Keep speculators out of carbon markets

Sen. Maria Cantwell has made a sensible proposal in the fight about cap-and-trade. She proposes that any market for carbon-emission permits be limited at the outset to the companies that use these permits — electric utilities, steel manufacturers and the like — and that speculative trading, including derivatives, be banned.

It's not clear whether such a ban should be permanent. In many markets, from pork bellies to petroleum, speculators can add value. A market in wheat futures allows a farmer to lock in the price of his crop before it's harvested. Perhaps, if a cap-and-trade system works for a few years, it can expand in this way. But at the outset we believe Cantwell is right.

A carbon permit is not a real thing, like a bushel of wheat. It's a permission created by the government — a permit to pollute.

The theory of allowing it to be traded is to set a price on carbon dioxide, so that emissions that can be stopped for less than that price will be stopped. That way, emissions are reduced at the least cost.

That's the theory. The reality is that traders learn to game such markets before the designers can get their market to work right. For example, when the European Union adopted such a system in 2005, it issued too many permits. Traders are making money but pollution has hardly been affected. Europe's system needs to be changed — and the more people making money off it, and the more vested interests created by it, the more difficult it will be to change it.

Our lawmakers haven't made those mistakes yet. They need to listen to the scientists, about what needs to be done, and industry, about what can be done. The investment bankers should be invited in only if they can show an added value — later. Not now.

Cantwell is right: Keep the speculators out.