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With the global economy in meltdown, and faith in Wall Street wizardry at a low — to say the least — it’s perhaps an odd time for a push to put the fate of the planet into the hands of the market.

But that’s the solution for fighting global warming already in practice in Europe, and the one with the most traction in Congress and the White House. When President Obama, soon after the election, promised “a new chapter” in American leadership on climate change, he said, “That will start with a cap-and-trade system.”

In cap-and-trade, Uncle Sam would either hand out or sell tradable “permits” that would allow power plants and other businesses to emit a certain amount of carbon dioxide into the atmosphere, and no more. The idea is that the permits would become a valuable commodity, and companies that can cut emissions quickly can profit by selling their permits to companies that are having a hard time. It’s a way of giving businesses flexibility, while creating incentives for innovators to figure out the lowest-cost solutions.

The idea of creating a “carbon market” is based on the hugely successful 29-year-old program that curbed U.S. acid rain pollution far more quickly and cheaply than industry anticipated. But the acid rain market deals with only one pollutant — sulfur dioxide — and one kind of polluter: the coal power plant. Carbon dioxide and the other greenhouse gases like methane are so much more prevalent that an effort to limit them would involve every sector of the economy.

“It’s the most important thing we have never done,” Commodity Futures Trading Commission member Bart Chilton said in a recent speech. Within five years, he anticipates that a carbon market would dwarf any of the markets his agency currently regulates — from livestock and corn to oil and natural gas. “I can see carbon trading being a $2 trillion market. The largest commodity market in the world.”

It also would likely be the most complicated. The idea is that companies could meet their carbon “caps” not only by cutting their own smokestack emissions, but with the help of “offsets.” That is, by making investments in a wide-ranging array of projects that reduce greenhouse gas some other way — solar or wind power plants, tree planting, or capturing methane on hog farms.

Each potential offset is fraught with possible controversy: Is it real? Is it verifiable? To move money around in such a market would require project developers, financers, verifiers, registries, and consultants — all of whom are now well aware of their stake in climate policy. Wall Street banks like Goldman Sachs and JP Morgan Chase, insurance companies like AIG and private equity firms had virtually no reps on Capitol Hill working on global warming policy in 2003; by last year, they had about 130 climate lobbyists, the Center for Public Integrity’s analysis of Senate lobbying disclosure forms shows. About 20 additional lobbyists worked for firms and organizations wholly dedicated to carbon marketing last year.

But given the shaky state of the world’s financial markets, cap-and-trade advocates face a new skepticism on Capitol Hill. Senate Energy Committee Chairman Jeff Bingaman has voiced concerns that Congress will set a seemingly aggressive cap on carbon emissions, and then enact a system that allows such generous offsets that no emissions reductions will actually take place.

Dirk Forrister, managing director and lobbyist for Natsource, a top finance firm in the carbon market that’s already active in Europe under the Kyoto treaty, argues that there are ways the United States could already be cutting its greenhouse gas emissions today—through renewable energy, better agriculture, and forestry practices. But those things aren’t happening — not on the scale needed — because no one sees the value in investing in them. In theory, there would be a potential return on such investments under cap-and-trade.

But Forrister, an old Washington policy hand who chaired the White House Task Force on Climate Change under President Clinton, says that in the wake of the recent financial upheaval, cap-and-trade advocates will find themselves in the coming months making the case not only for a market — but for regulation. “There’s a newfound concern about the role of markets in general,” he says, “and I think we have to be thoughtful about what forms of market oversight need to be put in place.”

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