Posted by: Matthew Hoffmann | January 13, 2010

Carbon Market as Misnomer

Carbon markets–the notion of putting a price on greenhouse gas emissions by commodifying and trading them–had been gaining significant momentum in the last few years.  A handful of emissions trading venues are up and running  (EU Emissions Trading System, the Regional Greenhouse Gas Initiative  and the Chicago Climate Exchange in the US are exemplars), multiple systems are being designed (e.g. Western Climate Initiative, Australian Federal system), and the voluntary offset market is thriving.  The failure at Copenhagen may ironically provide a boost to these markets, if national and subnational systems start up to fill the gap (a big if to be sure). There are big questions about the effectiveness and even morality of carbon markets, but I’ll leave that for another discussion. One thing that fascinates me is the kind of market that is being constructed (from scratch!).

In some ways the carbon market is like any commodity market.  Suppliers have a commodity that those on the demand side want to consume.  Except in this case, the supply side is not a tangible commodity–it is the promise to not emit greenhouse gases in specified quantities. In both offset markets and emissions trading systems the ‘commodity’ changing hands is a license to emit a specified amount of greenhouse gases.  Those selling the commodity are essentially giving the buyer a promise to not emit that specified amount of greenhouse gases so that the buyer can consume the commodity by emitting that specified amount of greenhouse gases. Now in both the offset markets and the emissions trading system the key becomes measuring and tracking promises (which gets into the development of property rights, significant accounting issues, and high level scientific methodologies so that one knows how much greenhouse gases one is or is not emitting).  Offset producers and holders of emissions permits need to show in a reliable way that they are not emitting a specified amount of greenhouse gases (proving a negative!).  A huge array of organizations and businesses are developing to provide ways to enhance the reliability of the promises (standard setters, registries, accounting firms, brokers, verifiers).  We are witnessing the birth of a commodity market and maybe even a currency from whole cloth.

Yet the name of all this activity remains the “Carbon Market.”  I suppose the “Promise to Not Emit Carbon Market” is too unwieldy to catch on, but it is a more accurate name for the kind of market that is developing–and a more accurate name might lead to better discourse on the appropriateness (and I am agnostic at this point on whether it is appropriate or not) of this tool for combating climate change.

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