OPINION: Let Investors Make Money Cutting Emissions; It’s the ONLY Way to Save the Climate (1)

By Mathew Carr

Nov. 25-28, 2020 — LONDON: For Adam Smith, the Scottish-born father of economics, a regulatory framework was necessary to steer humans toward productive pursuits that benefit society.

He’d be turning in his grave if he noticed the United Kingdom, the country that led the industrial revolution, is still now in 2020 considering taxing carbon emissions instead of allowing people to make money cutting them in a free market.

Britain might be considering a post-Brexit carbon tax instead of an emissions-trading market, but I doubt it.

The U.K.’s threat to walk away from carbon markets may simply be a negotiation stance that’s part and parcel of Brexit negotiations. See this:

One person who’s not given up on the notion that Britain may actually remain in the European Union’s carbon market after the end of the Brexit transition next month is Ken Schneider, president of Grey Epoch LLC, an environmental markets options outfit near Chicago.

“If we find that out by the end of the year or early next year, then that will be a very bullish catalyst, because it will remove a giant question mark from the system,” Schneider said Wednesday by phone.

Providing EU carbon traders with certainty on Brexit will boost prices because an uplift from the end of the coronavirus pandemic is already factored into market levels, he said. Should the U.K. opt to create its own emissions market or set a carbon tax, that wouldn’t be so bullish for EU carbon prices, he said.

The EU carbon market has allowed it to cut emissions much faster than its peers. The bloc is set to easily exceed its 2020 emissions reduction target of 20% below 1990 levels.

It’s effectively blown away its rivals. See this energy-emissions chart:

Carbon markets are intended to turn the right to pollute into a commodity, creating an incentive to cut emissions and spur investment in clean technology. 

With a well-regulated trading system, those who successfully cut emissions will be rewarded because they can then sell spare allowances for profit.

Carbon trading also makes taking on ambitious, science-based targets less risky, because a country like Britain will have more options open to it as it complies with its voluntary limits under the Paris climate deal.

Investors who risked real money to cut heat-trapping gas since the world agreed to tackle climate change in the 1990s probably won’t be punished, as nations agree the transition from the Kyoto Protocol to the Paris climate deal struck in 2015, according to a climate envoy close to a giant emerging nation.

Competition will probably underpin Paris’s global climate framework, or it simply won’t work to contain emissions fast enough. For Smith, competition was the “desire that comes with us from the womb, and never leaves us, until we go into the grave.”

That desire, let’s say well-regulated greed, will need to be tapped to save the climate.

There’s only space for about 400 billion tons of carbon-dioxide equivalent left in the atmosphere if the world truly wants keep temperatures from rising 1.5C. That’s seen as an acute problem. And it is — it’s less than 10 years of global emissions at current rates.

With Joe Biden set to take the U.S. presidency, and China on board, the world now has a chance to turn the problem into an opportunity. That ball is already beginning to roll.

The fact that Biden’s nominated climate envoy is saying Paris is incomplete is a big deal. The U.S. is most responsible for climate change based on historic emissions, and many big investors and poorer nations are angry that Donald Trump wound back measures to fix the problem.

If anyone’s in the frame for admonishment, it is the countries including the U.S. who caused most of the problem, promised to demand Kyoto credits, then never did.

Paris, as it stands, is simply not good enough, as Biden’s new team admits. Five years after being struck it’s still got few teeth — it’s merely a skeleton framework and a voluntary one at that. It needs rules to govern the transition from the Kyoto era and detailed standards to cover accounting and trading in new Paris carbon allowances.

Using Smith’s best thinking and 2020 cleanteach, policymakers around the world can now add to the call for carbon markets to help limit fossil-fuel pollution with carrots, not sticks.

It makes no sense to subsidize fossil fuels because that’s effectively a negative carbon price. It’s almost as silly to give the right to pollute away for free when revenue from selling carbon allowances would otherwise provide sorely needed cash to mend strained post-pandemic government budgets.

The call for putting a price on carbon is the loudest it’s ever been.

Countries from South Korea to Brazil, Kazakhstan and New Zealand have advocated for pollution-curbing systems inspired by market economics rather than taxes and subsidies.

About half the world’s nations were discussing use of markets. even before the Paris agreement was struck.

Intended Nationally Determined Contributions to climate talks
Nations’ emission pledges to UN climate talks before the Paris climate talks. Countries are meant to become more ambitious by the end of next month, setting targets that could boost demand for carbon allowances. Source: IETA

About 20% of the world’s emissions now face carbon pricing. With new net-zero plans by China, South Korea, Japan and perhaps the U.S., that could quickly near 75%.

Except in the EU, greenhouse-gas markets have struggled to deter fossil-fuel burning, as demand waned and prices collapsed. Still, markets are the cheapest way to provide the finance that developing nations say they need to shift away from coal, oil and natural gas.

Selling carbon allowances boosts government coffers, which can help nations like Britain retain its ability to help fund overseas development. Carbon trades themselves can boost rich-country finance to poor nations, who are less to blame for the climate crisis.

The Green Climate Fund, established as part of the United Nations climate talks, and trade policy are key tools to inspire other nations to join the new market-based measures — that’s going to require some clever politics. But money from the GCF is already spurring change.

In less than a month, nations are making a last-ditch effort to improve and recast the UN Clean Development Mechanism created under Kyoto for the Paris era starting next year. It’s unlikely to die because about 7 billion of the world’s 8 billion people want to retain it.

Along with more stringent emission accounting standards, Paris will probably create “internationally transferred mitigation outcomes” — one of Paris’s carbon trading assets — to meet climate pledges on a voluntary basis.

Hurdles to progress remain.

New UN markets under articles 6.2 and 6.4 of Paris are yet to come really alive. Five years after Paris was agreed, the Article Six carbon market rules are still not finally agreed — and probably won’t be until envoys meet in Glasgow in a year’s time. Still, some people close to the negotiations are hopeful.

If Britain and those new UN rules fail Adam Smith, they’ll fail society and all our kids, as well.

(Updated Saturday evening to add science-based targets)

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