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Those wishing to finance the "green revolution" think that carbon trading will enable CO2 release in one part of the globe can be offset by carbon capture in some other location. So far this has failed to stop the net increase in emissions; it has not worked. Carbon Trading started in 1997 when some 180 countries signed the Kyoto Protocol. The Protocol called for countries to reduce their greenhouse gas emissions between 20082012 to 5% below 1990 levels, a target that was never met. The USA pulled out of the Kyoto Protocol in 2001 and other countries also followed later. In spite of carbon trading having been a failure, except for the commission agents selling the credits, the renewed emphasis on this scheme overlooks significant practicalities.


Arthur Cecil Pigou
(18771959)
Carbon trading is a modern version of a tax proposed by Pigou in 1920 in his, "The Economics of Welfare". Pigou developed the concept of "externalities", proposed by Marshall. These are the costs imposed or benefits conferred on others that are not accounted for by the person whose activities create these costs or benefits. Pigou proposed that negative externalities, such as pollution, could be discouraged by a tax, and positive externalities could be encouraged by subsidy. Carbon trading is based on this model.

Ludwig von Mises
(1881-1973)
unrelated to Pigou's book (as far as we can discern), Ludwig von Mises analyzed how pricing systems should work in practice. Mises reasoned in his essay, "Economic Calculation in the Socialist Commonwealth" that the socialist system was unlikely to operate effectively because it could not distinguish more or less valuable uses of social resources, and predicted the system would end in chaos. Translating that into current times he questioned how some central system of market control or coordination could set prices efficiently. Von Mises summarized this question as the challenge created by a "calculation and knowledge problem". His argument has held up over time. However, although fundamentally Von Mises was attempting to explain why "socialism" could not work, today, the very same question can be leveled at monetarism and central banks across the world and the way the financial system operates. Here we are faced with exactly the same calculation and knowledge problem. It was this particular issue that led to the central bank-driven monetarism delivering the 2008 financial crisis. Since then, the quantitative easing (QE) "solution" has led to an exacerbation of the state of affairs by increasing the "calculation and knowledge problem" concerning climate change associated with increasing income disparity, rising poverty and debt levels exceeding those in 2008.


The calculation and knowledge problems associated with carbon trading

Carbon trading depends upon a form of quality control referred to as certification both on the efficacy of the offset actions in terms of accurate estimates of carbon capture offsets and receipts as well as accurate estimates of carbon emissions of those purchasing credits. It is possible to equate this to the financial instrument rating system where fraudulent ratings contributed to the sub-prime mortgage crisis that tipped the global economy into a recession. This track record of too many financial operators indulging in fraud to satisfy their bottom lines was caused by light touch regulations providing a strong incentive for unethical decisions and maximization of profit at the expense of the planet and the majority. Sanctions are so small as to have become just a cost of doing business. The declarations are that the lenders will insist on strict due diligence on the part of projects receiving funds while the financial sector will continue to escape such scrutiny and the necessary level of sanctions to keep them in line. On the carbon pricing there exist strong incentives to underestimate emissions at company level and to exaggerate the extent of offsets achieved. There is a serious issue of transparency and ability to manipulate data to maximise carbon trading commissions. No matter what carbon credits will serve as indulgences to keep the financial system running smoothly. The hope is that all of this can be relegated to inventive accounting by well paid audit and management consultancy firms. However these require measurement in physical terms on the ground at each site in order to correct the calculation and knowledge problem. According to one of the longest serving systems engineering experts in this field, the oft-referenced AI and satellite technologies cannot provide the information concerned at the level of detail required. We will research further and prepare additional content on this topic soon.