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Why emission trading schemes are not the answer: a left critique

By Ken McKay - posted Thursday, 27 August 2009

First things first, this article is not an attack on the environmental activists who are valiantly trying to make our world a better place. Unfortunately they have been seduced into thinking that market forces can be used to correct the situation.

Just as Milton Friedman’s prescriptions for education, health or labour reform based on market forces and the profit motive are morally repugnant, so too is using market forces or the profit motive to achieve environmental outcomes.

The idea that labour is just another commodity to be traded belies all human dignity, so too is the concept that environmental pollution should be treated as a tradable commodity.


There is no economic evidence that controlling the impact of externalities such as carbon emissions is more effective via price effects than direct regulation. The principle behind Pigovian taxes or emission trading schemes is that by charging a tax equivalent to the social cost of the externality the demand curve will shift to what the socially acceptable quantum of permissible damage is.

For this to occur there must be perfect information to the market. Effectively for emission trading schemes to work there needs to be total reliance on the efficient-market hypothesis. So we accept that there is a market failure that does not recognise the social cost of pollution, yet we think we can rely on the same market which has already failed, to correctly establish a price mechanism to reduce the supply of pollutants to socially acceptable levels. Has anyone realised the inherent madness of this supposition?

Given the recent financial turmoil created by the lack of maturity and regulatory oversight of the derivative markets, there is a real danger that creating an “innovative” trading scheme for carbon emissions could have far reaching impacts wider than dealing with that particular externality. Hybrid securities based on bricks and mortar almost sent the world into the abyss; can we trust the merchant banks to be able to manage something as esoterical as carbon derivatives.

Those of us on the broad political left spectrum need to maintain consistency. If the reliance on economic rationalist policy is wrong for social welfare, health, education or the labour market we need to reject its use to address environmental issues.

The emission trading scheme is to environment protection what the trickle down policies of the New Right is to social welfare reform: just as the invisible hand of the market cannot be relied upon to magically address inequality nor can we rely upon the invisible hand of the market to correct environmental pollution or dangers.

What then is the solution?

Direct regulation is the only answer. Imagine if we had introduced a CFC emission trading scheme when faced with the threat to the ozone layer. Does anyone seriously think that we would have seen worldwide cessation of the use of chlorofluorocarbons?


What about when we wanted to remove lead from petrol, would a lead trading system have reduced lead in petrol?

Industrialised nations in the 60s and 70s introduced clean air acts to reduce the pumping of particulates into the atmosphere, primarily sulphates and nitrate pollutants. The results speak for themselves.

Planning legislation throughout the western world requiring the submission of environmental impact statements prior to development approvals being granted has, generally, seen vast improvements in environmental management.

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About the Author

Ken McKay is a former Queensland Ministerial Policy Adviser now working in the Queensland Union movement. The views expressed in this article are his views and do not represent the views of past or current employers.

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