Lessons learned from the financial crisis: Designing carbon markets for environmental effectiveness and financial stability
The spectacular market and regulatory failures we have witnessed in the current financial crisis provide a cautionary tale for any future carbon trading program. The crisis has highlighted the importance of preventing speculative bubbles and excessive risk-taking, how failures in one market can pose broader risks to the financial system, and the need for robust financial regulation. This article explores particular areas of concern for carbon market regulation, and examines various policy approaches for governing U.S. carbon markets. It concludes that, in order to ensure environmental and financial integrity in the carbon markets, not only must they be well-regulated, but they should also be designed to be simpler, smaller and more stable.