There are many obstacles to taking action on climate change. Most of those obstacles have deep roots: there are powerful interest groups that don’t want market prices to reflect true costs, and there are ideologues — financially supported by these interest groups — who don’t want to admit that sometimes the government has to intervene.

But there’s also, it seems, growing opposition to cap-and-trade from people who should be on the side of progress — but whose reaction is basically “Eek! Markets! Wall Street! Speculation! Bad!”

We don’t need this.

So let me talk a bit about why this reaction is 99% wrong, and bad for the planet.

Grist thanks its sponsors. Become one.

So writes Paul Krugman on his blog. He is responding to Sen. Byron Dorgan’s op-ed yesterday and my blog post on it (see “When Sen. Dorgan finds out what’s in the climate bill – hint, hint, White House – he might just support it“). Of course, I only did an undergraduate “concentration” on economics — micro, macro, and “The Economics of Energy and Environment” — whereas Krugman has a Nobel-friggin’-Prize, so people should probably listen to what he has to say on the subject:

Any time you have a market, there’s some opportunity for speculation. Even if the good being traded isn’t storable, there may be a futures market, so you can bet on the future price. If the good is storable, the spot price may be moved by the futures market, since high futures prices may provide an incentive for stockpiling.

For example, the fact that wheat is traded means that there’s also a wheat futures market; and because wheat can be stored, futures prices affect spot prices.

So, should fear of speculation lead us to ban trading in wheat? Nobody would say that. Yes, sometimes speculators will get it wrong – but the advantages of having a wheat market vastly overshadow the possible harm that may sometimes come from speculation.

Grist thanks its sponsors. Become one.

Now substitute “emission permits” for wheat. It’s exactly the same story. Why should you address it any differently? Yet as Joe Romm tells us, Sen. Byron Dorgan – who I suspect kind of favors allowing the market in wheat to operate – warns against cap and trade because it would offer too many opportunities to the “Wall Street crowd.” And that same line is, unfortunately, being echoed by a number of progressives.

[Note to self: Woo-hoo!]

This is really bad – it’s not a case of the perfect being the enemy of the good, it’s a case of the perfect being an enemy of the planet.

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.

The solution to climate change must rely to an important extent on market mechanisms – it’s too complex an issue to deal with using command-and-control. That means accepting that some people will make money out of trading – and that yes, sometimes trading will go bad. So? We’ve got a planet at stake; it’s crazy to cut off our future to spite Goldman Sachs’s face.

Precisely.

I would add that the oil price ran up in part because a lot of very knowledgeable people understand we’re peaking in oil and the “replacement” price for this non-renewable resource should be much higher (see “Science/IEA: World oil crunch looming? Not if we can find six Saudi Arabias!” and “IEA says oil will peak in 2020” and “Merrill: Non-OPEC production has likely peaked, oil output could fall by 30 million bpd by 2015“). Heck, look at how high the price is now and we’re in a major global recession. So betting on a much higher price of oil is not pure speculation – it may be completely rational.

But the 2020 W-M is too weak and clean energy strategies — efficiency, conservation, wind, CSP, biomass, and fuel-switching to natural gas — are too cheap and abundant. So betting on a very high CO2 price in the next decade makes no sense at all. And, of course, the climate bill has provisions that make it impossible for the price to run up the way oil did.

Yes, railing at Wall Street speculators is a great populist pitch, but not a credible attack from those like Dorgan who say they believe in strong climate action.