Um…. isn’t this how incentives work?

Fiona Harvey, the Financial Times' environment correspondent, reports that environmentalists are irked about the way carbon emissions trading is working out: Factories in China and carbon traders are exploiting a loophole in climate change regulations that allows them to make big profits from greenhouse gas emissions trading. Chemical plants that reduce the amount of polluting HFC gases they release into the atmosphere receive ?carbon credits? in return. Such credits can fetch $5 to $15 on the international carbon market. The equipment, known as ?scrubbers?, to reduce HFC gases is cheap to install, at $10m-$30m (?5m-?15m) for a typical factory, according to industry estimates. Installing such equipment can generate millions of carbon credits, because HFC-23 is a greenhouse gas many times more potent than carbon dioxide. Mark Woodall is chief executive of Climate Change Capital, which has a portfolio of about 50m certified emission reductions, or carbon credits,worth up to $750m, derived from Chinese HFC projects. He said: ?They were deals that could be done relatively quickly and did not need a large amount of capital. These projects have a good track record of delivering the credits because of the low methodology and low technology risk.? The practice is perfectly legal but effectively allows the factories and the companies through which they trade carbon credits to make big profits. The eventual buyers of the credits are governments in developed countries that have agreed to cut their greenhouse gas output under the Kyoto protocol.... But some carbon specialists are uneasy that the use of credits generated by HFC reductions is distorting the market. Tristan Fischer, chief executive of Camco International,a carbon trader, told the Financial Times: ?HFCs are controversial.? He said regulations to force factories to fund HFC reduction from profits might work better than allowing them to benefit from the carbon markets, or ?perhaps the World Bank should fund the installation of scrubbers?. About 60 per cent of ?certified emissions reductions? issued under the Kyoto protocol are estimated to be from HFC reduction projects, although the gas makes up a small fraction of industrial greenhouse gas emissions. Mitchell Feierstein, head of emissions products at Cheyne Capital Management UK, the fund management company, said: ?Carbon dioxide and methane clearly represent the majority of the problem. We believe a proportional amount of investment should be focused on technologies...to curb emissions.? Now this is a story that the Wall Street Journal and the New York Times have also carried this story, and each time I read it I'm confused. Reading the articles, I get that CO2 and methane are the big contributors to global warming in the aggregate -- but I also get that per unit of emission, HFC is far, far worse, and far cheaper to correct. Doesn't it make sense that a market mechanism would focus on the low-hanging, cheapest fruit first? The implication in these articles is that the carbon market is not working to reduce greenhouse gases, but from what I'm reading, it's working pretty well (though Chinese firms are reaping a large windfall). Greg Mankiw or someone else in the Pigou Club needs to explain all the hubbub to me. I understand if environmentalists want to increase incentives to cut greenhouse gas emissions even further; I don't understand why they think the current focus on HFC emission should be dealt with through direct regulation instead of the current set of arrangements. It should benoted that there are other ways that the carbon trading scheme is imperfect. The focus on HFC can, perversely, undercut the Montreal Protocol's efforts to reduce CFC emissions (click here for more on that). The primary thrust of these articles, however, is that the market is not working -- and I don't see that.