The Return of Carbon Markets

Diverse, dynamic and decentralized carbon markets allocate resources more efficiently than bureaucrats. But they only work if they can send a clear and consistent price signal. Right now, that signal is missing from the commercial activity causing carbon pollution, thus rewarding waste yet discouraging innovation.

Carbon and other greenhouse gas emissions concentrate in the atmosphere, with costly and lethal results. As the planet warms, climate change escalates: floods in the Americas, droughts in Europe, sea-level rise in Bangladesh and desertification in Africa.

Yet if robust economic transactions got us into this mess, perhaps they can also bail us out.

Governments could simply tax carbon, and redistribute collected revenues equally among citizens. Or, if a tax is too toxic, states and industries may construct carbon markets in which polluters agree to a cap below current use, and have flexibility to earn and trade credits to those who go over. Some nations, like Canada, foster both.

These markets have gained traction at many scales, taking shape within provinces, cities, industries or even a single company. Some are old; others are newborn. Each yields lessons. For example, it is better to auction carbon pollution permits than to give them away. Also, a thicker, more inclusive market is better than a thin, narrowly targeted one. Finally, stable prices are better than volatile ones.

Optimal efficiencies would one day come through one global carbon market exchange, yielding a single planetary carbon price signal, much as there is for oil, coffee and corn. That vision moved a step closer after the recent agreement in Paris at the Conference of Parties to the United Nations Framework Convention on Climate Change. By setting a global cap, the COP21 fuelled political momentum, as ratified by 125 of 197 parties, and raised an economic question about whether multiple markets may converge one day soon.

Right now, carbon prices are all over the place. In some places, a ton of carbon pollution is valued at $1; in others, it has reached $133. But are those price signals too high, crushing economic growth, or too low, failing to move the needle? When asked, CEOs largely split the difference, arguing for $40 by 2020 and $50 by 2030.

Public opposition to carbon markets or even taxes on carbon pollution has softened. Families want their children to grow up to be productive members of a strong economy, but they also want to be able to inhabit liveable towns and cities. They want freedom and flexibility to reward green growth, investing in outcomes that are modern, clean, smart and resilient.

Innovative technology is there, whether for electric cars and appliances, low-carbon cement fabrication or zero-emissions urban buildings, which have been the source of 40% of emissions. But there needs to be a long-term incentive to scale these up, and speed adoption.

Carbon markets would do just that, but there’s no time to lose.

In Marrakesh, at the recent UNFCC COP22, a Canadian Inuit told the tale of fellow hunters drowning due to ice that melts sooner and faster, and that is thinner and stranger than traditional knowledge could anticipate. Then, a former resident of a small island state in the Pacific Ocean described how his people had to relocate as seas overwhelmed their shoreline. The two embraced upon realizing that melted ice from one vanishing homeland is linked to the submergence of the other.

As their tales of despair merged into a global story, the countervailing pressure was building: that isolated carbon markets might also soon converge to yield one powerful global price signal of hope.