Market failure in emissions trading
The UK Government is launching a CO2 allowance trading scheme, and aims to reduce emissions by buying out some of the allowances. Economic theory strongly suggests that trading is more effective and cost-efficient than a system of fixed limits. Theory is backed up by evidence of the success of SO2 emissions trading in the U.S.A. However, the American experience also shows that the benefits of trading are reduced if participants can “game” the system by selling rights that they had no intention of using. The British Government is in danger of spending over £200 million of taxpayers’ money on “hot air”.