Avoiding extinction: Who needs a carbon market?

Nov 26, 2015, 11:33 AM EST
Source: Flickr - Library of Congress
Source: Flickr - Library of Congress
Graciela Chichilnisky is a Professor of Economics and Statistics at Columbia University in New York, as well as the Director of the Columbia Consortium for Risk Management. The views, opinions and positions expressed by the author of this blog are hers alone, and do not necessarily reflect the views, opinions or positions of Blouin News or Louise Blouin Media. This blog is part five of a series. 
Energy is the mother of all markets. Everything is made with energy. Your food, your home and your car, the toothpaste and the roads you use, the clothes you wear, the heating of your office, your medicines: everything. Changing the cost of energy, making dirty energy more expensive and undesirable and clean energy more profitable and desirable – changes everything.
It makes the transition to clean energy possible. We have the technologies – we just have to get the prices right. Is it possible to thus change the price of energy?
Yes, it is. And it has been already done, although it requires more input at present to continue this process after 2012, as discussed below. 
Here is the background and a summary of the current situation. In 1997, the Carbon Market of the United Nations Kyoto Protocol was signed by 160 nations. In it, and after a long period of lobbying and designing the carbon market, I was able to write the structure of the carbon market. The Kyoto Protocol became international law in 2005 when the protocol was ratified by nations representing 55% of the world’s emissions -- and the Kyoto Protocol and its carbon market have now been adopted as law by 195 nations. The U.S. is excluded. In creating the carbon market, I helped change the value of all goods and services in the world economy because the carbon market changes the cost of energy the world over. It makes clean energy more profitable and desirable, and dirty energy unprofitable. This changes all the prices of products and services in the world – since everything is made with energy -- and drives the economy to use cleaner rather than dirty energy sources. It is more profitable and less costly to use clean energy that reduces emissions of carbon now; this is precisely the role of the carbon market that I designed and I wrote into the United Nations Kyoto Protocol in Kyoto, December 1997.
The carbon market of the Kyoto Protocol is now trading carbon credits at the E.U. Emissions Trading System EU ETS, and as already stated it is international law since 2005. The World Bank reports on its progress in its report “Status and Trends of the Carbon Market” which is published annually since the carbon market became international law in 2005. The report documents that by 2010 the EU ETS is trading $200 billion/year, and has decreased the equivalent of 20% of E.U.’s emissions of carbon. Through the carbon market, those nations that over-emit compensate those who under emit, and throughout the entire KP process the world emissions’ remains always under a fixed emissions limit that are documented in Annex 1.
A ‘carbon price’ emerges from trading the ‘carbon credits’ or rights to emit, which represents the monetary value of the damage caused by each ton of CO2. The carbon market therefore introduces a ‘carbon price’ that corrects what has been called the biggest externality in the history of humankind.
The carbon market cuts the Gordian knot and makes change possible. It does so because it makes clean energy more profitable and dirty energy less profitable, and therefore encourages economic growth without environmental destruction: it fosters green development. The carbon market itself costs nothing to run, and requires no subsidies except for minimal logistics costs. In net terms the world economy is exactly in the same position before and after the carbon market – there are no additional costs from running the carbon market, nor from its extremely important global services. The over-emitter nations are worse off, since they have to pay. But every payment they make goes to an under- emitter, so some nations pay and some receive, but in net terms the world economy is exactly in the same position before and after the carbon market is introduced. There are no costs to the world economy from introducing a carbon market, nor from the limits on carbon emissions and environmental improvement that it produces. It is all gain.
What is the status of the carbon market today? As of 2010, it has been ratified in 195 nations, and this includes all the industrial nations except the US. It is international law since 2005. Its nation-by-nation carbon limits expire in 2012 but the Kyoto Protocol itself – its overall structure and the structure of the carbon market -- do not expire. They are and continue to be international law. All we have to do to keep the carbon market’s benefits is to define new emissions limits nation by nation for the OECD nations – something that we should be doing in any case as they are the major emitters and without limiting their emissions there is no solution to the global climate issue.
What is the current status of the carbon market in the U.S., which is the single industrial nation that has not yet ratified the Kyoto Protocol? There are cross-currents in the U.S., since it is a politically divided nation. But the U.S. already has a carbon market for 10 Northeastern states, called RGGI, which is operating but timidly – the limits on emissions are small and so are the prices for carbon credits therefore. The economic incentives of Kyoto Protocol’s carbon market are enormous. China, for example, created a reported 1 million new jobs and became the world’s main exporter of clean tech equipment since 2005 after signing on and ratifying the Kyoto Protocol in 2005 and benefitting from US$40 billion from its carbon market and Clean Development Mechanism. China is currently introducing its own carbon market. Many in the U.S. want part of the carbon market advantages. President Obama said he wishes to ratify Kyoto the Protocol, and by now 22 states are planning to create a carbon market of their own including California. Hundreds of cities and towns support the carbon market in the U.S.
In the fall of 2007, the U.S. Supreme Court agreed that Federal government and the EPA can enforce carbon emissions limits without requiring Congressional approval. Every effort to deem this regulation illegal by Republican representatives has failed so far. It is generally accepted that global businesses (for example the automobile industry) will benefit from KP’s guidelines, and could suffer economic losses without the benefit of KP economic incentives at home. This is because the automobile industry is global, and cars that do not sell in other OECD nations create huge losses and lead to bankruptcies. Since all OECD nations are buying carbon efficient cars, because they ratified the KP, the U.S. car industry is commercially isolated. For these reasons, in 2010 the EPA imposed automobile emission limits of 36.7 miles per gallon, an efficiency requirement that has been increased further by the Obama administration in 2011. The automobile industry voluntarily supported a rise to 54 MPH in 2011. Furthermore in December 2011 EPA announced that it would impose limits on stationery sources like power plants, which is the beginning of a U.S. carbon market, but the issue is still hotly contested by the Republican Party which freezes decision-making.
Nevertheless, Mitt Romney -- former Governor of Massachusetts and presidential candidate, endorsed the creation a “cap and trade” system or a carbon market. A similar sequence of events took place when the SO2 market was created at the Chicago Board of Trade 20 years ago. First it was quite controversial, but the SO2 emission limits were eventually passed for U.S. power plants and then traded in an SO2 market at the CBOT, which is now widely considered to have been very successful in eradicating acid rain in U.S.
Are the new EPA carbon limits the beginning of the U.S. carbon market as were the SO2 limits 20 years ago? History is being written right now.
- Graciela Chichilnisky
Follow this blog for the next chapter on “Avoiding Extinction."