Between Twilight and Renaissance: Changing Prospects for the Carbon Market

While several established carbon markets are experiencing a crisis of confidence, a remarkable transition towards carbon trading is currently underway in the developing world. Given the multiple benefits ascribed to market-based instruments for greenhouse gas abatement, the rise of carbon markets in important emerging economies should come as no surprise: no other policy option promises certainty of environmental outcome while lowering the cost of its achievement, and developing countries with rapidly growing economies are no less sensitive to the impacts of carbon constraints than their developed counterparts. But it would be premature to assume a carbon market renaissance: as the experience in industrialized countries has shown, quantity rationing with tradable emission units places considerable demands on the implementing jurisdiction, requiring technical capacity and political will in order to succeed. Although the rise of carbon trading in developing countries affirms the continued relevance of this policy instrument, it also highlights the importance of policy learning and clarity about objectives if earlier missteps are to be avoided. Providing the introductory background for a special issue of the Carbon & Climate Law Review (CCLR) on carbon markets in the developing world, this article canvasses recent developments and central trends in carbon trading, suggesting tentative priorities for developing countries engaged in the pursuit of domestic markets.

Hardly a month passes without the publication of a major study reminding us that our global energy system remains on an unsustainable course, atmospheric greenhouse gas concentrations continue to rise, and investment in alternative technologies remains inadequate to avoid dangerous anthropogenic climate change. Few policies are able to simultaneously address all three dimensions of the climate challenge, and carbon markets are usually listed among them. For one, they introduce a price on greenhouse gas emissions, often described as the logical foundation of any concerted effort to address climate change. Pricing carbon helps channel private investment into sustainable technology and innovation while offering the flexibility for abatement to occur where it is least costly. Given the scope of the required transformation, economic impacts are always a vital consideration, not least during periods of slow economic growth. A price on carbon can also serve to raise public revenue, a benefit that holds particular appeal to government authorities struggling with strained budgets.
But unlike fiscal instruments, which also may be used to deliver a price signal for greenhouse gas emissions, carbon markets promise certainty of environmental outcome. And that is critical when the objective is to uphold an absolute limit on greenhouse gas concentrations in the atmosphere. Less frequently mentioned are other features of carbon trading that can render it politically more appealing than a carbon tax, such as a greater diversity of options afforded to system administrators when allocating the burden and timing of mitigation efforts, improved opportunities for international cooperation through harmonization and linkage, and a politically less controversial discussion by leaving price discovery to market forces. Unsurprisingly, emitting entities regularly prefer market solutions to a carbon price determined by government fiat: while all emitters covered by a carbon tax will face a payment obligation, some participants in carbon markets stand to enjoy a net benefit if they can abate emissions below their market price, promoting the emergence of supportive constituencies. By becoming owners of a new asset with market value, participants become invested in the carbon market, inciting creativity and action rather than passive reaction. And finally, carbon markets also mobilize a group of new stakeholders, namely the providers of financial and other relevant services who facilitate market operation and who tend to become supporters in their own right.

Copyright: © Lexxion Verlagsgesellschaft mbH
Quelle: Issue 4/2012 (Dezember 2012)
Seiten: 14
Preis inkl. MwSt.: € 41,65
Autor: Michael Mehling

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