Carbon trading won't work.

• Author: Dorsey, Michael K.
• Position: Biodevastation - Viewpoint essay

Economists, some environmentalists and a growing gaggle of politicians are pushing a grand strategy that a market mechanism--known as "carbon cap and trade"--can rescue us fastest from a climate catastrophe. But early evidence suggests that such a scheme may be a Faustian bargain.

Gov. Arnold Schwarzenegger is one of the chief proponents of the market view. He has joined the governors of Washington, Oregon, New Mexico and Arizona to create the Western Regional Climate Action Initiative, which "sets the stage for a regional cap-and-trade program" that he hopes will serve as a model for a national program. The Kyoto Protocol, which went into effect in early 2005 (but which the United States has not signed), also endorses this approach.

Carbon cap and trade works this way: A group of nations (signatories to the Kyoto Protocol) or a group of states (the five Western states in Schwarzenegger's plan) cap their carbon emissions at a certain level. Then a government agency, such as the European Union or the California Environmental Protection Agency, issues permits to polluting industries that tell them how much carbon dioxide they are allowed to emit over a certain time.

Companies unable to stay under their cap can either buy permits, or "emission credits," on a trading exchange, which allows them to pollute more, or they will face heavy fines for exceeding their carbon dioxide targets. Firms that are able to come in under their caps can sell their excess credits on the exchange. Thus the right to pollute is a commodity bought and sold in a market.

The idea of trading pollution rights was part of the reauthorized 1990 Clean Air Act. The program successfully reduced the amount of sulfur dioxide emissions, which cause acid rain, largely because the sources were few enough (about 2,000 smokestacks in the Midwest) that they could be monitored effectively and because there was a national system, administered by the federal Environmental Protection Agency, to enforce the legally required limits, or caps.

Carbon trading on a global scale, however, amounts to an untested economic experiment. The most ambitious carbon-trading experiment to date began in the European Union in 2003. About 9,400 large factories and power stations in 21 member states were targeted, and the EU Greenhouse Gas Emissions Trading Scheme was established to trade pollution rights.

In January 2005, the EU governments distributed carbon credits--permits to pollute--to the companies and...