Making money out of thin air

What do the South Sea Company and carbon exchanges have in common? Everything.

In 1711, Britain’s treasurer, Robert Harley, had an extraordinary idea. He could finance Britain’s war debt by selling shares in a non-existent trading company: the South Sea Company. South America was just opening up and was imagined to be a place where silver and gold flowed as easily as water. But for the scheme to be pulled off, according to a recent Economist article, investors needed to “be persuaded to drive the stock above its par value” in order “to create wealth out of thin air.” It worked for a while. Speculation drove up the price but when negotiations with Spain faltered, the South Sea Company needed government backing to keep the party going. They went old school and bribed people close to the king. Eventually, despite the royal imprimatur, the investors discovered that the scheme contained no substance and was just hot air, and their shares’ par value equaled pond scum.

004 Carnival wind-peddler and wholesaler (stoc...

Today, a number of scientists, companies, and policy-makers are concerned with anthropogenic (man-made) global warming. And, carbon dioxide (CO2), a by-product of burning, has been fingered as the prime suspect. CO2 also happens to be the gas that you and I exhale with each breath. Simply put, CO2 reflects infrared radiation back to earth that would otherwise be lost to the cold cold depths of space–the so-called greenhouse effect.

Climate scientists have built complex computer programs to model the earth’s future climate. Using sophisticated equations with feedback loops and forcings they have “proven” the warming, which vary from 1 to 10 degrees Fahrenheit change, of the worldwide average by the end of this century. For our purposes we can simply say that more CO2 equals a hotter earth. People living at the start of the 20th century who could remember the “little ice age” thought this greenhouse effect beneficial. Today, the warming involved with the higher levels of climate change stands accused of everything from colder winters to cancer, and even illegal immigration (I am not making this up).

Some have suggested that a cap-and-trade system could reduce CO2 emissions; this would be similar to how regulators curbed other smokestack pollutants (such as sulfur dioxide) in the late 20th century. Essentially, regulators “cap” the total output of a pollutant with a limited allowance of CO2, and then polluters can trade their credits. Those who produce less of the pollutant can sell their remaining allowance to those who produce more. The state of New York has collected $282 million under a regional agreement from the auctioning of carbon dioxide credits.

In addition to selling allowances in a cap-and-trade system, indulgences can also be sold in the form of “carbon offsets.” Offsets provide a counter-balance to the CO2-emissions’ damage (presumably) done by flying in an airplane, driving a car, having a child, or all three and more. The offsets vary: one might buy a bit of rainforest (to grow and soak up CO2 through photosynthesis) or fund family planning in Ethiopia (to prevent another carbon emitter from entering the world) as atonement. By buying such carbon-coated indulgences, one can expiate the sins of extravagant western living and transform oneself into a holy carbon-neutral being.

It’s not about saving the world (except for the true believers), it’s about money. Follow the incentives. Baptists and bootleggers, true believers and the buck-seekers, have banded together to make markets out of thin air with offsets or allowances. At the United Nations’ climate change delegate meeting in Cancun that just ended, investment funds, insurance companies and banks have lobbied for a treaty, and not because they are altruistic. Ronald Bailey at Reason writes that the delegates there have decided “to kick the Cancun down the road” because the “rich countries continued their vague promises to hand over $100 billion in climate aid annually to poor countries beginning in 2020.”

Cutting 100 percent of our CO2 emissions lowers CO2 emissions by a whopping 1.5 percent of the carbon cycle, because the rest (210 billion metric tons per year) comes from natural processes. But, “if you’re looking to make money from the trading of carbon allowances (carbon credits) than (sic) it makes a great deal of sense….If you are in the renewable energy business it makes perfect sense to support the reduction of carbon dioxide ‘pollution’,” writes one energy analyst.

I could be wrong, but I see no “there” there. The investment has no portfolio. I think, just as what happened to the British South Sea Company, investors will eventually learn that these hyperventilated bubbles are simply full of hot air. What do the South Sea Company and carbon exchanges have in common? Nothing.


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