Carbon markets may be the key to international climate cooperation

With the upcoming 26th UN Climate Change Conference of the Parties (COP26), public discourse is focused on how best to mitigate the effects of climate change. Fundamentally a collective action problem, climate change policy is a delicate balance between the preservation of individual choice and the role of government intervention to mitigate externalities.

The central planning mindset present in climate policy rhetoric often fails to account for the costs of policy—namely the harm caused by new taxes to pay for subsidies, and the forgone economic opportunities that are replaced by government-directed ones. But environmental gains need not always come at the expense of economic growth. Indeed, dispersed consumer choice—the free market—presents an opportunity to pursue climate goals without requiring government expansion. A voluntary international carbon market that enables private companies to invest in climate solutions may work better than central planning because the dispersion of choice allows for the capture of benefit opportunities that would not otherwise fall under government mandates.

Carbon Offsets

Climate change is a global challenge; pollutants are dispersed atmospherically, regardless of where emissions occur. This means that carbon offsets—an activity that attempts to stabilize the amount of carbon in the atmosphere by creating absorption points (or carbon sinks) through various mitigation tactics—can be achieved at any geographic locale. For example, a tree planted in Peru can absorb carbon dioxide caused by a plane in Norway. This effectively offsets the plane’s emissions.

The abatement cost curve for greenhouse gas emissions demonstrates that some emission mitigation opportunities are low cost, like efficiency improvements or clean energy growth. But there are also emission abatement opportunities that can have an exceptionally high cost—like replacing aviation fuel. For emission sources like these, which are in demand but unlikely to have accessible abatement costs, pursuing offsets seems logical. The R Street Institute (RSI) estimates the economic value of using offsets in lieu of conventional abatement methods in aviation and industry could be roughly $220 billion in 2030, and $340 billion in 2050 .

The use of offsets is sometimes controversial because practices do not always result in permanent emission avoidance as the climate benefit may be temporary or difficult to confirm. That Peruvian tree will eventually die, decay and release carbon dioxide, some of which may be sequestered for a time if the tree decays slowly or the wood is used in lasting products, but such nuances can be tough to measure and verify.

Recent research from RSI highlights the manner in which offset markets provide environmental and economic benefit, using consumer choice as an advantage rather than a hindrance. When the environmental benefits of carbon offsets are confirmed, they yield a much more economically efficient approach to reducing atmospheric carbon dioxide concentrations than competing policies.

International Carbon Markets

Private sector efforts like the Taskforce on Scaling Voluntary Carbon Markets are identifying the major opportunities and challenges for carbon offset markets. In fact, private firms are the largest category of buyers in the voluntary market. Investments in carbon offsets come from airlines and businesses that seek to offer products that cater to the consumer demand for environmental responsibility. Even without new government requirements, the value of carbon offset markets is expected to reach $200 billion by 2050 .

The importance of carbon offsets to the global economy, though, is comparative advantage . This means that an offset that might be too expensive to produce in one country can still be achieved in another. Imagine that the cost of an offset in a global carbon market is $10, and producing that offset costs $12 in the United States but only $7 in a different nation; with this difference, the other nation can capture the profit while also abating emissions. Since emission abatement is effective regardless of geographic location, this kind of comparative advantage is useful in capturing climate benefits outside of conventional regulations.

Confined to the government of a single nation, opportunities for cost-effective emission abatement are limited to what is within the jurisdiction of the law. Privately managed international carbon offset markets ensure that environmental conservation that may not be cost-effective in one place, but is in another, is still incentivized. In fact, such markets already exist: the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA ) promotes voluntary offsets and defines sustainability requirements.

As climate change remains a pressing global collective action problem, and one that the Intergovernmental Panel on Climate Change has affirmed is not subsiding anytime soon, it is always wise to look for opportunities to utilize the human preference for dispersed choice as an advantage. There are limitations to the central planning approach to addressing climate change, and policy should not stymie the interest and capital of private industries to invest in carbon mitigation. As global leaders convene at COP26, they should look to the comparative advantages their nations bring to address climate challenges—and embracing carbon markets can help facilitate such international effort.

Image credit: jackey

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