Although CDM sounds good in theory, it is basically a tax on businesses which can be paid by investing in another country.

All taxes are market distorting, so we can expect adverse consequences as well as positive consequences.

Cap and trade essentially penalizes businesses in carbon generating businesses, while transfer wealth to companies who are not in the carbon generating business.

In addition, CDM would transfer capital and wealth out of the home country and send those funds to other countries.

Given our economic downturn, neither taxing companies or shifting capital outside of our country (specially with our negative balance of payments) would be a good thing right now.

The most ideal solution to minimizing carbon footprint would be to devise a system that does not punish companies in certain sectors, nor transfers wealth out of the country.

A better solution would be to offer an economy that promotes saving as well as investment in businesses. This would happen if the Federal Government stopped pushing interest rates down (punishing savers) and creating inflation (also punishing savers).

The most effective way to get companies to reduce their carbon imprint would be to offer significant tax incentives to do so.

I would be in favor of promoting tax incentives and fast, flexible depreciation schedules for carbon reduction in key areas.

Other than that, I think the price of oil will quickly be moving above $100 per barrel, and that will quickly put pressure on the carbon generating businesses.

As for coal, it will always be a problem because it is a cheap, abundant form of energy - however coal has very negative downsides. Perhaps social pressure on utilities that produce power via coal is the way to go.

Australia, for instance, that thinks of itself as a "green" country, produces much of it's electricity from dirty coal. However the generation of power in Australia is placed far outside of the cities, so it's "out of sight, out of mind" for Australians.

Marc,

We agree that the Clean Development Mechanism has been a valuable tool for promoting sustainable development, and it has given developing countries important hands-on experience with market-based emissions reductions.

But in the 10 years since the Kyoto Protocol was adopted, the science has become grimmer: dangerous climate change is occurring more rapidly than predicted, emissions continue to rise – and the need for a truly global agreement to reverse that trend has become more urgent.

Averting the worst impacts of runaway climate change will require the sum total of global emissions to begin decreasing in the near future. That will require absolute emissions reductions (not simply reductions from business as usual) from developing nations, not only from developed ones (though we must lead the way). Because the CDM awards tradable credits for emissions reductions projects in countries whose overall emissions continue to grow, it only marginally slows the pace of emissions growth IN the developing world -- there is no guarantee that overall global emissions will come down.

That’s why Environmental Defense Fund is developing an alternative path to bring large developing countries into a binding system of emissions caps, while preserving access to the CDM for small developing countries. Our twin goals are to secure sufficient global emissions reductions to protect the climate and enable the poorest countries to benefit from CDM financing.

The CLEAR path -- short for "Carbon Limits + Early Action = Rewards" -- provides incentives for developing countries to join the global carbon market. While we would like to phase out CDM for large developing country emitters, we are certainly not trying to phase out project-level carbon finance. EcoSecurities does fantastic work in securing financing and developing greenhouse gas reduction projects all over the world. We would like to see these projects grow to a multiple of their current volume.

CDM provides incentives for countries to stay out of the carbon market and not to take on national emissions reductions targets. CLEAR creates incentives for countries to join the global market with their own reduction targets. The CLEAR path proposal is a work in progress, and I welcome your comments on it. We are continuing to flesh out the details; the most recent version of our proposal, an academic version focused on the financing mechanisms can be found here: http://www.edf.org/documents/9410_clean-investment-budget.pdf

Fred Krupp
President, Environmental Defense Fund