“Climate change”, the report says, “presents a unique challenge to economics: it is the greatest and widest-ranging market failure ever seen”. Further, if nothing is done – if “business-as-usual”, or BAU as the report calls it, continues – things will get worse: “Our actions over the coming decades could create risks of major disruption to economic and social activity, later in this century and in the next, on a scale similar to those associated with the great wars and the economic depression of the first half of the 20^th century”.

This devastating description of one of the consequences of capitalism doesn’t come from some socialist critic of the profit system, but from a pillar of the Establishment, Sir Nicholas Stern, a former chief economist at the World Bank and now an adviser to the Chancellor of the Exchequer.

The failure in question is that the spontaneous operation of the market has resulted in the release of so much carbon dioxide into the atmosphere that it has caused the average world temperature to rise and to go on rising (because of the time lag between cause and effect) for the next forty or fifty years. The market-oriented enterprises responsible – coal, oil and gas burning power stations, heavy industry, airlines, rail and other transport firms, car producers – have only had to pay for those costs that they have had to buy on the market; as releasing carbon dioxide costs them nothing it is not something they have had to take into account. So they haven’t, with the results described by Sir Nicholas Stern in the first part of his report.

As a conventional economist, he sees the solution as making the polluters from now on pay in one form or another. Traditionally this would have been through taxation and regulations. Stern still sees a role for these, but proposes to give spontaneous market forces a second chance via so-called “carbon trading”.

Carbon trading

Under this scheme there would be an international agreement fixing an overall level of carbon emissions for each country which would be less than what it currently emits; that country would then set enterprises within it an allowed level of emissions. If they exceed this level they would be fined. On the other hand, if they emit less carbon than allowed they can sell the unused part of their quota to some other enterprise even in another country. This other enterprise can then emit more carbon than allowed to it, without having to pay the fine.

Carbon trading is the buying and selling of such “permits to pollute”. It is supposed to help the environment by giving polluting firms a monetary incentive to reduce their emission even lower than the allowed level; the more they reduce their emissions below this level the more money they can make from selling their surplus permits. The buyers of these permits would be firms having difficulty reducing their emissions below the level allowed them; if they failed to reduce to this level they would still have to pay something, but the idea is that buying a permit would be cheaper than paying the fine.

A market for “permits to emit carbon dioxide” would thus develop. Where there’s a market there will also be middlemen, who in this case will specialise in the buying and selling of these permits. There would also be the possibility of speculating on future changes in their price.

Two such schemes already exist. The Emission Trading Scheme, run by the European Union, and the Clean Development Mechanism provided for under the Kyoto Treaty. One carbon trader, James Cameron (who had helped negotiate the Kyoto Treaty), has said of such schemes:

“What is happening in these markets is the creation of environmental value. The deals being done will mean large volumes of greenhouse gases are being taken out using the capitalist system” (Times, 12 September).