Cap and trade: How To Game the Carbon Markets

Regular readers know we favor a transparent, simple carbon tax with 100% of revenues rebated to taxpayers by reductions in growth-inhibiting taxes. The politicians favorite policy is more of the failed Kyoto-style cap and trade. Here’s an example of the sort of gaming that we have been describing:

ONSAN, South Korea — A French chemical maker is reaping a potential billion-dollar windfall under a United Nations program intended to spur climate-friendly investment in the developing world, highlighting the challenges of using market forces to tackle global warming.

The company, Rhodia SA, manufactures hundreds of tons a day of adipic acid, an ingredient in nylon, at its factory here. But the real money is in what it doesn’t make.

The payday, which could amount to more than $1 billion over seven years, comes from destroying nitrous oxide, or laughing gas, an unwanted byproduct and potent greenhouse gas. It’s Rhodia’s single most profitable business world-wide. Last year, destroying nitrous oxide here and at a similar plant in Brazil generated €189 million ($300.5 million) in sales of pollution “credits.”

The laughing gas is big money thanks to the U.N.-administered program in which polluters in rich countries buy credits like Rhodia’s, effectively paying for the privilege of continuing to emit greenhouse gases. The money is meant to flow to poorer countries to develop clean-air technology — for instance, an African nation would get a financial incentive to build windmills instead of a cheaper, but dirtier, coal-fired power plant.