Can you trade pollution?

October 19, 2023
8:34 am

Can you trade pollution?

Chrysoula Pythoula is writting…

It’s common knowledge that whenever there are needs, there are also markets. And wherever there are markets, there is profit. This is also the case with carbon markets. As most goods, pollution can be tradable. But how can you “trade” pollution, or in this case carbon dioxide? Is it considered ethical to trade such thing, known for its massive consequences in the environment? Has the open market gone too far? We will try to give an answer to all of these questions by examining all aspects of this system.

First and foremost: What are carbon markets?

“Carbon markets are trading systems in which carbon credits are sold and bought. Companies or individuals can use carbon markets to compensate for their greenhouse gas emissions by purchasing carbon credits from entities that remove or reduce greenhouse gas emissions.” (What are carbon markets and why are they important?). Simply put, a carbon market is a market in which someone can buy a carbon credit in order to be able to pollute up to a certain amount of CO2. One tradable carbon credit is commensurate with one ton of CO2 or an equivalent amount of any other greenhouse gas emission. It’s also worth mentioning that carbon markets are generally categorized in compliance markets that are created by the interference of a national/ international policy or regulatory procedure, and voluntary carbon markets that mainly concern private entities.

Although its name can be deceiving, carbon markets were created in order to combat climate change. Climate change has been advancing at an unprecedented rate and scale, and not in a way that someone would hope for. The month of April 2023 was for many countries one of the hottest, comparing it with the same month, according to National Oceanic and Atmospheric Administration’s 174-year data. 28 countries experienced their warmest year while the Arctic Sea ice has been diminished to its fifth-lowest maximum. Carbon markets were a mechanism constructed as an answer to battle these challenges.

The idea behind it is that the less you pollute, the less you pay. This is working as a financial incentive for the mitigation of carbon emissions that one produces. Entities have to buy carbon credits from auctions, whose price is determined by the forces of demand and supply. Despite that, some permits are distributed for free, especially in sectors at risk of having companies relocate their production in other parts of the world with laxer emission regulations. EU ETS (Emissions Trading System) has been the first, and so far, the largest trading system established. From 2005 to 2015, emissions from sectors covered by the EU ETS decreased 24%. In 2015, the average CO2 emissions from power plants regulated by the Regional Greenhouse Gas Initiative (RGGI) were more than 45% lower than in 2005, with a substantial decline in the period after RGGI was introduced (2009-2012) – a trend not reflected in other U.S. states.

Considering the economy, by the end of 2017, ETS jurisdictions had raised around USD 37 billion from auctioning emission permits. This revenue is used for various purposes, including supporting climate action, and compensating low-income households. However, other data point out the inequalities that this system perpetuates and the effects it has on economic activity. A carbon policy shock, setting a stricter framework in the carbon pricing system, instigates a robust, immediate increase in energy prices and a persistent fall in overall Green House Gas emissions. Therefore, carbon pricing proves to be successful in achieving its goal of reducing emissions. Despite this, consumer prices rise significantly and economic activity falls, which then affects production and unemployment rates. Crucially, the fall in activity appears to be less persistent than the fall in emissions – improving the emissions intensity in the longer term. At the same time, carbon pricing creates motivation for green innovation, causing a significant uptick in low-carbon patenting.

But what about developing countries? Carbon markets can help developing countries to implement their NDCs (Nationally Determined Contributions), which are countries’ long-term goals to battle climate change, under the Paris Agreement. Carbon markets help mobilize resources and reduce costs, so that countries and companies transition into a low-carbon reality in a smoother way. Industrialized/developed countries can provide developing countries with considerable capital flows via emissions trading, therefore stimulating their economic growth. However, emissions trading should in no way be perceived as an exclusive policy instrument. Other policies and economic measures such as taxes or charges, are a key element for environmental protection. All the aforementioned should be established in conjunction with robust carbon rules that promote environmental integrity.

Despite all the positive outcomes that emissions trading might have, criticism on the subject could not be missing. Adversaries of this system argue that emissions trading entails the ownership of a type of good, which while it is possible to own, should not be owned. The natural world, such as atmosphere for example, should not be treated as people’s private property. Nonetheless, a counterargument is that carbon markets involve a right to use up some natural resource, but a “use right” is different from a ‘property right”. Another argument that renders emissions trading objectionable, is that certain responsibilities are inappropriate to be alienated. In an international context this means that each state must commit to its burden, and that high-emitting countries should not pay others to discharge their responsibility of not polluting the environment.

To conclude, carbon markets are an operating system for the protection of the environment which is surrounded by heating and opposite opinions. It is undoubtedly an effective way of removing Greenhouse Gas Emissions from the atmosphere, while simultaneously it can have side effects in some parts of the economy. The only certain thing is that Climate Change is advancing and not only does it create immense problems to humankind, but also a great deal of pressure on world leaders to find ways to combat it. And one of these ways, ethical or not, are carbon markets.

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