Europe’s ETS cap-and-trade system has taken a somewhat undeserved drubbing in the press. Overall, it has  functioned reliably and reasonably efficiently. Most of the alleged “Carbon Fraud!” you hear about in some quarters was really just easily fixable design flaws (like an initial over-allocation of allowances); tax  payment scams  that were wholly unrelated to the integrity of the carbon-reduction program (like the recent VAT scam); or a lousy offset program that is a potentially serious flaw, but that is also fixable  as well as  a threat to any carbon reduction plan.

But the latest revelation—what appears to be wholesale theft of carbon credits from some European registries—is another animal. It is, indeed, worrisome, and it points  to some of the  more structural flaws in Europe’s  trading system.  The biggest problems are that the  ETS system is overly sprawling, maintaining dozens of national registries of carbon credits that lack sufficiently clear central oversight. And the markets themselves permit an array of trading activities that seem to allow rouge traders to  dupe other market participants.

The good news is that virtually all of these problems are fixable (though news accounts suggest that European regulators are not moving toward reform terribly fast). Plus, while the alleged theft is certainly a black eye for the ETS, it’s hardly a refutation to the program, which really has accomplished most of its objectives.

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  • The better news is that absolutely none of these problems need to occur in North American carbon markets. In fact, just last month a new analysis of American carbon markets conducted by the US Commodity Futures Trading Commission (CFTC), together with a number of other federal agencies (USDA, Treasury, SEC, EPA, FERC, FTC, and EIA), documented how a well-regulated trading program could be executed domestically. (If you’re a carbon market geek, the full 50 page report is well worth reading; it’s the single best coverage of the topic I’ve seen.) Given clear regulatory oversight, a carbon trading market needs to be no riskier or more controversial than any other kind of regulated commodity trading, whether soybeans or wheat or whathaveyou.

    It’s really not pie-in-the-sky to think that carbon markets, or other types of cap-and-trade markets for that matter, are not inherently risky endeavors. One reason we know this is because we already have them domestically—and they have a sterling track record. The northeast’s carbon market, RGGI, has been operating for several years without a hitch. And other cap-and-trade markets have been operating for decades in the US with no evidence of fraud or manipulation. The key is  good oversight, regulation, and transparency—the very traits that  conventional  US commodities markets so exemplify.