Carbon credits: The next fiat currency experiment

Politicians are pushing ahead with their plans to centralise control of carbon emissions through a global authority, the UN’s IPCC. What very few have picked up on however is the possible emergence of another fiat, backed-by-nothing currency – carbon credits.

Some background on carbon trading

The idea of carbon trading (cap and trade) is that countries would have to limit of the amount of carbon they emit according to a regulated standard.  Exceeding this limit means fines and penalties, paid to government or some supranational regulator.  If a country does not exceed its emissions limit it receives carbon ‘credits’, which may then be sold to other nations who have exceeded, or expect to exceed, their limit.  This regulatory structure will increasingly generate demand for carbon credits as nations need to get their hands on a licence to exceed their carbon caps, avoid paying penalties, and limit curtailment of industrial production.  Any international agreement on carbon emissions (possibly arising from Copenhagen) will set the carbon cap low enough to force most nations to cut back on their use of fossil fuels.  Carbon credit demand will soar if such regulatory burdens are imposed and policed by governments or supranational regulators. 

But, carbon credits will only be worth something on a, as the eco-types like to say, sustainable basis if the consensus remains firm in its belief that carbon emissions do in fact cause global warming.

Major beneficiaries of the opposing views

If man-made climate change proponents are correct, cap and trade might help us avoid the climatic apocalypse.  Everyone benefits.  Capetonians won’t need to live in house boats.

But if the man-made climate change denialists are correct in saying that warming has not been the fault of humans and their carbon emissions and that we are simply in another natural climate cycle which has been ongoing for millennia, who will be the beneficiaries of cap and trade then?

Dig a bit deeper and you’ll find that there is a multibillion dollar carbon trading system already operational in some countries, and that the stakes are exceptionally high for bankers to get in on the action.  Some studies have found that the carbon trading market could grow larger than the oil market itself.  Carbon credit options have been bought by many speculative investors, and if Copenhagen (or some other summit in the near future) delivers a significant international cap and trade agreement, they’ll be seriously in the money.

The other major beneficiary would be government.  Just this week Nicolas Sarkozy and Gordon Brown suggested that banks, aviation, maritime taxes, and national emissions permits should be ways to finance the Copenhagen agenda.  We, the people, will be paying these taxes, without any representation, and the government gets more money to spend as only it wastefully knows how.

Carbon credits: Another fiat currency with a global application

But this is more than just about government taxing us all more.  The carbon trading (or emissions trading) market will be based on the belief that carbon emissions really do cause climate change.  The value of these credits will really depend on faith in the underlying science and confidence the regulatory edifice created to implement the solution that science recommends.  Much like faith in any fiat currency depends on the integrity of the issuing government, so too will carbon credits be backed by the belief in the fact that carbon causes climate change and in the credibility and enforcability of the regulatory fiat of governments or supranational regulators.  Carbon credits’ value can rise like hot air and be completely phony, and that value could disappear just as easily, at which point it would again cause economic hardship, wealth destruction, and a dislocative wealth transfer, just as with any collapsed currency.

There is a high probability that carbon credits could become a new form of payment in international trade.  If many countries are in on the scheme in the same spirit that nations accepted the US dollar as settlement for international trade over the past four decades, so too would carbon credits gain in popularity as means of international settlement and reserve.  Currency is, after all, the most marketable commodity which is used as a medium of exchange.

This takes authorities like the UN, IMF and World Bank one step closer to creating a centralised authority to regulate into existence a global reserve currency – carbon credits.  Forget Special Drawing Rights (SDRs), carbon credits may be it.  If carbon credits don’t knock SDRs completely off the pedestal, the two will at least compete rigorously with one another.

Conclusion

While this may be hard to foresee right now, judging by the largest players involved here - governments and banks - this could quite easily evolve into something with a character much more powerful than purely carbon trading.  It could become a tool for centralising monetary authority on a global scale, with a pretext for a reserve currency asset that will catch many people offside.  The faster the US dollar sinks, the more likely this outcome.

A new fiat carbon currency would not be a step toward liberty and prosperity, but a step toward more coercion and more state control that is bound to fail.  Like every other fiat currency before it, carbon credits would eventually return to their intrinsic value – zero.  Backed by nothing other than a weak scientific theory of man made global warming and regulatory fiat policed by a cumbersome centralised bureaucracy, carbon credits would sooner or later also get confined to the dustbin of history.

Instituting carbon credit trading and the evolution of this to a global currency system will be a tool for reducing liberties of the common man – the little guy – whether carbon emissions cause climate change or not.