability of a product, social and economic penalties predictably follow," said Cato Institute Senior Fellow Jerry Taylor.

Carbon Offsets Under Fire

Another aspect of carbon trading schemes is the buying and selling of "carbon offsets."

Carbon emitters purchase "offsets" from companies or organizations that promise to undertake projects that reduce greenhouse gas emissions in an amount equal to the amount emitted by the purchaser. This is done by planting trees, creating wetlands, decreasing emissions at other locations or companies through efficiency measures, or investing in low/no-emission energy technology in developing countries.

In theory, companies that buy enough credits could become carbon-neutral; in practice, the offset industry has been beset by lax accounting practices and outright fraudulent behavior.

The July 9 Los Angeles Times reported 10 of the world's leading international banks are looking into self-regulation programs because of "reports of widespread problems in the [global] market for carbon offsets." Most notably, the Times reported, "In April, the Financial Times found multiple examples of companies trading carbon offsets that carried no environmental benefits."

In July, printer manufacturer Kyocera released a survey showing 47 percent of the United Kingdom's large companies view carbon trading as a confusing scheme that lacks any real value in pursuing carbon emission reductions.

CBO Finds Trading Flaws

In the United States, proposed cap-and-trade programs have run headlong into economic analyses from the Congressional Budget Office (CBO) indicating most of the costs of the program would ultimately be borne by consumers, with carbon emitters receiving value far above any costs they bear.

Other analysts have pointed out that countries like China are poised to reap windfall profits by selling excess carbon credits simply by not undertaking certain types of energy developments.

"The wrong model is being touted," said James Johnston, senior fellow for energy and regulatory policy at The Heartland Institute. "There is little or no exchange of emissions reductions" taking place under the trading schemes.