The Carbon Folly; Policymakers have settled on 'emissions trading' as their favorite global-warming fix. But it isn't working.

Byline: Emily Flynn Vencat (With Chris Stowers in Raipur)

Global warming isn't the only debate that may be over. Governments and policymakers around the world also seem to have settled on a solution. "A responsible approach to solving this crisis," Al Gore said recently at New York University's Law School, would be "to authorize the trading of emissions ... globally." Emissions trading, also called carbon trading, is being expanded in the European Union and Japan. And in many places where it's yet to take hold, like Sacramento, Sydney and Beijing, politicians are embracing it. Nicholas Stern, former chief economist of the World Bank and Europe's foremost political expert on global warming, predicts that the value of carbon credits in circulation, now about $28 billion, will climb to $40 billion by 2010.

This should be great news for the environment, but many experts have their doubts. The notion that emissions trading is going to make a significant dent in global warming is deeply flawed, they say. Current emissions-trading schemes have proved to be little more than a shell game, allowing polluters in the developed world to shift the burden of making cuts onto factories in the developing world. Too often factory owners use the additional profits banked from carbon credits to expand their dirty factories. Even more worrying, emissions trading may have set back the battle against climate change by diverting investment from renewable-energy technology, which arguably is essential to any long-term solution. So far, the real winners in emissions trading have been polluting factory owners who can sell menial cuts for massive profits, and the brokers who pocket fees each time a company buys or sells the right to pollute. "Carbon trading is a promising strategy for reducing greenhouse-gas emissions," says Dan Esty, director of Yale's Center for Environmental Law and Policy, "but the current structures have serious flaws."

Part of the appeal of emissions trading is that it is a market mechanism that's easy to implement. By turning the right to release greenhouse gases into a commodity that can be traded like gold or sugar, governments need only set caps on the amount of pollution they'll allow and let the invisible hand of capitalism do the rest. But emissions trading is proving to be a grossly inefficient way of cutting emissions in the developing world. For instance, under the Kyoto Protocol, the U.N.-brokered agreement that set limits for carbon and other emissions, companies in nations with Kyoto targets can avoid making expensive cuts to their own emissions by paying companies in countries like China to make cuts instead. This approach has been a boon to developing-world factory owners and international brokers, but the impact on the environment is more ambiguous. Since developing countries don't have any caps on emissions, companies can take the handsome payments they receive from carbon cuts and use the money to build new fossil-fuel and coal factories. India's Gujarat Fluorochemical, for instance, made [euro]27 million in the last three months of 2006--triple its total company earnings compared with the same period in 2005--thanks to carbon credits. That boost in profits will no doubt help fund its new plant for making Teflon and caustic soda, both polluting substances.

One reason emissions trading is so politically popular is that it's vulnerable to lobbying. The European Union's Emissions Trading Scheme, which accounted for two thirds of the global carbon ...