By Deutsche Presse-Agentur
It might be the most volatile market in the world, and the one most prone to existential changes in the years to come: the market for carbon.
Markets, actually, would be the more accurate way to describe the hodgepodge and inchoate patchwork of places where carbon has a trading price. Almost 40 countries and more than 20 cities, states and regions already have or are putting a price on carbon.
To the consternation of traders who like a sure thing, carbon markets can be as unpredictable as the politics driving them – a fact that mounting pressure to limit greenhouse gas emissions, which include carbon, may ultimately upend.
As negotiators from 195 countries around the world gather north of Paris to hammer out a deal to limit the average temperature increase caused by global warming to 2 degrees centigrade, a longstanding scheme to employ the invisible hand to save the planet seems to be having a resurgence.
“We want to send a clear signal on the necessity of internalizing the costs associated with climate change,” Chilean President Michelle Bachelet said during the opening of the summit. She said her country would begin charging a tax on carbon in 2017.
Carbon dioxide – formed when carbon and oxygen bond together – is the key man-made contributor to greenhouse gases and reducing levels of it plays a key role in curbing global warming.
The drive to put a price on carbon and allow the market to manage the reallocation of resources has given birth to tax and trading schemes the world over, some of which withered away before taking root in the economies where they were instated.
Barack Obama
In the United States, where the idea originally spurred conservative politicians to instate a cap and trade system on sulfur emissions to fight acid rain in 1990, a programme proposed in 2010 for carbon emissions was rejected by Senate.
“I have long believed that the most elegant way to drive innovation and to reduce carbon emissions is to put a price on it. This is a classic market failure,” US President Barack Obama said at a press conference before leaving Paris.
Referencing risk calculations by insurance companies, Obama said he hoped the private sector would ultimately propel the government to act. “The more the market on its own starts putting a price on (carbon) because of risk, it may be that the politics around setting up a cap-and-trade system, for example, shifts as well,” he said.
Schemes that have gotten off the ground were not always an unmitigated success. A trading scheme that began in the European Union in 2005 was much derided after shares-per-ton plummeted to less than 3 euros (US$3.26) in 2013. Since then, they have regained nearly 6 euros, but remain far from their highs of 32 euros per ton.
Nevertheless, the EU says that sectors covered by the scheme have reduced carbon emissions by 2% since trading began. And other markets have started to clamber on board.
China began seven pilot projects in major cities, due to expand nationally in 2016. Qimin Chai, of China’s National Centre for Climate Change Strategy and International Cooperation, said that the system used coal as its benchmark for the price of carbon.
“We calculated the benefits and costs of carbon pricing. If we take (a price of) 50 yuan (US$7.8), the increased electricity price will be about 20%,” Chai said.
Angela Merkel
“But it will bring new investments as well – the market itself, which will be about 400 billion yuan, and indirect investments due to the carbon market will be about 11 trillion yuan. So that’s quite big.”
German Chancellor Angela Merkel, French President Francois Hollande, and many heads of international institutions also voiced support for putting a price on carbon at the start of the climate summit in Paris.
In the absence of national schemes, some places have simply decided to build limited global markets, as in the case of California in the US and Canada’s Quebec. The two regions linked their carbon markets in 2014, allowing international trade on a regional level.
One of the major questions is how to price a commodity valued for its absence, and whose only worth depends on its political context. Researchers for the US government put the cost of carbon at 40 dollars per ton. Chile’s plan to implement a carbon tax starts at US$5 per tonne, with the aim of ratcheting it up.
“We’re just trying to be pragmatic, by going jurisdiction to jurisdiction,” World Bank Group Vice President Rachel Kyte said. “Because in the absence of a global carbon Dumbledore who can go ‘Shazaam!’, now we have a global carbon price.”
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