‘Markets’ can fail

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.

QED

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46 Responses to ‘Markets’ can fail

  1. dover_beach

    QED

    Surely you meant RIP.

  2. JC

    That too, DB.

    But hey, we need to “pud a pwice on carbon”. It’s hilarious we now have leftwingers talking about the economic function of pwice.

  3. murray

    Funny how it is always people who are otherwise against free markets, that are always the ones spruiking the ‘market mechanism’ for pricing carbon emissions.

  4. hc

    You mean a market where participants volunteer to pay a price failed. What a joke. This does not mean that cap and trade with legally enforced emissions quotas would not work.

  5. JC

    It’s been a startling success in Europe, hey Harry.

    You’re starting to really sound as embittered as Homer.

  6. conrad

    Can we have that headline the next time, say, performance pay for teachers or vouchers for schools does nothing again?

  7. Sinclair Davidson

    Harry – people volunteer to pay a price in every market. It is called voluntary exchange.

  8. Michael Sutcliffe

    Can we have that headline the next time, say, performance pay for teachers or vouchers for schools does nothing again?

    Yes, when schools are free to hire, fire and remunerate teachers at will, and parents can take their voucher to any school they want, and this doesn’t bring about a net improvement in educational outcomes, you can have that headline again.

  9. conrad

    Sinclair,

    you guys should be unhappy that this mechanism failed. The obvious course of action this suggests for the green lobby, some of whom are probably happy to see markets like this fail, is non-market and potentially far more authoritarian solutions.

  10. dover_beach

    you guys should be unhappy that this mechanism failed.

    No, I’m quite happy a mechanism whose sole intention was to increase the price of energy failed.

    some of whom are probably happy to see markets like this fail, is non-market and potentially far more authoritarian solutions.

    Artificial markets are not markets.

  11. Sinclair Davidson

    conrad – the correct market solution for a long-lived stock pollutant is a tax. Tax is also a market solution because it too establishes a price. ‘Direct action’ as proposed by the coalition is a non-market solution.

  12. Michael Sutcliffe

    I hear the markets for randomly hitting trees with sticks and throwing rocks at passing cars aren’t going well either.

  13. hc

    Yes Sinclair markets are based on voluntary exchange. But markets are not based on voluntary prices – prices are real constraints on the terms of exchange.

  14. .

    Prices aren’t voluntary but exchange is?

    Sounds more like ransom. Are you sure you really feel this way hc?

  15. hc

    FFS. There is a huge difference between a market for carbon where people must pay a price and one where it is voluntary to do so. The failure of the latter says zilch about the workability of the former.

    A strange post and some even stranger comments.

  16. Good morning everybody, long time no read.

    I didn’t know what an artificial market was but I’ve seen ’em.

    It’s part of this bonehead thinking of politicians: markets are good now, so anything ‘market-related’ is good. And so you get ’em talking about markets and brands and so forth when they shouldn’t be. Adam Bandt, my local Marxist MP talks about the Greens’ ‘brand’. A political party’s ‘brand’ should be a minor facet not a mission statement. He also thinks that lawyers in parliament are going to create a ‘new energy economy’.

    It’s a tax, so make it a tax. I’m not even sure a tax is necessary. Just a generation of engineers who’re paying attention. I think they’ll graduating soon. If they don’t die of cirrhosis first.

    The only place cap and trade is still alive and well is, alas, California.

  17. Sinclair Davidson

    hc – Places where people voluntarily pay a price are called markets, where people pay involuntarity its called coercion, ransom, taxation, theft and so on. You do know the difference?

  18. Kirill

    I wonder if you were able to short-sell carbon credits?

  19. JC

    harry:

    Do you know the difference?

    Prices aren’t voluntary but exchange is?

    Lol.

    Harry, do you want the red nose for Christmas or your birthday?

  20. hc

    This is crazy.

    There is a difference between voluntary exchange in a market where a price will be charged – you get something if you pay, you don’t get it if you don’t pay – and a ‘market’ where you have an option of paying a price or of, in fact, paying nothing. The latter involves voluntarily agreeing to pay a price but not being compelled to do so.

    Restricting the supply of emissions permits so that a positive price eventuates is a market. Getting a group of people to voluntarily agree to a restriction but leaving them with the option to opt out isn’t.

    I’ll ignore JCs usual ignorant drivel. Wipe the froth from your mouthe JC and munch on a few anti-psychotics.

  21. JC

    Keep your shirt on Professor Clarke. Your abuse of people that don’t agree with you is legendary and I won’t fall for it.

    It appears to a lot of people that your understanding of economics is worryingly little. Disturbingly so.

    Can i suggest that you take a look at the European experiment in carbon credits before you go spouting off propaganda that our version would be a success.

    Wipe the froth from your mouthe JC and munch on a few anti-psychotics.

    lol.. The only froth we ever see comes from you, Professor Clarke, you sermonizing mental midget.

  22. JC

    Restricting the supply of emissions permits so that a positive price eventuates is a market. Getting a group of people to voluntarily agree to a restriction but leaving them with the option to opt out isn’t.

    This has to be one of the stupidest comments on this subject I’ve seen for a while.

    No wonder Professor Clarke thinks Green’s economic policies “are overall not terrible”.

  23. pedro

    Harry is correct. The market failed because the product turned out to not really exist. I think cap and trade is a dumb idea, but not because I think a market mechanism can’t work to allocate resources created by government licence.

    Any permit trading system will have permits as the traded product. Other government licences are capped and traded successfuly, such as liquor and gaming licences and water permits. The market for pokie licences is not artificial just because you can’t otherwise run poker machines.

    Water permits are a good analogy for what seems to be wrong with cap and trade systems in practice, namely, the over-allocation of permits, not to mention rule-changing by the state, featherbedding and other rorts.

  24. JC

    Bullshit Pedro. You’re comparing penny ant stuff to the real McCoy and quite frankly you have no freaking clue what your talking about.

    You’re seeing a single engined crop duster and think it’s identical to the 747 jumbo because they both fly.

    Tells us how the European credits trading has worked out?

    Why should we automatically assume the examples you illustrated have been successful. By what criteria? Name them.

    Just because we never hear about what’s happening in those markets suggests it’s been success.

    Professor Clarke doesn’t understand what a market is.

    What you and silly old Harry are suggesting is like the Zimbabwean stock market was the most successful in 2007 because it literally rose 2 million %.

  25. .

    Jesus Crhist calm down JC!

    “The market failed because the product turned out to not really exist. I think cap and trade is a dumb idea, but not because I think a market mechanism can’t work to allocate resources created by government licence.”

    pedro is inferring that it is a sham.

    “Water permits are a good analogy for what seems to be wrong with cap and trade systems in practice, namely, the over-allocation of permits, not to mention rule-changing by the state, featherbedding and other rorts.”

    Being blatantly obvious towards the end, actually.

  26. JC

    Dot, this is what he also said:

    I think cap and trade is a dumb idea, but not because I think a market mechanism can’t work to allocate resources created by government licence.

    The point is that this isn’t a market. It never can be a market. That’s the point i was focusing on.

    Perhaps I was a little harsh on Pedro but he floored me because his first utterance suggested Harry was right when everyone knows this couldn’t possibly be true. It’s a scientific impossibility .

  27. pedro

    Yes, you were a little harsh.

    “Bullshit Pedro. You’re comparing penny ant stuff to the real McCoy and quite frankly you have no freaking clue what your talking about.”
    I’ll let others be the judge of that.

    “You’re seeing a single engined crop duster and think it’s identical to the 747 jumbo because they both fly.”
    No, I just think they are both planes.

    “Tells us how the European credits trading has worked out?”
    Or just read on to what I said in the post as Mark suggested.

    “Why should we automatically assume the examples you illustrated have been successful. By what criteria? Name them.”
    Well, if people buy and sell pokie and pub licences, or taxi licences, and prices get set by market activities then you have a market.

    “Just because we never hear about what’s happening in those markets suggests it’s been success.”
    The existence of a market is not a sign of success. There’s a market for heroin but you won’t be calling that a success.

    “Professor Clarke doesn’t understand what a market is.”
    Well, I know you like to bag harry, but even Homer is correct occasionally.

    “What you and silly old Harry are suggesting is like the Zimbabwean stock market was the most successful in 2007 because it literally rose 2 million %.”
    Well I would say that a 2mil% index rise in Zim is not evidence of success or failure in the stock market so much as currency problems.

    People aren’t automatically wrong merely cause you usually disagree with them. Address the argument not the man. If something can be and is traded you have a market. The price will be more or less affected supply, demand and regulatory factors, but you can say that about heaps of market products and services.

    The voluntary chicago exchange under discussion shows classic market effects. When the credits were expected to have value, they were given a price. You might say that some of that price was just good-corporate-citizen effects, but hey, values are subjective any way. When it turned out that the credits are essentially an unlimited good, the price collapsed.

  28. JC

    There should “need” for a market in the US, Pedro as California instituted a cap and trade. Europe has one too. All you need to do to trade in the Chicago market from a eurotrash trash perspective is to convert the Euros and hedge the position with a hedge contract.

    Japan also has a cap.

    It didn’t work. The Euro market has also not worked.

    Macro wise it will never work because there is leakage. Leakage means that if any country or state stupid enough to apply a cap and trade the end result will be that other places that don’t wear hair-shirts will take up the business and arb away the differential.

    That applies to gambling and water rights too I might add, such as Australians going off to Vegas or rises in food imports which are basically disguised, but the leakage is still there.

    Harry and his co-defendant (homer) are never right. It’s scientifically impossible.

  29. rog

    When JC talks about market failure I know that it just a cover for his own failings in the market.

  30. Infidel Tiger

    Why did your business fail, Rog? Bad management? Morale?

  31. JC

    You wish, wodge, you venom filled loser.

    Answer IT’s question. How did you fuck up in the biggest property boom in a 100 years?

  32. rog

    “biggest property boom in a 100 years?”

    Oh, you mean the one that I bought into and am now sitting pretty?

    You just keep on playing with yourself JC, you #1 wanker.

  33. rog

    Y’know, anybody who spends 24/7 yapping away on the internet, like you do JC, has to be compensating for some serious problems. Overcompensating too, maybe.

  34. daddy dave

    Oh, you mean the one that I bought into and am now sitting pretty

    More evidence, perhaps, that “rog” is an impostor, not the right-wing property developer rog of yore.

  35. JC

    Yea right right, Wodge you bought into it. That’s right.. lol.

    With monopoly money?

    Wodge is playing Monopoly now and thinks he’s a big landowner. He owns Piccadilly Circus and borrowed money from the Monopoly bank to buy Charing Cross station.

    You used to comment here a lot more yourself, Wodge. In fact if I went over to Blair’s or Jen’s site there would invariably be you trying to paste leftwingers 28/7 rather than 24/7.

    That’s obviously dropped now since that fateful Friday when you decided to become a Doctor’s wife and began to criticize people here. The fact you’re treated as worse than vermin may have had a effect on you calling in as often, you dishonest little grub. After all the only thing you are capable of doing is trading insults as nothing you ever post here has any value.

  36. JC

    Dad’s, no It’s him alright it’s the same loser. He used to post stupid comments and links here all the time that no one looked at and then over a weekend he had a sea-change during the heavy duty days of 09.

  37. hc

    As I have said before on Cambria:

    “Do not argue with an idiot. He will drag you down to his level and beat you with experience”.

    It is 100% accurate WRT JC. He is an experienced idiot. Look at the way he has torpedoed this thread! A destructive troll wins again.

  38. Sinclair Davidson

    hc – if you think JC is trolling then ignore him. You’ve been around blogs long enough to know the rules.

  39. JC

    Professor Harry Clarke the only troll I see on this thread is you, you offensive old coot.

    I’ll start from the beginning.. there have been two cap and trade markets. Both have failed. My score is 2 while yours is two.

    And by the way your attempt to try and muzzle me by somehow trying to turn the tables around in some way won’t work, you deadshit.

    (Go and apologize to the people at troppo for what you said about them before you grease up there you oily intellectual oaf.

  40. JC

    oops….. while yours is zero.

    ——–

    I’m sorry Sinclair.. I find the old coot winds me up the wrong way. Every time I see him commenting he’s always trying to bully one of the writers in some way: passing judgment in that sniveling unique way he has and invariably turning the thread about what the moron thinks on some issue and why he’s right because of his opinion alone. What a first rate dickhead.

  41. JC

    Just to be clear. This is first comment;

    You mean a market where participants volunteer to pay a price failed. What a joke. This does not mean that cap and trade with legally enforced emissions quotas would not work.

    He’s either lying or simply ignorant. I don;’t care which.

    The European credit’s market has failed several times. He’s wrong. A market with legally enforced emissions has failed.

    The European one has failed. There’s fraud and leakage and the Chicago market has failed despite there being a cap and trade in California.

    But Clarke is too much of a gutless weasel to admit to it.

    Now the French are pulling the plug on these sorts of bullshit monstrosities too

    For three years, the super ministry “Medad” was in charge of sustainable development, environmental protection, energy and raw materials, as well as industry safety, transport, agriculture, urban planning and even the oceans. Sarkozy and his Premier Fillon have removed the Ministry’s hard functions and have even ushered in a paradigm shift: the Ministry for Environmental Protection, Oceans and Sustainable Development and Energy will be transformed to only a Department of Environment, Sustainable Development, Traffic and Housing.”

    http://notrickszone.com/2010/11/15/great-news-sarkozy-kills-french-super-environment-ministry-medad/

  42. hc

    If there is an excess supply at a zero price then a good will be supplied free JC. That European emissions prices became low is the basis for a literature suggesting a minimum price achieved by simultaneously taxing emissions at the minimum price and allowing an ETS to work.

    A zero price doesn’t mean a market failed. Just that the economy is in recession or that the initial quota allocations were too large.

    I am not lying or ignorant and you are not lying either. You are just so sustainably ignorant – it just goes on and on.

    I await your next distorted outburst.

  43. rog

    No JC, with real money. Unlike you I don’t have to resort to gambling to make ends meet.

  44. JC

    I await your next distorted outburst.

    Professor, the only outbursts/dummy-spits I’ve ever seen are initiated by you. I suggest you go back through the various threads and take a good hard look at the things you say to me, as well the sermonizing you do to other people here, such as the writers. You ought be ashamed of yourself.

    That European emissions prices became low is the basis for a literature suggesting a minimum price achieved by simultaneously taxing emissions at the minimum price and allowing an ETS to work.

    It’s hard to tell what you’re trying to say here, but let me remind you that the European market started trading credits at around 33 euros then locked up at 9 cents, as governments began issuing more of these things to their loudest constituencies.

    You seem to call that a success. Most reasonable people would call it failure. It failed. It totally seized up. That’s exhibit A.

    Exhibit B is the Chicago market. It’s not entirely true that it was a voluntary market where people trading without legal compulsion to do so were the only potential participants.

    California had introduced a cap and trade. Japan and Europe did also. It’s not particularly difficult to arb Chicago sitting in Japan and Europe for the reasons I enumerated earlier up the thread.

    So that’s 2 markets to zero success.

    A zero price doesn’t mean a market failed. Just that the economy is in recession or that the initial quota allocations were too large.

    Are you seriously this delusional, Professor? European credits went from 33 euros to 9 centimes and then locked up with zero trading going on. That’s a success? LOL
    Chicago locked up too. Are you actually trying to peddle the idea they are a success?

    Then if you say there may have been a supply shock (in Europe), doesn’t that simply defeat the purpose of issuing those things to the point where it drove the price to 9 centimes? Ummm!

    Chicago’s failure had nothing to do with the recession and neither did Europe’s market which failed much earlier.

    We’ve recently had the spectacle where European firms were buying credits from Chinese companies for the abatement ($100’s of millions of Euros) of very noxious gases (not CO2). It was later revealed the Chinese firms actually cranked up production of these nasty gasses in order to obtain the credits from the Euro firms. Does this spark any hesitation in you or is it full steam ahead, Captain Clarke?

    I am not lying or ignorant and you are not lying either. You are just so sustainably ignorant – it just goes on and on.

    Professor, as I said I don’t care if you’re stupid or ignorant. I simply can’t tell. But you do have all the hallmarks of taking over from where Homer left off. Don’t take it from me; ask the writers if you’re starting to resemble the co-defendant. Go on. I dare ya.

  45. JC

    No JC, with real money. Unlike you I don’t have to resort to gambling to make ends meet.

    You are gambling Wodge. You’re just too stupid to realize.

  46. pedro

    I’m going to keep arguing against you JC:
    “We’ve recently had the spectacle where European firms were buying credits from Chinese companies for the abatement ($100’s of millions of Euros) of very noxious gases (not CO2). It was later revealed the Chinese firms actually cranked up production of these nasty gasses in order to obtain the credits from the Euro firms. Does this spark any hesitation in you or is it full steam ahead, Captain Clarke?”

    That’s evidence of problems on the supply side, not market failure. If permits are a scarce and necessary good then a market will develop no problem. The reason that the various markets have problems is that the predicted scarcity relative to demand does not exist.

    But to be clear, this is not an argument for an ETS, it is an argument against the claim that an ETS could not operate as a market mechanism.

    http://en.scientificcommons.org/32947667

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