When Markets Are Poison
Learning about Climate Policy from the Financial Crisis

Corner House Briefing 40

by Larry Lohmann

first published 18 September 2009

Studying the financial crisis and the climate crisis together can provide useful tools for understanding how to tackle both. Overconfident commodification of uncertainty (in the form of a trade in new and complex derivatives) helped precipitate a global economic crash. Overconfident commodification of climate benefits (in the form of a trade in carbon) threatens to hasten an even worse catastrophe.

Close parallels can be drawn between the financial innovations behind the current economic crisis and the marketing innovations associated with carbon trading -- the dominant official response to climate change. Both the new financial markets and the new carbon markets involve the construction of similar abstract commodities. Both heighten systemic dangers, necessitating movements of societal self-protection. Both involve regressive redistribution and the destruction of crucial knowledge; are vulnerable to bubbles and crashes; erode notions of transparency and conflict of interest; and call into question the assumption that each and every market can be successfully regulated simply by virtue of being a market.

This briefing paper suggests that the hows and whys of the failures of both markets need to be investigated and understood before a coherent and effective response can be formulated to the problems that both were supposed to have tackled.