Post Kyoto: Does Carbon Emissions Trading have a Future?

The Kyoto Protocol, the allowance and credit trading schemes based on it and the question as to whether or not it should be continued after 2012, is a polarizing issue. One is either for it or against it, or so it seems, and that is then all too easily equated with being for or against "the environment". Also, the reasons cited for one's standpoint are often remarkably unbalanced: thus for example, one may find arguments "for" (post-) Kyoto such as "although not perfect, it's the best we have" (without any further explanation), or arguments "against" (post-)Kyoto like "as long as China and India do not participate, any mandatory cap is worthless". The views on the success of the carbon emissions trading scheme introduced by the European Union are equally opposing. One the one hand, one can hear or read very enthusiastic accounts of the hundreds of millions metric tonnes of CO2e traded, on the other hand one hears professional traders of financial assets and commodities explaining that the "carbon market" is not interesting at all because the liquidity is far too low. Especially the latter dichotomy has led to the subject of this essay. It tries to answer the question "does carbon emissions trading have a future" by assessing the merits of both the Kyoto Protocol and the European Emissions Trading Scheme on the basis of criteria generally used to judge the efficiency of financial and commodities markets. Because if the efficient trading of emissions (permits/allowances or credits) is viable, even if only in theory as yet, a strong case can be made for the continuation of the market-based model of the Kyoto Protocol. If, however, it turns out that the model of emissions trading has inherent obstacles which make efficient trading an unattainable ideal, then one should seriously question any continuation of the Kyoto Protocol.