Climate Policies and the Politics in the Design of Markets of Carbon Credits
Centre for Management under Regulation Warwick Business School Coventry, United Kingdom
Market-based mechanisms for addressing environmental problems are becoming common features of environmental policies and, in particular, are at the core of the Kyoto protocol about climate change. Market-mechanisms are supposed to harness the dynamics of competition and to incentivize actors to commit themselves to long-term goals of environmental protection.
Compared to other forms of regulation, market mechanisms could theoretically reduce costs of cutting down carbon emissions, thanks to the flexibility allowed through emissions trading among heterogeneous stakeholders. They could allow states to raise considerable revenues without the need of a new tax. Market mechanisms make it also easier to reach political consensus at an international level, as degrees of freedom are left to local and national actors to elaborate their own road map for carbon reductions. Now economic actors have managed to negotiate not too restrictive measures and have learnt to play with the possibilities offered by market mechanisms: it appears that the popularity of the cap and trade schemes among decision-makers relies also on the possibility for governments and corporations to postpone painful choices.
This paper will examine the rationale behind the adoption of market-oriented policies instead of traditional environmental regulations and some of the practical difficulties encountered in the application of the Kyoto treaty linked to its inherent logic. It surveys the literature on the first stages of the European Union Trading scheme and analyses the system of preferences and the strategies of major polluters, notably from the energy sector, facing the constraint of greenhouse gas emissions reductions. Finally, it will synthesize the main critics of carbon trading schemes and draw some concluding remarks from debates about the current attempts to extend carbon trading systems to a greater number of countries and sectors of the economy.