A good gas can help clear the air

Much as the Kyoto Protocol on reducing emissions of greenhouse gases is a flawed treaty, its real contribution for future efforts to reduce global warming lies in the flexibility mechanisms it established. These enable someone with the need to cut carbon dioxide emissions to pay for the reduction to take place in another part of the world. While, for some, this seems like offloading the problem of one's own emissions, it is cost-efficient since the costs of lowering emissions in, say, developing countries should be less than those of reducing one's own emissions.

Cost-efficiency matters. Without it, few will have an incentive to participate in the relevant treaties, fearing, as President George W.

Bush does, that being green comes at an unacceptable cost.

Paying for emission reductions elsewhere immediately signals the existence of a new kind of market, and "carbon trading" is but one example of a growing array of measures known as environmental market creation. The attractions are self-evident: cost-efficiency and, to a considerable extent, a minimal role for governments, with the market taking on the task of adjustment. For example, someone wanting to reduce carbon emissions can call up the World Bank's Prototype Carbon Fund in Washington to broker a deal whereby polluters pay for emission reductions in, say, South America.

Better still, the bank's new Bio-carbon Fund will fund projects involving land-use change (such as afforestation and reduced deforestation) that both sequester atmospheric carbon through biomass growth and help conserve biological diversity and assist local communities.

One would expect such "exotic" carbon deals to cost more than straight carbon-reduction projects, but the attractions to polluters in terms of global image are obvious. The resulting reductions are credited to the emitters, who may be able to use them to offset targets under national emission strategies, but the project benefits accrue to the host country.

To date, the majority of carbon deals have not involved attempts to gain credits under the Kyoto flexibility mechanisms. They have been due partly to the desire to gain green image and partly to learning how such markets would work.

The literature on market creation has expanded dramatically in the past few years. This set of updated essays edited by Ian Swingland of Kent University is a welcome addition. Not only does the volume give solid examples of how such markets function, it sets out the background of climate science and the role of land-use change in reducing carbon concentrations in the atmosphere.

The book pulls no punches and this makes it stand out in a literature that is often overtly commercial in its efforts to "sell" carbon trading, or ideologically prejudiced against the notion of treating carbon emissions as a commodity to be traded. The problem, as Swingland notes, is that political correctness is all too often to the fore. Pollution is evil so polluters must be punished, and trading seems like a dispensation from punishment. Unfortunately, this moral view is naive and relies on the idea that most, if not all, players will act against their own interests. That will not happen - hence it is far better to take motivations as given and work with them to secure mutually beneficial policies.

The attractions of carbon trading should not be exaggerated. Existing emission reductions due to trading are modest, as is the finance involved.

But, as several authors show, this is much as one would expect in a context where there is a substantial need to learn about trades and, even more important, a need to invest in institutions and training to manage the trades. Once the trades extend their goals to securing joint benefits such as biodiversity conservation and building up community involvement and benefits, the learning process will get tougher still. Just as conventional markets have evolved with time to be as sophisticated as they are today, so we should expect trades in emission reduction to develop in a similar way.

Even more important is the message in this volume that the poorest countries of the world are potentially huge beneficiaries. Several authors point out that, because tropical countries can secure the highest rates of biomass growth, so they can secure the highest rates of carbon sequestration. Sequestration becomes an economic good - something for which greenhouse gas emitters will be willing to pay. It follows that poor countries could be sitting on massive economic resources they can sell.

Others point to the problems. First, those who negotiate international treaties do not have the same vision as many of the authors in this book.

Instead, they have systematically placed obstacles in the way of allowing sequestration projects to be included in the Kyoto flexibility mechanisms.

Second, getting this economic resource mobilised will require huge increases in institutional investment in poor countries. The indicators we have suggest the rich world lacks motivation to help the poor world through official aid channels. Maybe the reduced isolationism of the US would help reverse this trend, but hopes are not high.

Other chapters deal with measuring biomass assets in the developing world, the legal aspects of the Kyoto flexibility mechanisms, and various scientific aspects of forest and soil dynamics. All the authors are experienced in the carbon area and some are experienced "traders", from the World Bank and the private brokering market. The volume combines open advocacy for sequestration to be commercialised, but with an honest appraisal of the problems. It should be in the top ten volumes on market creation.

David Pearce is professor of environmental economics, University College London.