Acton Commentary

Cashing in on Carbon Credits


Many religious leaders will mark Earth Day, which falls on April 22 this year, with more gripes about the United States refusing to ratify the Kyoto Protocol. In fact, people of faith - if not their leaders - should be grateful that the U.S. government has rejected this fundamentally flawed treaty.

The hype surrounding Kyoto included a canard about its standards being economically sensitive because the agreement would use “market-based” solutions to solve the perceived problem of greenhouse gas emissions. The Kyoto solution created a carbon credits trading system, wherein a fixed number of total credits are doled out among participating nations set on a baseline of previous carbon emissions for that country.

Those nations that do not need all of their credits can sell their excess shares to nations that needed more credits to meet the standards. This could theoretically be accomplished without exceeding the emissions allowed by the aggregate number of carbon credits, and so it's more accurately named a “cap and trade” system. Religious and moral leaders too have succumbed to the allure of such ostensibly economy-friendly solutions, as earlier this year the Evangelical Climate Initiative specifically endorsed policy to reduce greenhouse gas emissions “through cost-effective, market-based mechanisms such as a cap-and-trade program.”

This part of the Kyoto system has sparked a trend in climate change policy, as similar prescriptions were put forth in the failed McCain-Lieberman Climate Stewardship Act of 2003 and have been a feature of global warming discussions ever since.

But it turns out that Kyoto's so-called “market-based” solution is having some unintended consequences. Russia, currently one of the world's worst polluters and emitters of greenhouse gasses, is being rewarded by the carbon credit scheme . As NPR's Stephen Beard reports, Russia is now sitting on nearly $1 billion worth of carbon credits.

The way the Kyoto scheme works is that the baseline for carbon emissions is set at the level of the country's emission in 1990. At that time Russia was, as Beard says, “belching out pollution” at a record rate. With the contraction of the Russian economy in the 1990s, industrial and domestic emissions radically declined. At their current levels, Russia's carbon emissions are far below their 1990 level.

Even so, Russia's industries remain one of the world's biggest emitters of carbon dioxide. Their plants and manufacturing facilities tend to be outdated and inefficient, but because there are fewer of them than there were in 1990, they have a surplus of carbon credits.

So despite the best intentions of the Kyoto cap and trade scheme, there is no real incentive for Russia to reduce those emissions. Russian industries can continue using inefficient means of production while enjoying the bountiful fruits of the carbon credit scheme.

The Russian situation should serve as a wake-up call for religious and other groups that have touted the “market-based” incentives of carbon trading schemes. The fact is that such “markets” are artificial constructs of political entities--in the case of the Kyoto standards, the governments that have ratified the treaty.

In this sense, characterizing cap and trade schemes as “market-based” is rather misleading, because these systems lack the fundamental elasticity and flexibility of authentic and spontaneously generated markets. Cap and trade schemes cannot foresee the various economic and other factors that will affect the situation of participants in the system. Many participating nations, for a variety of reasons, are beginning to realize the difficulties of meeting the Kyoto treaty's goals and will face stiff penalties for their failure to comply.

The fundamental problem with cap and trade schemes is that they misapprehend the role of government. Governments do not create markets but rather provide the necessary framework within which markets can function. This framework consists of things like the consistent application of the rule of law and protection of property rights.

Real market-based solutions include the possibility for increased efficiency and reduced pollution that new technologies and innovations provide. They also don't rely primarily on government coercion but on moral suasion to enact the changes that are thought to be beneficial. This preserves the possibility of authentic virtuous choice.

Advocates of environmental stewardship are obliged to pay attention to the real-world results of governmental policy and not simply the good intentions in which programs may be grounded. As Russia profits from the Kyoto scheme, religious and political leaders need to get beyond the “market-based” rhetoric of cap and trade schemes and come to grips with the failure of such systems to justly provide rewards and punishments.