Solving the carbon crisis will require more than financial engineering - World News Report

Solving the carbon crisis will require more than financial engineering – World News Report

What are carbon markets? Regulators are asking more and more companies to start paying for the damage caused by their carbon pollution.

CONDON, OREGON, UNITED STATES OF AMERICA, September 14, 2022 / — Carbon emissions are an established threat to the health, safety and economic viability of people worldwide. 68 percent of all greenhouse gas emissions are associated with carbon-rich fossil fuels. Because gaseous emissions transcend political or even geographic boundaries and move freely into the atmosphere, where they exacerbate the constant threat of runaway greenhouse effects and associated climate volatility, this issue requires broad cooperation.

In economics, there is a concept that is directly related to this issue, called the externality. Also called external costs, externalities are consequences that are borne not by the person or group responsible for them, but by uninvolved third parties. Pollution is one of the most common and harmful external factors.

Consider a transportation company: they have to pay for their fleet, drivers, and the fuel they need, but they are usually not required to pay anything to compensate for the damage that their vehicle emissions cause to local communities, or to take responsibility for their contribution to the common cause. anthropogenic climate change. These costs and negative consequences are passed on to others.

When outside factors are out of control, they represent moral hazard, a situation where there is no incentive to do the right thing because the consequences are so disconnected from the main actors and therefore provide no real deterrent. In such a case, not only is there no reason to avoid externalities, but taking advantage of them can be seen as a cost-saving trick.

The carbon atom that broke the camel’s back
Moreover, such situations inevitably lead to a problem, especially relevant for ecological systems, called the tragedy of the commons. Shared resources refers to resources and lands that are shared by large groups. British economist William Forster Lloyd first coined the phrase in the 19th century to describe the problem where many people, acting independently, inadvertently destroy a common resource because everyone thinks their little actions are harmless. In fact, individual actions may be relatively harmless, but collectively they can cause havoc.

For example, if even one person regularly dumps polluting waste into a river, over time it is likely to be diluted to a safe level. But if everyone in the community follows suit, the river will eventually become poisoned, destroying its usefulness.

The nature of the free market is such that every participant is considered rational. Not rational in the sense that psychologists would define it, but means that, other things being equal, it is taken for granted that they will make decisions that are closely related to their own interests. So given that externalities save businesses money, they are unlikely to worry about them unless they have to—and that is what drives carbon taxes and carbon markets.

Make the polluters finally pay their fair share
Carbon taxes are fees levied by regulators on the hidden costs of carbon emissions. The aim is to make the use of polluting technologies more expensive so that companies look for alternatives and innovation is accelerated in sustainable solutions.

The main disadvantage of simple carbon taxes is that they do not match real market conditions very well and the process of updating them can be slow to accurately reflect the current cost-benefit ratio between pollution and profitability. To correct this imbalance, countries and groups of geopolitical partners around the planet have introduced a different structure called emissions trading.

Emissions trading, also referred to as cap-and-trade or carbon pricing, refers to the creation of a carbon market (or carbon market in short). There are many such markets and they work according to different principles. Some are more aggressive in their aims than others, but in general they all reduce the competitiveness of fossil fuels against renewables by placing an upper limit on the total emissions of all parties bound by the agreement. Consequently, the price of pollution naturally fluctuates with actual market activity; when emissions rise, so does the price of offsetting the released carbon.

On a practical level, the process works like this: if a company exceeds its carbon footprint, it is obligated to purchase offsets from another company that has not fully used up its own. Thus, the group’s total emissions remain within the limit, the polluting company is penalized for exceeding its individual limit, and the non-polluting company is rewarded.

This system encourages companies to look for cost-effective carbon reduction strategies. In some trading schemes, the regulator allocates emissions allowances free of charge, in others they are auctioned off to the highest bidder, but in either case, once established, natural market forces will dynamically raise or lower the price. Recent models attempting to determine the social cost of carbon estimate that each ton of CO2 emitted results in $3,000 in damage.

Solving the carbon crisis will require more than financial engineering
Despite their benefits, carbon markets are far from a panacea and cannot tackle the carbon crisis facing our planet alone. Most existing frameworks cover only certain types of emissions. For example, the European Union’s carbon market is geared primarily towards heavy industry, meaning that smaller sectors of its economy may continue to pollute the environment.

There is currently no nationwide emissions trading system in the United States. However, several states, notably California and Washington, have adopted their own restrictions and trade programs. There is also a joint carbon market called the Regional Greenhouse Gas Initiative (RGGI) that several New England states have joined.

Carbon trading is also subject to manipulation. In one troubling example, companies in China were caught deliberately producing unnecessary greenhouse gases for the sole purpose of destroying them in order to obtain UN carbon credits. These permits were then sold to polluters in the US, effectively rewarding the polluters. Fortunately, international regulators are actively prosecuting rule breakers.

Regardless, carbon markets are just another tool in the fight to restore our planet’s ecosystems. Read more

Fred Parent
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