At the recent conference put on by Point Carbon and the Climate Action Reserve, it was striking to witness two disparate communities coming together over their shared interest in the health of a market. If you are new to the concept of carbon trading and how it works, here’s a good overview.
Over the course of many years following the development of the American carbon markets, there has been a slow shift in the demographics of participants–from hippie dresses to business suits, from brown hair with sun soaked highlights to salt-and-pepper comb-overs. The population of people who cared about the carbon markets in their infancy were mostly passionate about finding a solution to climate change, and using the power of markets to drive business innovation. That crowd has slowly shifted to include those with finance backgrounds–individuals who recognize the financial gains to be made from getting into this market in its early stages. There are those who decry this shift, like the lone protester who snuck into last week’s proceedings to unravel a banner about how nature shouldn’t be for sale. I’m here to argue that the carbon markets are the most robust and effective when all of these sectors have a seat at the table. What they want and need from a market isn’t so different:
Members of the environmental community want strong regulations around what makes an offset, and strong caps on companies’ emissions so that the atmospheric levels of carbon can be reduced as quickly as possible. They also advocate for the co-benefit side of carbon regulation– piggybacking regulations of other harmful emissions like soot, nitrogen oxide, and sulfur oxide onto carbon legislation because the emissions are all harmful and they come from the same pipes. In the words of Ian Kim from the Ella Baker Center, “When we are attacking carbon, we are talking about some of the same emissions that cause asthma and other health impacts. We have an opportunity to reduce particulates like NOx SOx, and other emissions from cement factories and oil refineries. We have to consider how we link solutions because the problems are the same.”
Folks from the financial world also have a proper home in the carbon trading sector. They view the carbon trading market as opportunity for a financial return–through the buying and selling of offsets on the open market. Some of these folks were involved with the sulfur dioxide market of the early nineties, which successfully eradicated US acid rain, while others have little environmental experience. What they all have in common is a desire for clear standards and carbon legislation, because only under these guidelines can the market truly flourish and their early investment give them financial rewards. Clear standards allow companies and offset project creators to plan and invest and that is good news for financial traders.
The Project Developers
Project developers–those who create carbon offset projects like tree farms, methane capture and the like, are also taking risks that they hope will pay off financially. The gamble is that they will create offset projects that will both comply with pending legislation and sell at a price that allows them to make a profit. Some are environmentally and socially motivated, like solar stove projects which replace wood (or dung)-burning cooking stoves in Africa with clean burning solar stoves. Others, like industrial gas capture projects have zero social benefits but a huge financial return. In either case, project developers are similar to carbon traders in what they want from a carbon market: a national standard with clear project requirements will allow them to focus on those project which traders will want to purchase–the standard reduces risk. Further, tough standards mean that they will be able to fetch a higher price for their efforts.
Big business is the wild card, and the largest reason why passing cap and trade legislation in the US has been so difficult. While clear legislation will help businesses plan and reduce risk, it may also end up costing them money, in some industries like utilities and oil and gas production, it might cost a lot of money. This means that companies are caught between a rock and a hard place- calling for clear legislation in some circles, while fighting *any* legislation tooth and nail (I won’t name names, but you can feel free to in the comments), in the hopes that the end result will be lowest cost for their bottom line.
As you can see, a compliance market, where everyone knows the rules, is going to be most effective from an environmental standpoint and the most efficient from a financial standpoint. While many businesses have legitimate concerns about increased costs, these should not outweigh the power of a strong clear market to drive innovation and create profit in new sectors.