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  • Companies are driven by money

  • So putting a price on carbon emissions...

  • ...should encourage businesses to stop polluting, right?

  • That's exactly what carbon markets were designed to do...

  • ...reduce emissions by charging polluters...

  • ...but so far they haven't achieved that aim

  • Here's why:

  • Towards the end of the 1980s America had a problem

  • For years, its power stations...

  • ...had been emitting large amounts of sulphur dioxide...

  • ...which was falling back to Earth as acid rain...

  • ...causing harm to plants, aquatic animals and infrastructure

  • But there was no incentive for the power plants...

  • ...to stop emitting sulphur dioxide

  • Weather warnings, an acid-rain alert is in effect

  • So in 1990 the American government launched an experiment

  • ...passing a law to force polluters...

  • ...to pay for their emissions, by establishing a new kind of market...

  • ...governed by a system calledcap-and-trade

  • Eight years later, acid-rain levels over large regions...

  • ...in eastern America had fallen by 20%

  • And a new way of cutting emissions was born

  • In 1997 the international climate-change treaty...

  • ...known as the Kyoto protocol...

  • ...suggested applying the concept of cap-and-trade to carbon

  • In the years that followed different countries and regions...

  • ...set up their own carbon markets

  • Many of these used cap and trade

  • And this is how it works

  • A government sets a cap on the amount of CO2...

  • ...that can be emitted by an industry

  • It splits the cap into permits...

  • ...and either gives or sells these permits to firms

  • If a company doesn't use up all of its allowance...

  • ...it can sell what it doesn't need

  • If it needs more permits, it can buy them from those with spares

  • Each year the cap gets stricter...

  • ...and the shrinking pool of permits gets more expensive

  • The genius of cap-and-trade systems when they're done properly...

  • ...is that they both use a stick and a carrot

  • That gives them an incentive to innovate, to get cleaner and cleaner...

  • ...it provides that carrot for innovation...

  • ...and that trading mechanism...

  • The magic of the market unleashes those animal spirits...

  • ...in favour of decarbonisation

  • While regulation can introduce a new industry standard...

  • ...it doesn't give firms an incentive to cut emissions below a certain level

  • But a carbon market creates a race in which companies...

  • ...are motivated to cut emissions as fast as they can

  • The more they cut emissions, the fewer permits they have to buy...

  • ...and the more excess they have to sell

  • So in theory in a cap-and-trade market...

  • ...carbon-dioxide emissions should fall...

  • ...but in reality, they've continued to rise

  • Because incentives work only if they're big enough

  • Carbon markets are great in theory, but in practice...

  • ...we run into a problem

  • Carbon prices have been far too low to motivate change...

  • ...that's needed to decarbonise the world economy

  • According to Joseph Stiglitz and Nicholas Stern, two economists...

  • ...in order to meet the Paris Agreement goal of limiting global warming...

  • ...to two degrees above pre-industrial levels...

  • ...the price of carbon worldwide...

  • ...needs to be between $50-100 per tonne by 2030

  • However, the majority of carbon prices still remain far below that figure

  • What's more, even if carbon is priced appropriately...

  • ...the fines for exceeding permitted levels...

  • ...are sometimes ineffectively low

  • In the EU, a fine can be as low as €100 per excess tonne

  • Considering that's not that much more than the price of a permit...

  • ...it's hardly a deterrent

  • And that's if firms even get caught

  • Now in theory, regulators enforce carbon prices and permits...

  • ...but in practice, it can be very challenging

  • There's measurement problems...

  • ...direct emissions versus indirect emissions

  • There's questions of cheating, for example...

  • ...you find in most markets around the world...

  • ...enforcement is lax and punishment is not great

  • And even if some markets adopt effective deterrents...

  • ...the ones next door may not

  • If you look globally...

  • ...you have a mind-boggling variety of rules, systems...

  • ...enforcement mechanisms

  • And so if you're a company that's based in multiple countries...

  • ...divisions of your company making the same product in the same way...

  • ...will face a mind-boggling patchwork of rules, regulations that differ

  • Worse than that, you have leakage, among these markets as well

  • The direct result of this patchwork of systems...

  • ...is known ascarbon leakage

  • A business or an industry relocates from an area...

  • ...with high environmental regulations...

  • ...to somewhere where the rules are more relaxed

  • Which means it can avoid having to pay for its carbon emissions

  • But these problems have solutions

  • The role of regulation is important because absent regulation...

  • ...nobody would pay for carbon emissions or pay a penalty for emitting carbon

  • So almost by definition, government has to create the market...

  • ...set the rules, enforce penalties, set a carbon cap...

  • ...for example, the maximum amount a company or industry can emit

  • If governments limited the number of permits, it would drive their price up

  • Setting a minimum price that rises over time...

  • ...would mean the price would never fall too low...

  • ...and governments could enforce more stringent deterrents...

  • ...for potential rule-breakers

  • Getting serious about regulating carbon markets...

  • ...really involves regulators making it clear to industry...

  • ...that they will not tolerate cheating

  • They will not tolerate leakage or obfuscation...

  • ...and ultimately that they will hold corporate executives to account...

  • ...for their carbon emissions

  • I think we're getting there, particularly in the European Union...

  • ...we're seeing much more seriousness...

  • ...that this is not a frivolous greenwashing exercise...

  • ...nudge, nudge, wink, wink, but rather that this is as serious as safety...

  • ...or other regulations. This is not yet the case in many other parts of the world

  • It would help if the world had more integrated carbon markets...

  • ...but as that's unlikely to happen in the short term...

  • ...one solution to help prevent carbon leakage is a border tax

  • The EU has recently proposed to tax the carbon emitted...

  • ...in goods produced outside its carbon market

  • Importers would have to pay the same amount...

  • ...as if the goods had been made in the EU

  • Meaning it wouldn't be any cheaper...

  • ...to source goods from a region with less regulation

  • If we're going to get serious about dealing with climate change...

  • ...within the next few years, we must...

  • ...achieve something like a global carbon price...

  • ...and some form of harmonisation amongst economies

  • Now we're getting to something like momentum in this direction

  • The big kahuna is China because it's such an industrial powerhouse...

  • ...it's so carbon intensive

  • If it doesn't get serious and work with other economies...

  • ...to harmonise carbon pricing and carbon-trading systems...

  • ...then most of the world's efforts will probably be undermined...

  • ...by the fact that countries like China...

  • ...are producing heavily carbon-intensive goods

  • And we'll see multinationals shifting production...

  • ...to those places even more than they have in the past

  • As climate change has moved up the political agenda...

  • ...governments are starting to improve how their carbon markets work

  • Since 2019, the EU has been taking steps...

  • ...to reduce the number of permits it hands out

  • Partly as a result, carbon prices in the EU...

  • ...are now hitting record highs of over €60 per tonne

  • Carbon prices in other markets are also rising...

  • ...as regulators look at ways to make them more effective

  • If it seems that money can be made...

  • ...other countries might create their own markets

  • We have seen just in the last 12 to 18 months...

  • ...a dramatic take-off in carbon markets

  • This is a really exciting time for people...

  • ...who believe that there is a good marriage...

  • ...between public policy and regulators and markets and innovators

  • If prices stay high enough

  • ...helped by commitments from governments and regulators

  • ...then greener industrial processes would become more attractive

  • And carbon markets could start to achieve their original goal

  • ...of helping to decarbonise the world

  • I'm Vijay Vaitheeswaran...

  • The Economist's global energy and climate innovation editor

  • To keep up to date with all of our climate-change coverage...

  • ...please click on the link

  • Thanks for watching and don't forget to subscribe

Companies are driven by money

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How do carbon markets work? | The Economist

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    joey joey posted on 2021/10/01
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