One of the concerns that critics of a cap-and-trade system for greenhouse gases sometimes raise, on both the left and the right, is that a market for carbon would be prone to speculation and other forms of Wall Street shadiness. Paul Krugman argues that these fears are mostly unfounded:

But wait—don’t we have examples of energy markets being manipulated by speculators? Yes—but the proposed cap-and-trade system would NOT reproduce the conditions of those markets.

The prime example of an energy market gone bad is the western electricity market in 2000-2001; and let me say that I have some moral authority here, since I called it when it was happening. That was the real thing—but what made it possible was a combination of at least two factors. First, the demand for electricity was highly unresponsive to prices; second, the relevant markets were fairly small (northern and southern California were isolated both from the outside world and from each other by transmission bottlenecks).

In the case of emission permits, demand will probably be quite responsive to prices—and the market will, as Joe Romm says, be huge.

What about the 2008 surge in commodity prices? Actually, I’m still of the view that speculation didn’t drive that episode—a view backed by serious research. But even if you think that there was a speculative bubble, would that lead you to propose shutting down the market for crude oil?

By all means keep a watchful eye on speculators and regulate derivatives — and make market manipulation illegal, as Waxman-Markey does. But don’t apply standards to emissions trading that you don’t apply to any other market.

Krugman's trying to reassure Sen. Byron Dorgan (D-ND), who recently penned an op-ed expressing doubts about cap-and-trade because, he explains, it would lead to hedge funds and investment banks creating "derivatives, swaps, and more in that new market." But there's nothing inherently wrong with a carbon market that has futures contracts and options—that's a fine way for companies to hedge against risk. The key is sensible regulation and oversight.

On that score, Joe Romm explains how the House climate bill tries to ward off market manipulation, while Dianne Feinstein and Olympia Snowe are working on additional protections in the Senate. Maybe there's reason to believe these oversight measures are all grossly inadequate, but Dorgan could at least acknowledge they exist.

--Bradford Plumer