Greenhouse gas emissions and anthropogenic climate change are directly linked to the combustion of fossil fuels for energy, deforestation, and certain agricultural practices. Reducing emissions will thus require major economic changes in production and consumption systems, and in the governance systems which guide individual and corporate behaviour. Yet the economic profiles of nation states vary widely, and current emissions are strongly correlated with wealth, historical circumstances, climate, access to energy resources and population size. These national circumstances, on top of the profound wealth disparity between developed and developing countries, will continue to present obstacles to the negotiation of a fair allocation of a global emissions cap stringent enough to combat climate change. Added to this is the feature of climate problem having all the attributes of a ‘Tragedy of the Commons’ where it is rational for each nation to pollute the global commons to the maximum and free-ride on the mitigation efforts of others (Gardiner 2002; Wagner and Weitzman 2016).
This background partly explains why political disagreement represents a key feasibility constraint that cannot be overlooked in designing climate policies. The climate policy debate (in contrast to the discourse in law and international relations about climate politics) is concerned with designing policy instruments which as a priority, put a price on pollution commensurate with the damage that it causes, or will cause later. Since the failure to agree on a global carbon tax through the UNFCCC regime and the withdrawal of the US from the Kyoto Protocol (Convery 2009), the policy debate has increasingly shifted towards carbon trading systems which allow for ‘decentralised action’ (Grubb 1990, 81) partly because it was the one pricing instrument that negotiating parties were prepared to agree on.
Emissions trading works by setting a cap on the emissions allowable by certain sectors, and requiring installations to purchase permits to cover emissions over a given time period. The key innovation is the establishment of property rights (or leasing rights) for tradable carbon permits, and then leaving it to market forces to determine the price. Ideally, by establishing a market to bring an optimum utilisation of such rights, ‘least-cost’ abatement will take place through technological innovation (Calel 2013b). According to advocates of emissions trading, the creation of property rights is a more economically efficient way of pricing carbon than taxation, though both instruments can actually work well together. In theory, by requiring polluters to purchase permits, the market can deliver mitigation more efficiently than taxation by targeting ‘low hanging fruit’ or incentivising technological innovation away from carbon-intensive economic activities (Calel 2013b; Convery 2009; Ellerman et al. 2010).
In principle, any product that has a carbon footprint could be required to purchase emissions credits, and in principle, anyone could get involved in buying and selling emissions credits, and even generating them through mitigation projects. In fact, the quickest way to decarbonise the EU energy sector would be for every citizen in Europe to purchase, and then put the permits under the mattress for a decade.
In most countries with carbon trading schemes however, markets are designed to cover major emitters first. The key benefit of requiring the market (as is the case in the EU) to major industrial producers of greenhouse gases and the power generation sector is that an effective carbon price should ripple throughout the economy as higher energy costs are reflected in consumer prices. And again, according to the theory, a strong price incentive will have the effect of discouraging emissions and incentivising the transition to low or zero carbon forms of economic activity and energy production.
Given the task that confronts us – that of reducing greenhouse gases by 40% across the EU by 2030 – it might be a good starting point not to rule out any instrument that might be effective at reducing emissions without massive economic disruption. Indeed, effectiveness might arguably be the only relevant criterion here, given the urgency of mitigation. However, is worth considering how we might evaluate the broader ethical implications carbon trading. Markets also have the effect of establishing moral norms: they act as moral templates because they establish and reproduce patterns and regularities that guide interactions and transactions in the marketplace and daily life. The absence of a ‘solidaristic community’ or world government at the global level does not preclude global or transnational institutions from exercising power over any community or country, which in turn begs the question of their political legitimacy if they do not make justice a primary goal (Pogge 2008, 120). The legal power of international financial institutions to confer ownership rights over resources, or to provide or withhold credit, empowers them to engage in resource distribution, however indirectly. Therefore, such institutions – and indeed markets that are regulated by them – have duties of justice that may be even more pronounced than those of national level institutions, partly because their activities may lack legitimacy and transparency to those people who are affected by their operations.
From an equity point of view, it is the nature of these new property rights that matters: the initial allocation determines who gets the permits, and who will then benefit from trading. If permits are they grandfathered, they are effectively given away to polluters for free. In practice, grandfathering may soften up opposition to the imposition of a cap but at an opportunity cost to society as a whole in rewarding incumbent polluters. Nor does grandfathering resolve the question of historical emissions. Recall the case of Tata Steel in the UK, which though facing bankruptcy in 2016 had claimed more than £700m in windfall profits, offsets and free allowances from the ETS over a 6 year period. In this case, a greener method of steel production may be incentivised by the cost of purchasing credits, but at the cost of some job losses. Critics of Tata pointed out that when the carbon trading model of mitigation was being extended to steel production, employers were effectively shielded from its logic via the free allocations when workers were not. This does not constitute a ‘just transition’ to a low-carbon energy future. Yet the income from carbon credits could conceivably be ringfenced to ensure that communities such as those in Port Talbot benefit from a transition to cleaner production. From the perspective of fairness as well as competitiveness, only auctioning is justifiable, especially when there is no convincing empirical case for shielding industries from carbon leakage (Timiliotis and Koźluk 2016). Revenues can and should be used for subsidising innovation in a socially just manner.
A second questions concerns whether permits are leased or permanently owned. If the property rights gained by polluters (on behalf of the whole of society in effect) interfere over time with the public interest, it should be possible for regulators to withdraw, cancel or reserve permits from the market. The EU’s latest reforms to the EU-ETS do make provision for a Market Stability Reserve, but this will not come into effect until 2021, and it is offered as a bulwark against price shocks rather than ensuring a high enough carbon price. Ethically speaking, market-based instruments can only be justified if the flexibility assured by trading sets a price that reflects the full social cost of carbon. A recent – albeit conservative – estimate by the economist Bill Nordhaus puts this at $31 per tonne of carbon at 2015 US prices (Nordhaus 2017), compared with the current average EUA price in the EU ETS of €5. A hybrid approach combining taxation (to ensure a high enough minimum price floor) and trading (to ensure flexibility) might ensure both price stability and the correct incentives.
Prices, moreover, whether set by a government, a company, or an individual, involve an exercise of power; power that one party can use (and abuse) to influence the behaviour of another (Calel 2013a, 281). Furthermore the effects of commodification – of turning carbon into a tradable commodity – may be irreversible, and by reducing a social relationship to an exchange of commodities, may be ‘infectious’ (Calel 2013a, 279-280). Therefore initial allocations have enormous ethical implications because they distribute and redistribute public goods by solving for externalities (Stiglitz 2000, 215-241), because of their distributional implications (Calel 2013b, 113) and their potential to establish incentives that ‘crowd out’ other social norms (Sandel 2012).
A related question is the status of emissions permits themselves. To the extent that permits can be exchanged for traditional financial products and currency, they acquire all of the status and power that money has. But this outcome is not inevitable: since this market is a human invention we can design it in theory to have the features we desire. Permits could be designed to expire after a certain period, or exchangeable under much more limited conditions. A crucial issue is the coverage of the market. If carbon trading is limited to large installations and power generation which operate under reasonably competitive conditions and have comparable regulatory structures across the EU, the commodification argument loses much of its force since both the emissions and the mitigation will be roughly equivalent.
To the extent that carbon markets cover sectors in which individual consumers and firms make transactions, it will be possible to absolve a moral obligation to reduce emissions with the swipe of a credit card. Offsetting allows pollution to continue as long as polluters are willing to pay for the effort of mitigation somewhere else. Even if trading is effective overall at reducing emissions, we might still reasonably contend that polluters have not discharged their moral obligations, and that such a scheme does not satisfy principles of justice across space and over time. There is a strong normative case for limiting the scale and scope of carbon markets so that the effects of transactions are transparent, tangible and accountable to an identifiable political community. This implies imposing strict limits on the use of international offset credits via the Clean Development Mechanism (CDM) under the Kyoto Protocol or any other similar instrument (Lohmann 2009).
What happens when carbon markets are linked, and when they are expanded to include offsetting credits such as those of the CDM and other flexibility instruments is that transparency and thus accountability is sometimes lost. Treating all emissions and emissions reductions as equivalent is also both scientifically and ethically problematic (Spash 2010). It makes no sense for example to make emissions from aviation, which is the domain of the global rich, equivalent to the mitigation efforts of subsistence farmers battling drought, disease and poverty (Aldred 2016; Shue 1993).
The realist might argue that these problems simply cannot be solved with any brand of idealism, or by appealing to abstract conceptions of rights or justice. However, the alternative is to exclude ethical considerations entirely. As Shue notes, failure to even ask the question ‘who’s in? who’s out?’ over time and space sets up a default method of setting up the policy questions that is full of arbitrary exclusions but which neglects to consider the fact that harms to future people cannot be compensated for (Shue 2006, 711).
The atmospheric ‘sink’ is a finite resource that we share with future people, whose interests and basic needs, we can assume, will be the same as ours. While it is tempting from a political perspective to set a target for reducing emissions based on what is feasible or affordable now in individual countries, to do so would likely be ineffective, since it is cumulative global emissions that increase the risk of dangerous climate change (Anderson and Bows 2008, 2011). Targets based on an permissible temperature increase also fail to communicate the inconvenient truth that since emissions are still rising, the global carbon budget is likely to be exhausted even sooner.
If the international community is serious about backing up any limit to global warming with credible but fair policies, then scenarios will have to be developed that explicitly construct pathways for developing countries to grow, peak and then reduce their emissions alongside radical cuts in emissions by Annex I countries (Rockström et al. 2017). If global emissions are assumed to peak and then reduce from about 35 GtCO2/yr in 2020, this implies that anthropogenic carbon emissions need to be roughly halving every decade from then onwards (Rockström et al. 2017). These are staggering emissions reductions, that do not even take into account the fact that the remaining budget needs to be shared equitably with developing countries and future generations.
Of course, a global tax on emissions could achieve the goal of setting a price on carbon that reflects the true social costs of climate harms now and into the future, but there is no institution in place to collect and redistribute tax revenues at a global level. Large wealth transfers from the global North to South are also likely to be resisted by many wealthier nations. It will be left therefore to states that are committed to mitigation policies to negotiate economic instruments and policies which devalue commercial propositions based on fossil energy. One remaining option is to work gradually towards a global price on carbon (Helm 2013; Stern 2007; Stern 2011) by forming ‘carbon clubs’ and setting border taxes on imports to account for the consumption of carbon-intensive products at home that are manufactured abroad (Nordhaus 2015).
It is possible of course that this analysis is overly pessimistic, and that there is still potential for international climate agreements to shape a radical mitigation policy in time to achieve the Paris Agreement goals and without the world’s second largest emitter, the US. Yet even if this takes place, for any future agreement to be scientifically relevant to the task of meeting a 2 degree target, it must devise a mechanism to abide and enforce a global cap, and distribute the remaining budget fairly. This implies an effort to shape the likely policy instruments, especially carbon trading, so that they achieve the goals of fairness and efficiency together.
 Strictly speaking the US never ratified the Kyoto Protocol: Canada did but then withdrew later.
 This would have the effect of dramatically reducing the allowances available to installations that are required to have them to cover their emissions, and it would raise the cost of purchasing remaining allowances (Kollmuss and Lazarus 2010). It would socialise some of the transition costs (because citizens would not get a return on their investment) but leave consumers and citizens somewhat in control of the timing of structural change. Fanciful though this might appear, there is a tendency among climate activists to underestimate the potential of carbon markets for delivering environmental justice. The complexities of setting up such a regime are also somewhat offset by the power, speed and reach of digital technologies.
 the only year since the base year of 1990 to report a global emissions reduction is 2008, when economies around the world ground to a halt in the grip of a global recession. That decrease only amounted to 1% and only for one year. Overall, since 1990 global emissions have risen by 57% and show no signs of abating yet.
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