The development of carbon markets – and what they have become

This article is written by Birte Kurbjeweit.

The if and how of carbon markets is a heavily discussed issue in climate politics. Supporters of carbon markets argue that emissions trading systems are the most liberal and economic form of carbon reduction while strengthening the economy. Opponents on the other hand refer to the rather inefficient carbon markets set up by the Kyoto Protocol and the EU’s Emission Trading System (ETS), where the emission limits were set too high and carbon prices too low to incite green development. Additionally, through carbon offset programs polluters have been given the opportunity to make money in carbon markets.

What are carbon markets?

In general, there are two common methods to carbon pricing: a carbon tax and carbon permit trading. In the first case, a tax of a certain amount is levied on each tonne of CO2 equivalent (tCO2e) released. ‘CO2 equivalent’ is a general term for describing the level of damage that any greenhouse gas, e.g. methane and nitrous oxide, can do compared to CO2. The tax is therefore a very simple economic measure: the more one pollutes, the more one pays. The second most common form are emission permits that are used in carbon markets. In this case, a certain amount of emission permits is issued in a carbon market, representing the total amount of greenhouse gases that can be released into the atmosphere. The permits are then allocated among the market actors. If a market actor needs more permits because he pollutes more, he can purchase permits from another actor, who pollutes less than expected. The price of carbon is thus determined by supply and demand.

The historic development of carbon markets

The history of carbon markets began in 1920, when the British economist Arthur Pigou introduced the Pigouvian tax. The tax proposed to levy charges on all negative externalities – social and environmental – that arise from market activities. The Pigouvian tax remained the only economic measure for policy makers to control pollution until the 1960s, when Ronald Coase proposed a new form of intervention: tradable permits. He argued that once the property rights of each party are established, i.e. the permits allocated, “it can be left to market transactions to bring an optimum utilization of rights“[1].

The first time this theory was put into practice was in the 1970s in the after the Clean Air Act was adopted. The newly formed Environmental Protection Agency (EPA) tried several approaches to meet new air standards for the industry, and finally emissions trading was included in the Clean Air Act in 1977. During the 1970s and ‘80s, several international agreements addressing greenhouse gas emissions, both voluntary and binding, were signed. However, the next crucial step to combat internationally global warming was the 1992 UN Earth Summit in Rio de Janeiro, which resulted in the creation of the Framework Convention on Climate Change (UNFCCC) but did not include any mandatory targets. After this event with rather loose results, the launch of the US Acid Rain Program came at a pivotal time. The program aimed at reducing sulfur dioxide (SO2) and nitrogen oxides (NOx) emissions through gradually decreasing, tradable emissions permits. The program was a huge success and two years later, in 1997, the Kyoto Protocol was adopted.

The Kyoto Protocol

The Kyoto Protocol committed its Parties by setting internationally binding emission reduction targets. The idea was, under the principle of « common but differentiated responsibilities », to place a heavier burden on developed than developing countries with regards to national carbon limits. It was mostly the USA who then, euphoric about the Acid Rain Program, pushed for a global emissions trading market instead of strong national emission limits. Ironically, when the agreement was finally ratified in 2005, it was a European program, the ETS, that became the largest carbon market, while the USA had withdrawn from the agreement in 2001. After this perceived failure of the Kyoto Protocol, various independent carbon markets were established globally. According to the World Bank, in 2014, there were 39 national and 23 sub-national carbon markets. Due to the huge variability and the differences of carbon taxes and carbon permits, the formation of one global carbon market, that might globally reduce emissions, is extremely difficult and not more likely today than twenty years ago, when the Kyoto Protocol was adopted.

The profitable business of polluting

Besides the problems of many independent and unequal carbon markets and the allocation of too many carbon permits, carbon offset programs are a hugely contested issue. The initial idea behind this initiative is that polluters could acquire additional carbon credits not by reducing their own pollution but by contributing to a project that saves carbon. For example, they could invest in renewable energy or reforestation projects. The critical point hereby is to reduce future emissions but also serve the local communities, especially because these projects often take place in developing countries. However, some windy governments have for example allowed the industry to purchase and “save” a forest, whereby driving indigenous people out of their traditional foraging grounds. But even if there is no foul play behind carbon offset projects, polluters only save as much carbon with those projects as they pollute elsewhere, leading to a net zero saved emissions.

_MG_1414About the author: Birte Kurbjeweit is currently a master student of International Development at Sciences Po in Paris with a focus on climate politics. Before moving to France, she did a Bachelor degree in European Studies at the University of Southern Denmark in Sonderborg, Denmark. Having always been fascinated by foreign places and cultures, Birte wants to work to preserve the richness of what our Earth has to offer and enable at the same time other people the possibility to enjoy the same.

 

References
[1] Calel, Raphael. (2013) p. 108
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