[Market Economy Guide] Can the clumsy market created by the government really work properly?

An Emissions Trading Market Created Without Scientific Evidence,

Far from Market Principles… Emissions Permits Swayed by the Power of States and Corporations

The greenhouse gas emissions trading market is an example of pollution trading taking the form of a market equipped with a specific trading instrument called emissions permits. First, each company or country is allocated in advance a certain amount of greenhouse gases it may emit. Each economic actor is then allowed to emit greenhouse gases up to its assigned quota. In such cases, some will inevitably fall short of their quota while others will have excess allowances. The institutional mechanism that allows these surplus or deficit quotas to be bought and sold with other companies or countries is the greenhouse gas emissions trading market.

For example, suppose a company is allocated annual emissions permits for 10 tons of greenhouse gases. If that company emits only 7 tons this year, it can sell the remaining 3 tons to another company with higher emissions. Of course, it can also carry them over for use the following year.

Leaving Pollution Emissions to the Market Instead of Regulating Them Directly?

In Korea as well, a market for buying and selling greenhouse gas emissions permits opened on January 1, 2015. Korea’s total allocated greenhouse gas emissions amount to about 1.7 billion tons, and about 500 companies are currently participating in the market. On the first day of the new year, when the market opened, the volume of emissions permits traded was just over 1,000 tons, and the market price was said to be just under 8,000 won per ton.

The greenhouse gas emissions trading market is a method in which the government does not directly regulate pollution emissions but leaves them to market transactions. At first glance, this appears to be a fairly market-friendly solution. Regrettably, however, that is an illusion.

First, the greenhouse gas emissions trading market is not the kind of spontaneous market we are familiar with seeing around us. It is, through and through, a market artificially created by the government. The government’s ambition to observe and learn from the invisible hand of the market is at least worthy of praise. But that does not mean humans can replicate the subtle mechanisms of the market as easily as it sounds.

The Allocation of Pollution Permits Operates by Political Logic

Let us briefly examine the problems of the greenhouse gas market. First, there is the issue of permit allocation. Emissions permits, the trading instrument of the greenhouse gas market, are allocated by country and by company before being traded in the market. The problem is that there is no rigorous standard for this allocation. It is not determined through strict economic analysis and evaluation, but through political negotiation and compromise. One example is that Russia and Eastern European countries, whose voices on the international stage are strong relative to the size of their economies, received comparatively large allocations. Political logic overwhelmed economic logic.

The greenhouse gas emissions permits allocated to each country are then distributed by each national government to individual companies. Similar problems arise at the company level as did at the country level. Powerful firms exercised influence over political circles and secured large quantities of emissions permits. Naturally, companies with weaker lobbying capacity failed to receive sufficient allocations. Firms with ties to the government sometimes received special favors as well. The European Union even granted preferential treatment by distributing greenhouse gas emissions permits free of charge to companies fronting government public works projects.

Given these circumstances, the greenhouse gas emissions trading market was launched drenched in the filth of government failure before it was even truly born. In human terms, the greenhouse gas market is less like a naturally born person than an artificial being like Frankenstein. It is unreasonable to expect the normal functions of a market from something that, from the very beginning, was not market-like.

It Is Not Even Certain That Greenhouse Gases Are the Main Cause of Global Warming

If the permit allocation problem is one that arises from within the market, the greenhouse gas market also bears problems originating outside the market. The question is whether greenhouse gases really are pollutants that require international regulation and concern.

Are greenhouse gases truly, as the name suggests, the main culprit behind global warming and the destruction of the atmospheric environment? Even scientists are deeply divided on this issue. It is certainly true that greenhouse gases have a greenhouse effect at the laboratory level. If you build a greenhouse the size of a vinyl house next to a laboratory, increase the concentration of carbon dioxide, and expose it to sunlight, the temperature inside will indeed rise. But whether that effect extends beyond a small greenhouse to the entire planet remains unclear.

Global warming is a myth of modern society, created by the agitation of certain environmentalists and the political calculations of politicians in powerful countries. The problem is that the greenhouse gas market was built in large part on this myth of global warming.

The Earth’s temperature is shaped by numerous factors interacting in complex ways. Many scholars predict that, contrary to global warming claims, future global temperatures may actually fall. If global temperatures do not appear likely to rise, then greenhouse gases are no longer pollutants. If they are not pollutants, it is fair to question whether there is any need to regulate emissions and maintain a market for trading permits. And if that market itself was clumsily designed from the outset and riddled with flaws, what more needs to be said? The greenhouse gas market is like a sandcastle built on sand, something that could collapse at any time.

■ Please remember

The greenhouse gas emissions trading market is not the kind of spontaneous market we are familiar with seeing around us. It is, through and through, a market artificially created by the government. The government’s ambition to observe and learn from the invisible hand of the market is at least worthy of praise. But that does not mean humans can replicate the subtle mechanisms of the market as easily as it sounds.

Sung-no Choi, President, Center for Free Enterprise (CFE)

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Original title: [시장경제 길라잡이] 정부가 만든 엉성한 시장이 제대로 작동할까?

Author: Sung-no Choi

Date: 2020-10-05

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=6&idx=23142