Carbon Credits

I have already written about why I prefer Pigouvian taxation to carbon credits. In that I ignored the obvious problems of the bureacracy that will have to be built to allow the carbon trading system to work at all, such as it will be inefficient and become a massive political pork barrel. Dr Eamonn Butler writing on the Adam Smith Institute Blog outlines them and also presents another possible problem:

And, as a political scheme, carbon trading is also prey to non-market influences. Pure – the Clean Planet Trust, for example, is a charity which plans to raise money to buy up carbon credits and simply take them out of use. If it were successful on a big scale, that would drive up the price of the permits even higher, forcing businesses to cut back even further.

Well that isn't really a problem, if a greater utility is caused by reducing the amount of carbon that industry can produce then it is good that there is a mechanism for this. However there should also be a mechanism for allowing industry to generate more carbon if that is what maximises utility, they should be able to buy extra carbon credits from carbon offset companies planting forests or running carbon sequestration facilities. The same way that the market will always respond to a shortage by making new sources viable. If it is not possible for additional credits to work their way into the system from the offsetters then carbon credits simply become another tax on industry.