WHEN the world was edging towards its first, imperfect treaty on climate change in the mid-1990s, the US put a proposal on the table that has set the framework for the debate on carbon reduction. Uncomfortable about taxing carbon dioxide emissions, the Clinton administration suggested letting market forces do the work through a scheme of tradeable permits now known as cap and trade.
Ironically, the US has never ratified the Kyoto Protocol, which expires in 2012, but its successor, which will be negotiated in Copenhagen in December, while not mandating cap and trade, will be highly skewed in its favour.
This is because the 37 developed countries that have set targets under the Kyoto Protocol for the quantity of greenhouse gases they can emit are already committed to trading in emissions permits. Companies within those countries have a vested interest in perpetuating the status quo.
Yet among economists and business leaders there is unease about cap and trade, a system that has already created a derivatives markets of the kind that brought the global financial system close to collapse. A scheme that looked like a stroke of genius in the 90s is falling out of fashion. Read more.