Carbon markets: Effective policy?

By Danny Cullenward, Michael Wara

Originally published in the June 2014 issue of Science Magazine. In their policy forum “Carbon market lessons and global policy outlook” (21 March, p. 1316), R. G. Newell and his colleagues present an optimistic—but ultimately misleading—picture of existing carbon markets. Citing the expanded use of carbon markets, Newell et al. use economic theory to calculate the extent to which these policies are reducing net greenhouse gas emissions. In our view, it would be more realistic to look at how carbon markets are performing in practice, not theory. This distinction matters because actual markets are not producing the net emissions reductions for which they were designed.

One key problem is leakage, which refers to emissions that leave a jurisdiction because of the carbon price. Newell et al. claim that leakage has been small, but fail to address problems specific to subnational policies. Both the Regional Greenhouse Gas Initiative (RGGI) (1) and the California market (23) allow companies to swap emissions-intensive power contracts with neighbors in linked electricity markets not subject to carbon limits. Inadequate information precludes any conclusion on the Chinese pilot markets at this time; however, just as in RGGI and California, China’s grids are larger than its carbon markets.

The authors also gloss over the European Union’s problematic experience with international carbon offsets. Many of these offsets came from refrigerant factories that artificially generated extra emissions in order to destroy them for credit; their use in the EU Emissions Trading System has been substantial and came at the expense of actual emissions reductions (4).

Newell et al. close with a research agenda focused on the growth and consolidation of carbon markets. A more realistic research agenda would ask: Are existing carbon markets reducing net emissions as intended? If not, what policy reforms are required; and how effectively will these instruments, if left unaltered, scale to larger regions and stricter emissions targets?

 

References

  1. I. Sue WingM. KolodziejThe Regional Greenhouse Gas Initiative: Emission leakage and the effectiveness of interstate border adjustments (Harvard Kennedy School Working Paper RPP-2008-03,2008)
  2. Y. Chen, Energy Econ. 31667 (2009).
  3.  D. Cullenward, D. Weiskopf, Resource shuffling and the California carbon market (Stanford Law School ENRLP Working Paper, 2013).
  4. M. WaraUCLA Law Rev. 551759 (2008).