| Sourced From Seekingalpha.com |
One of the more potent criticisms of a proposed cap-and-trade policy aimed at reducing America’s carbon emissions is that the market for carbon allowances could come to be dominated and manipulated by financial institutions. These firms, the argument goes, might either bid prices all out of whack, doing significant economic damage, or craft new and dangerous derivatives generating the potential for a new financial crisis.
These claims are not entirely without meritanytime one sets up a new market, one should try and make sure that basic safety mechanisms are in place to prevent abusive practices, but for the most part, the “fear of markets” line against cap-and-trade is a pretty silly one. Paul Krugman, whose progressive credentials are not in doubt, has written that this anti-market sentiment is a misguided and damaging barrier to sound environmental policy.
But Congress appears to be paying attention to activist complaints. While most senators appear to be in favor of letting financial firms trade allowances, some members of the upper house are considering a measure to prevent Goldman Sachs (GS) and JPMorgan Chase (JPM) from trading or placing tight restrictions on the trading activity.
The concern appears to be that if disinterested groupsthat is, those who weren’t originally allocated permits and those who don’t need permits to conduct their businessare allowed to trade, that prices will come unstuck from “fundamental” levels. While in commodity trading there is a limit to which prices can depart from underlying valuesultimately the allowances will need to be sold to an end user at a price that user is willing to paywe have learned that the prices markets cohere around isn’t always the “right” one. But there are potentially very large costs to excluding disinterested traders from these markets, namely, that there will be too little liquidity for a carbon market to function.
If there aren’t enough traders participating in the carbon market, then orders will go unfilled, prices will be volatile, and bid-ask spreads will be large. Ultimately, the market will fail at delivering allowances to the places they’re most needed, defeating the purpose of the policy. This is why we put up with financial markets in the first place, despite the risks that come along with them; most of the time they do a pretty good job of directing resources to places where they are most efficiently used.
Other senators seem to have different concerns:
Related posts:
- Senate Wants To Ban Goldman And JPMorgan From Carbon Markets (GS, JPM)
- Cap And Trade Policies Limiting Carbon Dioxide Can Increase Value Of Some Electricity Generating Firms
- Lawmakers Want Preemptive Rules for Carbon Maket
- Goldman Sachs Enters Offsets Market with Blue Source Deal
- Loophole breeds speculation in EU carbon market
