Figure 1: Comical Cartoon about Emissions trading (Staton, 2014)
It is well known that greenhouse gases (GHGs) are a leading factor in climate change and that our ever-increasing need to consume is to blame. So what are countries doing to cut their emissions? Something that caught my eye is the idea of emissions trading (ET), where carbon is turned into a commodity to be traded, literally selling permits to pollute.
Climate change being tackled economically, can it work? As Nicholas Stern said, ‘’climate change is the greatest market failure the world has ever seen’’. Incentivising to approach emissions with almost a neoliberal ideology in mind, where only the right amount is polluted for societal needs.
ET is one of the three market-based approaches introduced by the Kyoto Protocol. ET functions by setting an amount that can be polluted, and if it’s exceeded, a fine is presented. Polluters that pollute less can sell their excess allowances to those that pollute over the limit. Over time, the quota of pollution decreases and so does the number of allowances, creating an impulse to find new ways to pollute less.
Figure 2: Innovation increase in companies after the implementation of the European Emissions Trading System (EU ETS) (Martin et al, 2016)
ET is said to be a beneficial policy tool because of its flexibility and incentive to innovate. After the implementation of the EU ETS (the world’s first international emissions trading scheme), low carbon innovation activities rose drastically. The EU ETS covers on average 45% of the EU’s GHG emissions, and is expected to lower emissions by 43% less than 2005 levels, by 2030. This unlike other policy instruments, allows polluters full control and creativity over how to reduce their emissions, that can be tailored to their individual needs.
However, ET sits very much on an idealised setting where pollution can be expressed in a monetary way. It can be argued that emissions trading is ‘’owning something that should not be owned’’, that humans should not be able to view or treat nature as their own property. Similarly, it is argued that it’s not possible to give a value to the natural world.
Still, GHG emissions have to start decreasing and as much as the government plays a key role, it’s too difficult to know the most efficient way to reduce GHGs for every firm. ET over other interventions provides each firm with the power to decide, which leads to more efficient changes.
Overall, putting a price on emissions does sound absurd to me, it seems like a way to delay what actually has to be done such as divesting away from fossil fuels. However, with the need to reduce emissions, economic mechanisms might be the best way for stakeholders to impose strict rules, and as some say, does not directly have anything to do with the value of the emission, but more with the end goal.
It will be interesting to see what will happen with the next phase of the EU ETS.
What do you think about ET? Should economic mechanisms be a principle tactic in fighting climate change?
Thanks for reading!
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