The advocates of economic liberalism have managed to suppress dissent against their policies for the last thirty years. The world has been saturated with the liberal gospel that markets unconstrained by state interference are the most efficient means of allocating the finite supply of goods across society. This is because the market supposedly acts as a balancing mechanism for the forces of supply and demand. The idea is that on the demand side, competition between consumers for limited supplies of goods drives prices up. On the supply side, competition for market share between producers or vendors of goods drives prices down. The market is the matrix which brings producers and consumers together and balances their contradictory impulses in a way that enables the economy to function rationally and efficiently. According to liberal theory, interference by government in the marketplace upsets this finely tuned, self-regulating machine, causing the forces of supply and demand to get out of balance.
Under the cover of this theory, neoliberal politicians have taken an axe to regulation of business and public provision of services. In the name of economic rationality they have lifted controls originally established to shield the public from over-exploitation and financial uncertainty, while moving to privatize every pubic institution in sight. Thus, national railway systems have been splintered into multiple mini-systems competing for “customers” over the same track networks; state schools have been turned over to entrepreneurs whose lust to turn a profit supposedly inspires a better learning environment; even the fighting of war has been contracted out to corporate mercenaries who supposedly provide more bang for the buck - literally.
If the market is the most efficient means to run trains, educate children and fight wars, why not turn the entrepreneurial mind to the problem of reducing environmental pollution?
Industrialists in charge of polluting enterprises have always resented interference in their affairs by do-good environmentalists, who rain on their profit parade merely to save the planet from climate catastrophe. However, if they could keep the spectre of effective environmental regulation at bay by using market incentives, that is, make money off their pollution, well, maybe “environmental protection” wouldn’t be so hard to swallow.
Hence, the concept of emissions trading. First implemented in the USA in the late 1970s, it was popularized and internationalized in the Kyoto Protocol of 1997.
Under the widely employed “cap-and-trade” model of emissions trading, a price tag is put on the pollutants emitted by businesses in the course of their operations. The state (reluctantly) sets a limit on the amount of the various pollutants which operations are permitted to emit. Operators whose pollutants fall beneath the threshold of allowed emissions are awarded credits corresponding to the size of the margin by which they “under-pollute”. They can then sell these pollution credits on the market. The less they pollute the more they stand to earn by selling off the credits they earn. On the other side, operators who exceed the limits allowed for their emissions have the choice of buying pollution credits from the under-polluters, which allows them to continue over-polluting, or face penalties imposed by the government. The more credits they buy, the more pollution they can get away with.
Thus, emissions trading creates a system in which pollution emitted in one place can be “offset” by curtailing pollution elsewhere. The progress, or lack of, in reducing emissions is assessed against a national emissions inventory.
Trading of pollution credits occurs on the open market, and the price of credits supposedly fluctuates according to the aforementioned laws of supply and demand. Not only do polluters trade with one another, but brokers and investors can buy and sell pollution credits too. The pollution credit market is projected to grow over time as more countries and sectors enter into the process.
According to the free market theory underlying emissions trading, polluters will be attracted like bees to honey by the opportunity to make money by reducing their pollution and selling off the credits they earn for doing so. That’s the supply side of the equation. On the demand side, those whose find it too difficult, expensive or inconvenient to reduce pollution will be eager to snap up the credits being sold by the supplying enterprises, as this will save them from being penalized by government for their emissions and/or save them the trouble and expense of retooling to achieve reductions. Using the incentives of market forces, buyers and sellers of pollution credits will, between them, stabilize the emission of pollutants at quantities mandated by law. The idea is not that this process in itself assures open-ended pollution reduction, but that it supposedly incentivizes compliance with regulations and so, constrains pollution within the limits agreed in treaties or prescribed in legislation. In order to achieve actual reductions in emissions, regulators need to reduce, over time, the total amount of pollution which is permitted and can be traded within the system.
Despite the free market allure of the emissions trading idea some pesky contradictions lurk beneath the surface. These contradictions suggest that those who champion the concept are either somewhat idealistic or somewhat dishonest.
Consider, for instance, the obvious fact that in order for the system to achieve the objective of reducing pollution, operators have to make meaningful cuts in their emissions. You might be forgiven for assuming that the more they cut pollution the more the system will reward them. In practice, however, if operators become over-zealous and try to cut pollution “too much” then the market will end up with a surfeit of pollution credits. The market value of the credits would sink accordingly, raising the prospect that at some point the bottom would fall out of the market because the price being fetched by the proliferating credits would no longer be sufficient to incentivize emissions cuts.
In fact, something similar happened in 2006, except in this case the market nosedived without any pollution cuts being made. One year after the 2005 start-up of the European Emissions Trading Scheme (EUETS), when several countries’ emissions turned out to be lower than the projected level for which initial credits had been allocated, the market value of emissions credits crashed to almost nothing. The 
loss of carbon credit values cascaded into negative effects on the stock market value of some of the participating companies.
The same thing is happening again this year. In a 13 September 2008 article, the Guardian newspaper reported that the EUETS has distributed up to nine million extra credits to 200 companies [link]. If the market holds, then these credits can be sold off, netting windfall profits for the fortunate companies, and again, without a single gram of carbon reduction taking place. On the other hand, the emissions market could crash again, as it did in 2006. Either way, this shows that the emissions trading system is extremely vulnerable to distortions which make it ineffectual at reducing pollution.
In some situations, operators might not find any incentive in emissions trading opportunities and therefore make relatively small or no cuts in their emissions. This can happen when industries find it easier to keep polluting than getting involved in the trading system, such as when exceeding permitted emissions limits is punished with relatively low and affordable fines. In this case, the penalties become part of the industry’s costs of production. If, as a result, uptake of emissions credits is less than enthusiastic, then relatively few pollution credits will come onto the market and, in accordance with the law of supply and demand, their price will be high. They would then be unattractive as an alternative to conventional regulation, meaning that there would be few buyers for them and the system would very likely founder.
So the hope that the market will strike just the right balance between the absurd concept of “too much” pollution reduction and the untenable situation of not enough pollution reduction seems highly suspect. Add to this the fluctuations in the market which could be caused by the participation of speculative traders, and that hope becomes no more than pie in the sky: the hoarding or dumping of credits by speculators would cause unpredictable fluctuations in prices, and futures trading in emissions would distort the system beyond credibility.
As suggested above, perhaps something less than honesty underlies the concept of emissions markets as a vehicle to reduce pollution. Could it be that the corporations, which are much happier with emissions trading than mandatory pollution reduction, realize that this is the perfect foil against having to engage in serious cleanup efforts? After all, if the market fails to achieve the desired effect no one in industry will be directly guilty, and at worst they will have evaded profit-reducing regulatory requirements for at least several years while the trading system flounders around. At best, they stand to make further large profits from the scheme, as is happening at the moment. Furthermore, in accordance with the principles mentioned above, liberal governments hate to interfere with the operation of the markets - unless, of course, they are bailing out failed businesses with pubic money. Having made emissions reduction into a market phenomenon means that in addition to the existing inertia in dealing with damage to the environment, governments have yet another economic/ideological barrier preventing them from dealing decisively with pollution. The more entrenched emissions trading becomes as a part of the market system, the more non-market, enforcement-based regulation of emissions will be regarded as unwarranted state interference; and the more lobbyists will be deployed to protect industry from legislated changes that might crimp any existing profit-making opportunities in the trading system.
There are many other holes in the case to the use market incentives as an instrument for reducing pollution. One of these is the fact that industry can pass on the cost of reduction or non-reduction to the consumer. Whether compliance with emissions reduction schemes means purchasing credits, paying fines or refitting factories, unless specific rules are made to prohibit it, businesses will pass on the costs to the public. Another class of problem stems from the fact that the emissions market can elicit 
environmentally adverse behavior, such as the felling of old-growth timber, which has slow carbon absorption characteristics, in favor of new plantations containing species which absorb carbon faster.
The world is now at environmental code red. We will shortly be arriving at the tipping point beyond which it is too late to reverse the profound disruption we have caused to global ecosystems. There is literally no time to tinker with incentive systems which supposedly offer profit-making opportunities for reducing pollution. Our sole objective can only be to get pollution levels down, fast.
A faint glimmer of hope is found in signs that the sway of neoliberalism is on the wane. The shocks dealt to the world economy by the bursting of the financial bubble have resulted in new mistrust of unregulated markets. This situation may make some politicians more sensitive to the absurdity of trading emissions to halt climate change. But their feet will have to be held to the fire: nothing will be accomplished without an upsurge in political/environmental activism at all levels, from the grassroots up.
