This story has been around for a while, but the Wall Street Journal editorialises.
A cap-and-trade system for carbon emissions has been touted by environmentalists as a market-friendly mechanism to reduce global warming. Well, the market has spoken. The Chicago Climate Exchange, which advertises itself as “North America’s only cap and trade system for greenhouse gasses,” is shutting down.
The CCX launched to great fanfare in 2003 with a grant of some $1.1 million from the Joyce Foundation. Time magazine called company founder Richard Sandor a “hero of the planet.” The exchange got off to a blazing start with hundreds of companies—from DuPont to Ford to Motorola—voluntarily agreeing to buy and sell rights to emit CO2 above a legally binding quota. At its peak in May 2008, CCX was trading 10 million tons of carbon permits per month. The price of carbon offsets rose from $1 a ton to a high of $7.40 in mid-2008.
The market collapsed in 2009 when the price fell to $1, and trading all but ceased this summer. The fate of the carbon trading market closely followed the prospects of passing a mandatory federal cap on carbon emissions in Congress. Once the Senate rejected the cap-and-tax scheme—because the tax would have cost millions of jobs—many corporations suddenly lost interest in paying for greenhouse gas emissions. A market that green groups had predicted would exceed $500 billion a year in trading is now flat-lined. The only place cap and trade is still alive and well is, alas, California.
This was an artificial market and not surprisingly it failed.
The problems of socialist calculation are too often overlooked even in ostensibly capitalist economies. Government struggles to allocate resources or to set prices in any economy. Mises tells us the socialist “solution” to the calculation problem is the creation of artificial markets. A modern example would be the creation of a carbon trading market. He provides a lengthy explanation how and why this “solution” is likely to fail. Ultimately, artificial markets are unlikely to be as dynamic as real markets.