Friday 28th October 2016                 Change text size:

Will carbon trading save the world?

coal power plant by Greg Goebel via Flickr

This week chiefs of global energy companies, including Shell and BP, called on world leaders to adopt a carbon pricing scheme ahead of UN talks later this year. Asher Kohn takes a look at how the idea of a carbon market took hold.

This article was originally published on Timeline. To download the Timeline app click here.

The Brief

Environmentalists have an unexpected ally in the fight against climate change — oil companies. Six of the world’s largest declared that they’re on board for a carbon market and that they look forward to seeing one come out of Bonn’s June 1-11 climate meetings.

The oil companies aren’t doing this out of kindness. A carbon market would make sooty coal more expensive, and render oil, gas and renewable-energy investments more attractive by comparison. With the EU and Big Oil (if not Big Coal) onboard, a global carbon market may be within reach. And regardless of whether carbon trading achieves its goal, it will certainly make some people a lot of money. Here’s how the idea took hold.

1920 – Economist brings external voice to energy debate

Britons in the early 20th century knew that soot from burning coal was rendering their fair isles not quite as fair as they used to be. Cambridge economist Arthur Cecil Pigou, assigned blame for British smog squarely on the coal industry.

It had long been agreed that a product might have costs not immediately visible; a drinker may pay a shilling for a beer to get drunk, but five shillings equals not just a drunk night, but a hungover morning. Pigou made the same argument for coal. He noted that people pay for the energy provided, but nobody pays the bill for sooty windows and sick livestock. Pigou argued that the crown should tax coal producers for the “external” costs society pays for their products.

1968 – Canadian economist breathes life into toxic lakes

Pigou published just before the Great Depression and World War II, which made politicians wary of his high-concept tax idea. But just because Pigovian taxes, as they were called, were unviable in real life didn’t stop economists from diving into their theoretical use.

University of Toronto economist John Dales proposed emission permits as a mechanism for Pigovian taxes. If the right to emit a certain amount of runoff and could be traded, he argued, the permits market would push environmental responsibility onto polluters. Published at a time when the car and steel industries dominated politics, Dales knew that his carbon market ideas were unlikely to gain traction any time soon.

1990 –  Clean Air Act limits acid rain

In the late 1980s, acid rain caught the public imagination for two reasons; it ignored political boundaries and it sounded scary as hell. Rainwater thatcontained nitrous oxides killed trees and fish, making for ugly pictures in the media.

US President George H.W. Bush cajoled Congress into signing amendments to the Clean Water Act to create permits for air pollutants, as Dales suggested years before. Businesses would reluctantly self-regulate, which many in both the industry and environmentalist camps hated. Stakeholders on both sides fought to maximize their advantage in a well-monitored permit market, which made it work better than many predicted.

2003 – Australian greenhouse gas scheme short-lived

Inspired by the 1997 Kyoto Protocol, the Australian state of New South Wales launched a “greenhouse gas abatement scheme” that went mandatory in 2003. Australia’s most populous state aimed to limit not just nitrous oxides but carbon dioxide by initiating tradeable permits. The state’s forestry department went on a large-sale tree-planting rush to use the trees as a carbon sink to offset coal plants’ carbon output.

The scheme was scrapped in 2012. Carbon dioxide turned out much tougher to track than anticipated. What’s worse, one company had acquired nearly half of the state’s carbon permits, and used their ownership position to manipulate the permit market.

2005 – Europe makes carbon market, recession undoes it

Soon after the Australian attempt, the European Union formed a similar emissions market that had a bit more structure and far more actors. The market launched in 2005, and EU regulators promised to take three years to see how it could be improved.

Unfortunately, the EU economy imploded in late 2007, done in not by carbon regulation but by real estate skullduggery. European policy was more focused on keeping people employed than building a perfect market, so the EU issued many more permits than necessary. This made it cheap to exceed allotted emissions caps, rendering the system ineffective. The EU promised to pop this bubble later in 2015 as part of their new international climate change protocols.

2013 – China slows coal roll

China’s astonishing growth over the past few decades has been on the back of cheap coal, so energy analysts were astonished when China’s National Energy Administration announced that they would aim to switch from coal to natural gas. Gas is more expensive to transport than coal, but it is safer to extract, cleaner to burn and easier to integrate into a global emissions market.

But China’s swap won’t save the world. Seven years before the move, an environmentalist discounted the Earth-saving potential of a global carbon market in New Scientist.

“Global warming requires…nothing less than a reorganisation of society and technology that will leave most remaining fossil fuels safely underground. Carbon trading can’t do this.” – Larry Lohmann

2015 – Oil companies sign up for free market

Six major European oil companies wrote an open letter to the United Nations with an unusual request: Please regulate us! As the UN Framework Convention on Climate Change meets in Bonn from June 1-11, the oil titans stated “We stand ready to play our part.”

What sounds altruistic is more likely a clever play. The past century of carbon markets have targeted far dirtier coal, which makes oil and natural gas more attractive in comparison. The European oil companies have much to gain from a carbon market, and it looks like China may mitigate coal use. If the US and its companies sign up, the market might work. Whether that means blue skies, black ink or both remains to be seen.

Photo: Greg Goebel via Flickr

Further reading:

EU votes to fix carbon market in 2019

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