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Markets to the Rescue?

Fighting the interests of fossil fuel companies is a colossal undertaking, not least because we live in an era in which corporations and markets are seen as near-sacrosanct forces. A laissez-faire attitude often described as neoliberalism has prevailed. Deregulation and privatization have heralded an increasingly globalized economy and the emergence of globe-spanning corporations whose influence and power often trumps that of governments, communities, and labor unions.

The view that government is the problem and private markets are the solution has carried over into the design of environmental policy. Governments, academics, and many mainstream environmental groups have put considerable hope into the assumption that, with the proper signals, markets would ride to the rescue and drive a clean economy transition. Specifically, this has found expression in proposals for carbon markets and socalled cap-and-trade systems. In principle, the idea of imposing a cap on emissions and of putting a price on carbon is sensible. The actual manner in which this has been implemented—specifically the European Union's Emissions Trading System (EU ETS), which had 88 percent of the world's carbon trading volume in 2012—raises fundamental questions about whether salvation will be found solely in market-based mechanisms.

ETS carbon prices have nosedived repeatedly. In the scheme's first phase (2005–07), prices plummeted from a peak of around)30 ($38.70) per ton in April 2005 to a mere )0.10 ($0.14) per ton in September 2007. This was due largely to an overly generous allocation of emission allowances and exemptions—itself the product of industry lobbying clout. Although the EU insisted that it was learning by doing, the experience was replicated in the second phase, when prices once again collapsed, from about)25 ($36.75) per ton in 2008 to between )5 and )10 ($6.40–12.80) per ton in 2012. Prices stayed below)5 ($7) per ton during 2013, and absent regulatory intervention, analysts expect that they will remain low for the entire third phase (2013–20). Johannes Teyssen, the CEO of Germany's largest utility E.ON, commented in 2012, “I don't know a single person in the world that would invest a dime based on ETS signals.” Fixing the system—if it can be fixed— would require dramatically reducing the supply of carbon certificates and lowering the overall cap on emissions.

As national or regional emissions trading schemes are being adopted elsewhere around the globe—most recently in China and Mexico—fundamental governance lessons from the EU ETS experience need to be taken to heart. As a recent Climate Action Tracker report argues, “The new systems yet have to prove that their implementation will actually reduce emissions.” Fresh thinking also needs to be applied to related approaches such as the Clean Development Mechanism. A recent examination by Germany's Der Spiegel likened this approach, under which rich polluters have bought often questionable or even fraudulent carbon “offsets” in poorer countries, to the selling of indulgences. It is a practice that keeps carbon markets flooded with certificates and prices low.

Market-based mechanisms such as carbon trading seem to relieve governments of the difficult political decisions needed to alter unsustainable production and consumption structures. Trading of emission permits, for example, allows governments to avoid imposing a politically unpopular carbon tax. Yet carbon markets cannot possibly function without the kinds of extensive rules and regulations that have come to be excoriated as “command-and-control” policies. And there are other governance-related reasons for skepticism. Emissions trading favors—and often enriches—a “carbon priesthood” of corporations, traders, and financiers. The arcane nature of such systems prevents meaningful public engagement.

Moreover, the dogma of market worship has marginalized a large body of knowledge about the management of common-pool resources that points to the fruitful possibilities of controlling global carbon pollution by managing the atmosphere as a commons. This work—which for general audiences emerged into the light of day only when a major scholar of commons management, political economist Elinor Ostrom, won the 2009 Nobel memorial prize in economics—soundly refutes the argument that privatization of common resources such as the atmosphere's waste-absorption capacity is the preferred, or only, way to address the problem. (See Chapter 2 by D. Conor Seyle and Matthew Wilburn King and Chapter 9 by David Bollier and Burns Weston for more on Ostrom's work.)

Since Adam Smith, economists have argued that markets, even though driven by selfish, short-term motivations to maximize private gain, ultimately serve the public interest. This view springs from an idealized set of exchanges that assumes that all players have the same information and that markets will eventually self correct. But it conveniently overlooks the fact that some market players grow to become far more powerful than others. Markets do not have a social conscience, environmental ethic, or longterm vision, and therefore market dynamics and the public interest do not necessarily align. Although market tools could incentivize companies to go beyond the minimum of meeting a particular law or regulatory standard, markets as such are a poor arbiter of processes that decide whether civilization thrives or perishes.

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