Thursday, May 3, 2007

At Last, a non-IT Economic Bubble!

Sometimes it seems as if the only consequence of the bursting of the dot-com bubble has been a frantic search in the IT world for the next bubble. Web 2.0 has been, and may still be, one of the major contenders for such a bubble. Another, examined today on Lou Paglia's CoRrElate blog, is Web Services. However, an article by Fiona Harvey posted on the Financial Times Web site last night has served to remind us that you do not have to be an IT "player" to inflate a bubble.

The bubble that Ms. Harvey has chosen to examine is the market for carbon credits. She never uses the word "bubble." Nevertheless, experienced bubble-watchers should have no trouble seeing a red flag in her lead sentence:

The market in carbon credits grew faster than expected last year, tripling to $30bn from $10bn in 2005, the World Bank said on Wednesday.

Now, for those who have not been tracking this market, it emerged from an interesting strategy:

The market in carbon credits was brought into being by the Kyoto protocol, under which rich countries can meet their targets to reduce emissions by about 5 per cent by 2012 by investing in projects, such as wind farms, that reduce emissions in developing countries.

Reduced to less honorable language, the strategy basically says: We shall compensate for our failure to reduce emissions by financing the reduction of emissions elsewhere, thus improving conditions on the overall global scale. Ms. Harvey points out some of the problems with this kind of thinking, devoting much of her attention to the amount of this market that is unregulated. However, she does not examine the extent to which this is basically a market of intentions, not that different from the sorts of intentions being marketed by dot-com startups and the venture funds backing them in the late Nineties. However, while most venture funds could manage with a strategy of hitting a major success only ten percent of the time, I cannot imagine that a ten percent success rate in investments in emissions reduction is doing to do much for the overall good of the planet. There are also some interesting numbers as to just who has been benefiting from what the rich countries have been buying:

China was the biggest beneficiary, selling 61 per cent of last year’s carbon credits, while India took 12 per cent and Brazil 4 per cent. Credits normally sell for between $5 and $10. The UK was the biggest buyer of credits, purchasing 50 per cent of the supply.

Is this really going to bring about the Kyoto goal by 2012? I have serious doubts, particularly when it comes to wondering why, in light of my last post, China is selling when it has the economic resources to invest in global-scale improvements.

There is an often-repeated story that President Kennedy had been reading Barbara Tuchman's Guns of August when he found himself thrust into the Cuban Missile Crisis. He was strongly persuaded by Tuchman's argument that Europe basically blundered its way into the First World War and did not want a similar blunder to take place on his watch. The heart of the blunder was, of course, a preoccupation with "the great game of diplomacy" that blinded the diplomats to what was actually happening "on the ground." (As I previously mentioned, this was nicely depicted in choreography by Kurt Joss in his "Green Table" ballet.) These days "the great game" is the game of finance; but it is just as capable of inducing blindness. The bubble of carbon credits will probably burst sooner rather than later (most likely far before 2012); but this time the consequences will involve far more than financial losses!

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