LONDON • Carbon markets, the free enterprise solution to saving the world from global warming, are now in danger themselves.

The idea was simple enough: Set a cap on carbon emissions, issue enough permits to allow power plants, refineries and the like to stay within those limits, and then shrink the cap over time to achieve reductions.

The firms whose emissions fall fastest can sell their permits for a profit to slower responders - call it a reward for good behaviour.

The reality, though, is more complex. Undercut by a lack of political will on the size of caps and overtaken by costly new environmental mandates, carbon markets in the United States, Europe and Asia are collapsing, with prices so low they have become virtually valueless.

The credits auctioned in the US north-east in June, for instance, sold for just US$4.53 (S$6.12) a short ton, a 40 per cent drop from December.

"Climate policy has been muddled and messy," said Professor Michael Grubb at University College London's Institute for Sustainable Resources, who has advised the UK energy regulator.

"Governments have set inadequate targets due to lobbying pressures and because they didn't think carefully enough about overlapping efforts.

"That has destroyed investor confidence that carbon prices will rise."

The idea of a carbon market originated 20 years ago with economist Richard Sandor, who also pioneered interest rate futures and derivatives at the Chicago Board of Trade.

Today, there are 38 countries, cities, states and provinces using pricing systems in an attempt to put a lid on greenhouse gases, according to the World Bank.

The problem is that the permits are selling at a slower and slower rate.

The surplus of allowances is becoming so large in systems run by Europe, California and Quebec - which together account for more than 90 per cent of global trading - that by 2022 it could cover the emissions spewing from every car on Earth for a full year, according to estimates by the London environmental group Sandbag Climate Campaign CIC and Bloom- berg New Energy Finance.

In California's market, all 23 million allowances were sold in an auction in 2014. In May, 7.3 million permits found buyers, only 11 per cent of what was put up for sale.

The markets are crumbling just as Britain's vote to leave the European Union throws into question the future of the world's largest market by threatening to shrink demand.

Nor does the collapse bode well for China, as the world's top greenhouse gas emitter prepares to start its own next year.

BLOOMBERG