Even as the tsunami of Bernard Madoff’s busted Ponzi scheme was submerging hapless rentiers around the world, another esoteric financial enterprise quietly took a step forward this week. At a couple of hundred million bucks, this new venture is just spare change alongside Bernie’s 50 billion. But in time it could grow to rival Madoff’s swindle in scope, and in the process thwart our planet’s last shot to head off climate catastrophe.

The new venture is a national carbon cap-and-trade system, and for its Phase I the traders have crafted a ten-state Northeast compact dubbed the Regional Greenhouse Gas Initiative. “RGGI,” which applies to CO2 emissions from electricity production, has been so long in the making — negotiations started in 2003 — that it had largely fallen off my radar screen. But behold this week’s email blast from the NY League of Conservation Voters:

RGGI Nets New York $42 Million: The second auction of carbon credits in the Regional Greenhouse Gas Initiative generated funds for investment in energy efficiency, clean and renewable energy technologies. Proceeds for 2009 could total $217 million.

Funding energy efficiency and renewable energy is all to the good, of course, and we should tip our hats to the environmental advocates who demanded, and won, that the permits are auctioned rather than given away to the fossil-fuel generators. But there are several back stories that cast RGGI in a potentially Madoff-like light:

One is that the program allocations are being made through an insider-driven process over which major green players like the Natural Resources Defense Council and the Environmental Defense Fund wield considerable power. This may be why NRDC and EDF remain wedded to an arcane financial apparatus like cap-and-trade, and highly critical of the quicker, simpler and more transparent carbon-pricing alternative, revenue-neutral carbon taxing. The green groups get to run the action.

And while the action may be noble, it could have this profoundly damaging side-effect: as the revenue pie grows — which it must, exponentially, if the goal is to cause ever-deeper cuts in emissions — the proceeds allocated to investments, green or otherwise, will come right out of the pocket of families whom the rising energy prices will push further into the red.

The puny $3.38 average price paid under RGGI for each permit to emit a ton of CO2 thus bears the stamp of a Trojan horse. Although some Grist commenters claim the low price signals that cap-and-trade can destroy CO2 on the cheap, it is actually an indicator of both RGGI’s meager ambition and of cap-and-trade’s fundamental flaw of dictating quantity rather than price.

Why is the auction price so paltry? First, because RGGI’s emissions “cap” is held constant for six years — more than half the window Jim Hansen and others say remains to drive emissions far downward — before beginning a gradual decline. Second, because the tanking economy is busting electricity demand (and, hence, carbon emissions from electricity generation) largely through belt-tightening rather than permanent energy efficiency.

Assume, for argument’s sake, that Congress enacts a tight carbon cap. As the economy recovers, CO2 permit prices will go through the roof, blowing away the blandishments of some cap-and-traders that their scheme, based as it is on allocating the revenues instead of distributing them via revenue-neutral tax-shifting or “dividending,” won’t send fuel and energy prices to painful levels. The ensuing backlash could lead Congress to eviscerate the cap, setting back CO2 reduction for years and squandering what former Commerce Under-Secretary Robert Shapiro calls our one shot at saving the climate.

Meanwhile, RGGI has yet to accomplish much for climate protection, since the laudable but limited RE and EE programs that it finances leave most electricity usage untouched, not to mention the 60% of CO2 emissions that don’t derive from the electricity sector. Which didn’t stop NRDC CEO Francis Beinecke from touting RGGI and cap-and-trade in her recent Treehugger interview:

The cap and trade model for reducing global warming pollution is already being used in the European Union and a cluster of 10 Northeastern states. It is underway in California and several other states.

Beinecke went on to dismiss straight-up carbon taxing:

[T]he crisis of global warming is so urgent that we can’t wait for lawmakers, industry, and the American people to spend years hashing out the details of an entirely new system. We have to act now… Experts think [carbon taxing] is a slower mechanism for directing capital into clean energy technology.

Calling a carbon tax slower than cap-and-trade is almost Orwellian, considering the five years it has taken to incubate RGGI, which covers one sector (electricity) in just ten states, vs. the weeks or, at most, months it would take to start administering a revenue-neutral national carbon tax.

And especially in light of the latest DOE data on gasoline usage, indicating that the short-run price-elasticity of U.S. gasoline demand shot up this year to just under 0.3 — the highest level in years. Wasn’t it just two years ago that some West Coast experts were pegging gas price-elasticity at just 0.04? And that cap-and-traders were seizing on that figure as evidence that neither a gas tax hike nor a carbon tax could materially reduce U.S. gas consumption and carbon emissions?

Carbon cap-and-trade is an idea whose time has gone — and maybe never really came. After the spectacular self-immolation of similar financial Rube Goldberg machines on Wall Street, the public is rightly mistrustful of obscure gnomes manipulating vast quantities of money in a back room somewhere.

Even if the gnomes in question are Green as — well, Green as a greenback.