Editors\u2019 note: This is the second in a series parsing the future of the state\u2019s cap-and-trade market. Who will ensure the state\u2019s cap-and-trade market doesn\u2019t result in a financial meltdown like the wholesale electricity market in 2000-01? No one. Does it matter? Nope. The fledgling open market in trading greenhouse gas credits might make money for some. I could bite myself in five years for stating this now, but it looks like a complete yawner--profit-wise. It\u2019s like playing for drachmas with your nieces and nephews over \u201cgo fish.\u201d Back in the day of the state\u2019s deregulated electricity market, there were a lot of entities that could smell profit. They pushed the state to open up a market-based system. This time around, few are sniffing the wind of a market-based cap-and-trade system for greenhouse gas credits. Profit for some is what is supposed to drive reduction of California\u2019s greenhouse gas emissions. That\u2019s why it\u2019s \u201ccap-and-trade\u201d and not just \u201ccap.\u201d With the nascent carbon trading market the differences between it and the deregulated electricity wholesale market are: -Little money to be made; -Not enough action to provide liquidity to create profitable trading; -If the market goes sideways, only the vast horizon and its stratosphere get hurt--not any consumer, not any blackouts, no visible ugliness (like smog), just more global warming; -An expected derivative trading market that could be the kicker--trading in things associated with greenhouse gas emission, but not directly from credits, could hold the key to profitability for the banking industry. The energy crisis market was based on electricity deliveries, futures, ancillary services, and--primarily--a squeeze on transmission. Derivatives came later. Here, they\u2019re expected. In case there is no market ennui--that is, for some reason the price per ton of carbon credits soars and profits are sniffed in the stratosphere--then would, or could, the state or other regulators control the market from going haywire? AB 32, the law that spawned the cap-and-trade market, basically maintains that the state may enforce the \u201ccap\u201d but only monitor the \u201ctrade\u201d to the extent of whatever the Air Board decides. Air Board staff noted there could be price volatility back in October 2010. For that, the state expects to set up a \u201ccost containment mechanism.\u201d The state, in effect, would print its own climate currency--well, it\u2019s more like it would dip into the climate credits currency it\u2019s already printed. It would then stash that currency in its own version of a climate safe deposit box. The box can be unlocked to release credits to the market in order to calm high prices. If there\u2019s a bank heist and the safe deposit box is emptied, that could be a problem for power plant operations. The Air Board apparently isn\u2019t backed by any greenhouse gas version of FDIC. That is, when it\u2019s gone, it\u2019s gone. For crafty traders then, there could be a profit in forcing the bank to run out of currency, then the price would be as volatile as the market allows. Other than the credit market itself, if the cap-and-trade market somehow does start pricing carbon credits at $200\/ton (the general wisdom is that it has to be $30\/ton to make any difference, and this week it traded at about $8\/ton) would the state say, in essence, \u201cyahoo!\u201d we are going to decrease our greenhouse gases severely? Nope. It would be much like a decade ago when the price of pollution credits in the Los Angeles RECLAIM market topped out--and then credits became impossibly scarce to procure. On hot days that were straining the grid, polluting peaker plants weren\u2019t supposed to be used. But they ran anyway so the market was ignored. Trading was shut down. Instead, the South Coast Air Quality Management District put the generators under a series of abatement orders that outlined what they needed to do to control pollution and when they needed to do it. In effect, old style command-and-control regulation is what got the industry to clean up, not cap-and-trade. In that sense, the market program failed If greenhouse gas credits soared and became that meager, the state\u2019s fossil fuel plants would face the same operational problems. Could that cause rolling blackouts? I doubt it, as the government would temporarily disable greenhouse gas emission concerns. Would it cause political blowback? Depends on the prevailing partisan winds. If the state Legislature in 10 years looks like Congress now, it would probably simply veto progress toward decreasing greenhouse gas emissions--never mind global warming. In the overview, there\u2019s a couple of lessons learned from California\u2019s past experience. When the deregulated electricity market went through its fits a decade ago, the quasi-government agency that was slapped with doing something, anything, was the California Independent System Operator. At the time, the grid operator wasn\u2019t prepared for the market-driven energy crisis. My guess is that an agency whose role is pollution control isn\u2019t going to be in much shape to play the part of controlling a greenhouse gas betting casino. Where are the pit bosses? The people who are supposed to watch over the gamblers are giving the public conflicting information about their responsibilities. For instance: The Commodities Futures Trading Commission--the federal agency with the most clout if there\u2019s any clout at all in controlling trading markets--is not remotely interested in California\u2019s cap-and-trade system. That\u2019s what the feds say. The state\u2019s system is set to be a cash market. Federal market regulators only touch derivative trades. Ah, but that is not the story from the state Air Board. In documents, the state claims that it plans for the cap-and-trade market to morph into derivatives as well as the cash market. The Air Board claims it is conferring with the federal trading commission. One key entrepreneur in the nascent market has a different story. GreenX is registered with federal regulators to facilitate carbon credit transactions outside the bilateral market. That is, if Pacific Gas & Electric and Southern California Edison decided to trade their emissions credits, GreenX is out of the picture--and presumably regulated by the Air Board. If an entity wants to bet on the future price of a carbon credit, for instance, GreenX could facilitate that and take the credit risk for an exchange. All of the above assumes the state is good for its word, that California can be relied upon to back credits for a gas that is tasteless, odorless, weighs nothing, crosses city borders, and disappears into the clouds without looking back. A more sure way than developing a market is for Californians to put the profit in a carbon-lite future. We\u2019re already doing this through ever-higher electricity bills to pay for the move to renewable energy. From everything we\u2019ve heard leaking out of utility-scale renewables contracts, there does seem to be a profit motive there. The other way we\u2019re putting profit in a carbon-lite future (along with the other 49 state\u2019s help) is creating tax-based subsidies and tax write-offs for investing in new renewable energy. There are plenty of companies who see value in using subsidies.