Only those who want to derail a new climate agreement will cheer the Financial Times’ revelations that subsidies to Chinese wind farms under the Clean Development Mechanism have been halted on worries of manipulation. As evident as the CDM’s flaws are, however, they only add to the importance of establishing a global carbon emissions trading system that works.

Under the CDM, the United Nations awards carbon credits to emissions-reducing projects in the developing world. When credits are sold on to rich countries, the buyers can count them towards their Kyoto emissions targets. Supposed to kill two birds with one stone – reduce emissions and transfer money and technology to the poor – this was, however, never likely to work.

The CDM inherits the UN’s suffocating bureaucracy, so smaller projects struggle to gain approval. But more important than what it keeps out is what it lets in. The criterion of “additionality” is supposed to rule out projects that would not be undertaken without CDM payments. Not only is this counterfactual approach utterly unverifiable; it is also an ideal target for gaming.

The Chinese wind farms are a case in point: Beijing allegedly lowered their subsidies to make them eligible for CDM. The accusation plays right into the hands of the opposition to emissions cuts in the US. Congress threw out Kyoto because China and India were let off without obligations. A US public convinced that poor countries game the system would kill any prospect for a Copenhagen deal.

That would be tragic, for the solution to the CDM’s problems is more carbon trading, not less. It matters little for the climate where or what activities greenhouse gas emissions come from. But it matters enormously for the cost of cutting them. That is why the best solution is a global emissions cap and tradeable national quotas (ultimately based on equal per capita amounts) coupled with a scientific mechanism for measuring national emissions.

Governments could apply domestic taxes or regulation as they saw fit: so long as emitters had access to a global trading scheme, they would have strong incentives to cut emissions where it is the least costly. This could both minimise costs to rich countries and secure transfers to those which emit less.

Nothing near this ideal will come out of Copenhagen; it is wise to set our hopes on something imperfect but possible. Without making the best the enemy of the good, however, we should aim for what works, not what has failed.

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