350 reasons why carbon trading won't work

Rising Tide have just launched a new campaign: 350 reasons why carbon trading won't work.  Well worth a read.

The theory behind carbon trading is that it encourages innovation and carbon reduction funded by the market.  The argument goes like this.  Imagine that you have a carbon limit of 100 units (for the sake of the argument, it doesn't matter what your units are).  Company A and Company B both currently emit 110 units.  Company A, however, can easily reduce their carbon output; Company B would really struggle a lot to do so.  If all you do is charge for carbon output above 100, then A will reduce to 100, and B will reduce to maybe 105 (because they can't reduce any further that quickly): total 205.

Under carbon trading, the argument goes, A will reduce further, because suddenly a reduction below 100 units will be worth something.  Because they still have some easy wins, they reduce to 90 units, and sell their extra 10 units of permits to Company B.  Company B don't bother reducing at all, because it's cheaper just to buy permits, so they still output 110 units: total 200 units.  Hurrah, that is less than 205 units, carbon trading wins!

What strikes me is that carbon trading assumes that the problem with the first scenario (i.e. why it doesn't maximise the reduction) is to do with the lack of a market mechanism.  My suggestion would be that it is instead to do with where the limit is set.  What happens if we set the limit at 0, and companies have to pay for all carbon output?  Company A will (at least) reduce to that 90 that was their easy win.  Company B will reduce to the 105 that was all they could manage initially.  Total output: 195. 

In fact, under carbon trading, Company A may be discouraged from reducing as far as they can -- because if they reduce too far, then their permits will reduce in value (supply/demand)*.  Under a more draconian limit system, they have the absolute encouragement to reduce as far as possible.

Of course, this means that the operating costs of all non-carbon-neutral companies will rise, possibly by quite a lot.  Which in turn presumably means that the cost of whatever product or service they're providing will rise.  From where I'm standing, that's a further positive outcome.  Currently, carbon output costs: it just doesn't cost the polluters.  It costs everyone (and disproportionately, it costs the poor), just indirectly.  Currently, polluting companies are treated as if they have a right to pollute, which is (very) slowly being curtailed.  Let's turn it around, and make them actually pay for their polluting activities.

Yes, that will have a knock-on economic effect.  Some companies may even go out of business, if it turns out that when customers are asked to pay the true cost of their goods, that those goods aren't worth it.  Again: that doesn't sound to me like a bad thing.  That implies that currently, the rest of the world is subsidising something which the purchasers themselves don't actually value enough to pay for in full.**

Let's start valuing our environment properly.  Carbon trading is just a way of putting that off -- quite probably until it's too late.

* This is basically what has already happened: too many permits were issued at the start of the scheme, so permit costs are through the floor and no one has any encouragement to make any reductions at all.  This might have something to do with the fact that the basis on which numbers of permits were issued was calculated from numbers provided by.... the polluting companies themselves.  Um.
** OK, maybe some of those goods or services will have a social value such that they shouldn't be let go under.  In which case, governments may wish to subsidise them.  But again, let's do that openly and explicitly, and without invisibly handing value from the world as a whole over to private shareholders.