Carbon Trading

Carbon trading is the exchange of property rights and financial instruments based on greenhouse gas emissions. Larry Lohmann has framed the problem of climate change as one of an overflowing pollution dump caused by economic growth and material consumption unrestrained by social norms or formal regulation. Consumer culture is, therefore, at the heart of the greenhouse gas problem because it is the process most readily associated with rising levels of consumption. Carbon trading is a response to the environmental problems generated by consumer culture. Broadly, within carbon trading institutions, economic actors exchange financial instruments related [Page 136]to greenhouse gas output or reductions in emissions from “business as usual.” As such, polluting activities are to some extent governed by price and competition rather than explicitly political processes or norms of restraint, precaution, care, or equity. While being widely promoted as an economically efficient means of governing climate change mitigation, carbon markets have received criticism for being unjust and ineffective.

Carbon trading has risen to prominence in international climate policy through the negotiation of the United Nations Framework Convention on Climate Change (UNFCCC). The flexibility mechanisms in the 1997 Kyoto Protocol are intended to reduce the cost of compliance with the emissions limits for industrialized economies and foster sustainable development in developing nations. The first examples of carbon transactions were voluntary undertakings in the early 1990s, between electricity generators in the United States and the Netherlands, and forestry nongovernmental organizations (NGOs) operating in South and Central America. Formal regional emissions trading schemes are currently in operation or under development in Europe, the United States, Japan, Australia, and New Zealand. In advance of state legislation, voluntary purchases of emissions reductions credits are increasingly popular in wealthy industrialized economies. Internet retailers now enable individuals to calculate personal emissions and consume an equivalent amount of carbon credits in compensation. This exposes new audiences to the problem of climate change, key sources of emissions, and to a carbon price of some sort, but arguably entrenches high-intensity practices of travel and consumption. Carbon neutrality has become a vogue consumer status conferred to products, businesses, and leisure activities by a variety of private companies operating to autonomous standards. Although the co-benefits of investment to poor communities are often promoted, ultimately carbon offsetting is market exchange, not unbridled philanthropy.

Welfare and environmental economics theorize climate change as a market failure involving a public good; economic activities can emit greenhouse gases freely without facing the costs of climate change impacts that are felt elsewhere. It is an externality caused and experienced globally. As such, there is a case for regulation to correct this distortion by assigning liability to polluters and imposing taxes or restraints to realize a socially optimal level of pollution. This approach assumes that the central regulator knows in advance what the most productive use of a resource is, in this case the access to the pollution dump, or what the marginal damage cost is. Emissions trading removes this requirement and recognizes that there are reciprocal costs not only borne by the entity suffering harm but also by the polluters who must invest in new infrastructure or curtail their activities. In theory, unrestricted, private bargaining in well-defined property rights will lead to the most economically efficient net outcome, regardless of the initial distribution of those rights and with no central intervention except for enforcement. However, Ronald Coase argued forcefully that this outcome depends on the scale of transaction costs in asserting rights and negotiating settlements. Carbon trading draws on these insights to create institutions that enable flexibility in timing and location of emission abatement and reduce transaction costs between parties.

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