From my essay:
Cap-and-trade represents a market-based environmental policy that is typically preferred by industry and financial speculators over a more direct penalty or tax for polluters (Weeks, 2010).
In 2008, Commissioner Bart Chilton from the US Commodities Future Trading Commission reported in The Financial Times that carbon might emerge as the world's biggest derivatives market by 2013 (Gettler, 2009). In 2009 estimates for the carbon market valued it between $2 trillion and $3.5 trillion (Gettler, 2009).
It is worth noting that carbon derivatives were invented in part by the same woman who helped invent credit default swaps, Blythe Masters (Kassenaar, 2009; Washington’s Blog, 2009). Gillian Tett (2009) explains in Fool’s Gold that Blythe Masters of J. P. Morgan arranged the first credit default swap in 1994 with the European Bank of Reconstruction and Development (EBRD) in order to insure a line of credit J.P. Morgan was opening to the Exxon in 1993, after Exxon was threatened with a $5 billion fine for the oil spill....
Banks such as J. P. Morgan plan on serving as intermediaries in the growing carbon trading market...
Recently, calls have been made to regulate the market because of the proliferation of carbon derivatives: “Carbon derivatives should be regulated to stop the proliferation of instruments with the potential to wreak a subprime-style crisis, the head of chemicals group DSM said on Wednesday” (Hirschler, 2010 http://www.reuters.com/article/idUSLDE60Q1TK20100127). The Chief Executive of DSM was quoted as stating:
"There are now already in development derivatives of CO2 prices that are soThis concern that trading in carbon derivatives might drive the carbon market and eclipse the stated goal of reducing carbon emissions is widespread. The U.S. based environmental group, Friends of the Earth in 2009 released a report, Subprime Carbon, emphasizing the dangers of the market-based cap-and-trade system.
complicated that I do not understand it any more," he said. "If you get a
reservoir of derivatives which becomes so big that it becomes an industry in
itself that is very dangerous because you can get the tail wagging the dog.
(cited in Hirschler, 2010)