Carbon markets go global
ctree marketsFor a few years, it has finally become one of the most widely used tools in the fight against climate change. By the end of 2021, more than 21% of the world’s emissions will be covered by some form of carbon pricing, up from 15% in 2020. More companies need to pay regulators the right to release a ton of carbon dioxide into the atmosphere. Investors became interested, too: trading in these markets grew by 164 percent last year, to 760 billion euros ($897 billion).
This is undoubtedly great news. Carbon prices ensure companies that burn more fossil fuels are at a competitive disadvantage while green innovation is rewarded. In the meantime, the proceeds from the sale of carbon permits can be reinvested in renewable energy or other benign projects that governments see fit.
The problem is that very few markets are working as intended. Among the 64 carbon taxes and emissions trading systems (etss) which in 2021, only a small minority, covering 3.8% of emissions, has priced gas at more than $40 per ton, which the Carbon Price Leadership Alliance, a group of companies and governments, estimates as the minimum social cost of carbon (a Measuring damage to global welfare through increased emissions). And that might actually be very generous: some economists have put it at more than $200. Many carbon markets are too cheap to make a difference.
Most of the schemes work on the principle of “maximum and trade”. Regulators set the total level of annual emissions allowed – the maximum – and the auctioning of these allowances for companies included in the scheme. The companies can then exchange the provisions among themselves, which puts a price on the carbon dioxide. Some etsIt also allows financial companies, such as hedge funds, to trade, for profit only, on their own account.
The best markets put a high price on carbon thanks to a low cap that decreases over time, providing a strong incentive to switch to the environment. They also cover a wide range of economic activities, allowing dealers to trade-off between burning gasoline in cars, coal in blast furnaces, or natural gas in power plants. The broad scope ensures that commercial systems find the cheapest way to reduce emissions, lowering the overall cost to society of combating climate change.
However, many schemes fall short on both counts. The reason is clear: good workflow ets It requires political courage. Like taxes, carbon markets transfer resources from the private sector to the state, to the chagrin of those representing a small government. Higher carbon prices can also help drive up consumer prices, angering voters, while hurting the margins of companies that donate to political parties. Dallas Portrau, who chairs the independent commission that oversees the California trade scheme, says the extent of the carbon markets’ ambition is an “expression of political will.” Often this will is missing.
At times, shifting political winds have dealt a fatal blow to nascent carbon markets. Australia, for example, ditched its own scheme in 2014 after the liberal centre-right party made abolishing a “carbon tax” a campaign item.
Oftentimes, political protests prompt governments to do everything they can to keep prices low (see chart). On May 18, the European Commission, under pressure from member states concerned about rising energy prices, said it would sell an additional 200 million permits (there are currently 1.45 billion in circulation). carbon prices on European Union The scheme, the second largest project in the world, immediately dropped from €90 ($97) a ton to around €80. Permits flooded other schemes from the start. China ets, launched last year, is the largest in the world. But with the price approaching 60 yuan ($9), it does little to reduce emissions, says Yan Chen of Refinitiv, a data company.
The second problem is that sectors of the economy are often excluded. Manufacturers argue that including them in a strong portfolio ets It gives an unfair advantage to exporters from countries with low carbon prices, and for this reason European Union Others offer local heroes a certain amount of passes for free. Although the goal is to prevent “carbon leakage,” as steel companies, for example, move from areas with strict emission rules to those with relaxed standards, such concessions make schemes less effective.
Consumers are also often shielded from rising carbon prices. Transportation and premises, as high costs will be passed on to voters directly, are excluded from European Uniona plan. Others work better: the Californian system, which is more comprehensive than the largest etss, covering 80% of the state’s emissions. The proceeds from sales of carbon permits are used in part to support the purchase of electric vehicles.
Other markets are more limited in scope. Regional Greenhouse Gas Initiativerggi), supported by 11 states in the Northeast America, covering power generation only. The same applies to the Chinese national system (given the size of the Chinese economy, it still covers 7.4% of global emissions).
Sometimes the way emissions are calculated is the problem. China does not place a cap on the total amount of emissions, which can still rise along with demand for electricity, but on the carbon intensity of power generation. that it ets spoiled by poor data collection.
Making carbon markets work better is more of a political challenge than an economic one. Neither reducing aggregate emissions caps nor covering more sectors requires a deep rethink of carbon market designs. The difficulty lies, instead, in building and maintaining support for measures that make most economic activities more expensive. The same goes for other climate-friendly measures, Oxford University’s Ben Caldecott notes: Britain has long failed to raise taxes on gasoline in line with inflation, costing the government billions.
Cheerfully, though, the momentum around carbon markets appears to be self-sustaining. The European Union It studies what it calls a “carbon boundary adjustment mechanism” that will pay importers into the block the difference between the relevant foreign carbon price and European Union‘s. Not only will this remove the justification of free allowances for manufacturers within Europe; It will also encourage countries wishing to export to the bloc to bring their carbon prices closer to European Union‘s.
Create larger markets by connecting two or more etsThey can also help seal carbon leaks. This, of course, is justified on scientific grounds: a ton of carbon is as harmful in one country as it is in any other. It also makes carbon markets more liquid, which helps create healthier prices. Accordingly, regional patchwork appeared. California ets It has been associated with Quebec since 2014. Switzerland ets merged with European UnionIn 2020. Pennsylvania will become the 12th state to join rggi in July. Although Britain chose a separate administration ets after leaving European UnionReturning to the regional scheme should be fairly painless.
As more of the global economy is covered by etsTaxes on carbon and carbon limits are gaining preference, and it will be the backward rather than early adopters who risk becoming uncompetitive. This threat appears to be working. After resisting for years, Japan is preparing to try the national carbon market in September. Some US lawmakers are also beginning to look again at carbon pricing, just because their country tends to be greener than many of its trading partners, and carbon border taxes can be a useful excuse for protectionist measures. The key to building support for decarbonization, says Bertraud, is “creating winners.” In a country that bashing China tends to be more popular than protecting the environment, it wouldn’t hurt the case if the points could be scored at the expense of a staunch competitor. ■
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