Wednesday, June 10, 2009

Cap and Trade: The Next Market Meltdown?

Greenhouse gases to greenback boom...

An article in the current Mother Jones sheds light on a possible new financial tempest. It reports that if the Waxman-Markey climate bill becomes law, last year's financial disaster from credit default swaps and subprime mortgages could be replaced with carbon default swaps and subprime offsets. The law would create a new market for carbon derivatives whic
h was never the intent and, worse yet, never even thought of. This market will be huge ($2 trillion estimated), very complex and extremely hard to monitor. Without clear rules set in Washington, American-style cap and trade will be vulnerable to speculation and manipulation by many of the same financial big guns who brought us the market meltdown last fall.

Under cap and trade, the government issues permits allowing companies to emit a set amount of greenhouse gases. Companies that emit more than their limit can buy allowances from the companies producing less than their limit. Furthermore, there are carbon offsets which allow over-emitting companies to invest in an emissions-cutting project somewhere else, such as in developing countries. Examples would be paying Brazilian villagers not to cut down trees (which absorb CO2) or Filipino farmers to cap methane from pig waste.

For more on this timely, controversial issue, read "Could Cap and Trade Cause Another Market Meltdown?", by Rachel Morris in Mother Jones:


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