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Are market solutions, long touted as having a key role in combating global warming, on the way out? Or is news last week of the upcoming closure of the Chicago Climate Exchange (CCX) a sign that "cap and trade" is an idea whose time has passed?

At issue is the question of how to encourage companies to reduce carbon emissions, without heavy-handed micro-management from above. The problem lies in the fact that companies at present incur very little penalty, beyond the raw cost of the fuel itself, for profligate use of energy (and therefore, excessive output of CO₂).

The theory behind such systems is simple. Companies that participate are allotted so many permits by government, which dictate how much carbon they may emit. Those emitting carbon in excess of their allocation must either purchase additional permits from companies that are not making use of their permits – or face stiff financial penalties.

One of the earliest of these schemes, responsible in 2009 for 68 per cent of global carbon trades – which amounts to 6,326 million tonnes carbon dioxide equivalent (MtCO₂e), according to World Bank figures) is the EU Emissions Trading Scheme (ETS). It was backed with early legislation by the EU, and currently covers more than 10,000 installations with a net heat excess of 20 megawatts in the energy and industrial sectors. These are collectively responsible for close to half of the EU's emissions of CO₂ and 40 per cent of its total greenhouse gas emissions.

From 2012, the net will widen to bring even more companies into the scheme.

By contrast, the US initiative never had legislative backing. Rather, it was a voluntary scheme allowing companies to pledge to meet annual targets for the emissions of carbon from their factories and businesses. Those below the targets were then able to sell surplus allowances or bank them, while those above were able to purchase credits to offset their emissions.

However, with trades of just 50 MtCO₂e in 2009 (down from 309 the year before) the CCX has never been a major player on the world stage.

Investors’ hopes were pinned on pledges given by President Obama that the United States would back a "cap-and-trade" system. The American Clean Energy and Security Act, also known as the Waxman-Markey Bill, after its authors, narrowly passed in the House of Representatives in June 2009.

It then stalled in the Senate, in July of this year, with the recent mid-term elections and Republican gains sealing its fate. "Cap-and-trade" is no longer on the US agenda.

In its place is a commitment to lower national emissions by 2020 – and a new CCX Offsets Registry Program. This will allow users to offset gasses, rather than trade credits: thus, if an executive took a lengthy flight, the CCX Registry would allow the company to purchase an offset for the gas emitted by the flight.

So is carbon trading in trouble? Almost certainly not. The EU ETS continues to go from strength to strength, with carbon trading today at €14.28 per ton, according to market analyst Point Carbon. Elsewhere in the world, interest in carbon trading is hotting up, with countries as diverse as China, Kenya and New Zealand all eager to get in on the act and set up their own schemes.

So does it matter? If you’re not convinced of the perils of global warming – or you are, but you don’t see carbon trading as being an effective way to combat it – then probably not. On the other hand, by opting out from globally accepted approaches, the US runs two risks: first, it will be seen, yet again, as putting its own selfish commercial interests before the common human interest. There could be a political price to pay for that perception.

Second, and perhaps more immediately worrying from a US point of view is that, right or wrong, Carbon Trading appears to be the way the world is going. By opting out now, the US effectively bars itself from one of the most lucrative markets of the future – as well as giving up its right to participate in discussions on the shape of economic solutions. That, in the long run, may be a far heavier price to pay. ®

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