Weatherdem's Weblog

Bridging climate science, citizens, and policy


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Why Design of Carbon Markets Is So Important

Various interested parties have written about the efficacy (or lack thereof) with regard to carbon-related market schemes of all sizes and types.  Probably one of the more visible programs is the global emissions offset scheme enacted in the wake of the Kyoto Protocol.  This is the case for good reason: Kyoto represented the largest effort to date to deal with carbon emissions and related activities at the international level.  The short story can be summarized by two competing viewpoints.  On the one hand are people who think the Kyoto-scheme was real progress because it did something for the first time.  On the other hand, critics claim that the scheme is a failure for any number of reasons, most not actually dealing with real-world facts.

Who’s right?  Well, as usual, there are valid points made on both sides.  It is true that a global market was created where none before it existed.  In and of itself, that is probably a good thing.  It allows us to monitor how such a program works and make modifications with time if something needs to be tweaked or overhauled.  To that point, the critics make a good argument.  The scheme very likely isn’t working.  But critics will leave it at that without examining it in further detail.

I’m going to look at one part of the scheme in a little more detail and explain why the scheme isn’t working as efficiently as it should.

Quickly: there are too many credits in the market.  In economic terms, there is a drastic oversupply of offset credits.  By definition, the market will operate inefficiently.  How inefficient is the market?  After all, if we are talking about just a little oversupply, we are also talking about small inefficiency.  How does 1,000X oversupply grab you?  Yes, that number is correct and it is wildly inefficient.  This scheme is laughable (or would be if part of a comedy routine).  Unfortunately, it is what passes for real-world policy today.

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