Guardian | November 5, 2009
By Tracy Corrigan

Although significant scientific evidence points in that direction, some experts disagree and I feel neither qualified to judge, nor inspired to make a leap of faith.

On a related issue, though, I am a confirmed sceptic, and that is the effectiveness of trading rights to emit carbon as a means of reducing greenhouse gases.

In a new report called A Dangerous Obsession, Friends of the Earth argues that carbon trading is not delivering either significant carbon cuts or the technical innovation required to encourage a shift to low-carbon options. Even advocates of carbon trading admit the first phase of the European Union's emissions trading system, which lasted from 2007-2009, was a disaster and the current phase, which runs until 2012, is hardly a triumph. In its report on the European experience, the US Government Accountability Office concluded that "carbon offsets. . . may not be a reliable long-term approach to climate change mitigation"; the Centre for Climate Change recently warned Parliament that, partly as a result of recession, "there is a risk that the carbon price will not be sufficiently high to incentivise investments in low- carbon technologies". Among other snags are perverse incentives to increase carbon emissions in the short term and difficulties in verifying the offsetting of emissions.

It's not surprising that there are teething problems, given the ambitious scope of the project: to create an actively traded, government-sponsored carbon market which encourages ecologically desirable behaviour. But the mix of the state sector and the financial markets is always a combustible one, and traders are adept at gaming the system – it's what they do.

My worry is not simply that carbon trading won't live up to its billing as the answer to our global warming prayers, but that it will bring fresh problems. The rapidly expanding market creates opportunities for banks, investors and others to make huge profits out of a government-backed system which skews the market. As well as diverting money into the hands of intermediaries and speculators, this market distortion may also cause pollution to shift from developed to emerging economies, a phenomenon known as leakage.

Meanwhile, as a result of this new, profitable market in carbon trading, powerful financial groups now have a vested interest in its survival. Big banks and other institutions have invested in a business which is underpinned by the conviction that a government-sponsored carbon trading scheme will curb emissions and reduce global warming. Hardly surprising, then, that, according to the Center for Public Integrity's analysis of Senate disclosure forms, banks and other financial groups – which were largely silent on this issue until 2003 – had about 130 climate lobbyists in Washington by last year.

Whatever is agreed – or not – at the United Nations Climate Change conference next month, there already appears to be a global consensus that the main mechanism for pursuing any targets will be carbon trading. Despite all the problems, Europe currently accounts for the bulk of the $126bn global market, and if, as seems likely, the US pushes ahead with plans for its own version, the global market is likely to hit $2 trillion within five years, according to the Commodity Futures Trading Commission, which wants to regulate it. As commissioner Bart Chilton has observed: "We don't want to see the largest commodity markets in the world – these Green CAT Markets – become a private jungle gym for speculators and fraudsters." Indeed we don't. Nor, of course, is it desirable that the race into this new market and its associated derivatives inflates a new bubble, followed by an inevitable bust.

Yet our governments are creating a huge, highly complex, artificial market which will be far more difficult to regulate than simple products like mortgages – which, if memory serves, they didn't manage terribly well. (And there is, of course, huge scope for the development of derivatives, and derivatives of derivatives.) Even if the carbon market is sensibly regulated and functions reasonably efficiently – the very best that can be expected – large sums will be siphoned off by traders, intermediaries and investors.

Where does that money come from? Ultimately, presumably, from the steel and chemical companies which have to buy emissions permits. It makes me feel rather sorry for the poor old polluters.

Politicians like to talk about their desire for these very real industries to grab a slice of the economic pie from the financial services giants, but I guess that's another target that won't be met.