How Green Is Carbon Trading?

It was a deal to make Britain's Chancellor of the Exchequer, Alistair Darling, hug himself with glee.

Just as the world's existing financial markets were hitting a five-year low two weeks ago, Britain's Treasury raked in a cool $80 million from a brand-new one.

The occasion was Britain's first auction of carbon-dioxide permits. Almost 4 million were auctioned off to greenhouse-gas emitters in a sale that was four times oversubscribed. The government expects to sell 80 million more over the next four years, raising a further $1.5 billion.

The plan, at first glance, seems simplicity itself: By charging companies for the right to emit CO2, the government hopes to encourage them to switch to cleaner and greener technologies.

It's the latest development in a global campaign to save the planet by making polluters pay.

We are witnessing the birth of the greatest and most complex commodity market the world has seen. Last year alone, permits worth more than $80 billion were traded on the world's carbon markets — but future trading volumes, if all goes global according to plan, will dwarf these.

Carbon- trading schemes originate from the Kyoto protocol on climate change agreed under the auspices of the United Nations in 1997.

Governments adhering to Kyoto accept limits on the CO2 their countries can emit. To meet their pledges, they put caps on the carbon outputs of domestic companies, which have to buy annual permits to exceed them.

Permits are bought from governments or from carbon traders, who, naturally, charge a commission. For financiers, the arrival of carbon trading is a bonanza. The sector already employs about 3,000 people and has created a few dozen new millionaires.

Several such schemes are up and running around the world: Europe's Emissions Trading Scheme, founded in 2005, is the biggest, but others are following in Australia, the U.S. and even China.

It sounds good news for everyone: governments, taxpayers, City boys and the environment. The reality is a great deal less rosy — indeed some of those closest to the carbon markets say openly that the system is doomed to failure.

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