In the Chamber -- Grant Mitchell's Blog

Carbon Markets 101

Posted 4/8/2010 by Grant Mitchell


The government of BC has established that its public sector will be carbon neutral this year. To do this they will need to use carbon offsets. They have set up a crown corporation to work with the private sector to generate enough offsets to meet their zero footprint needs, which is about 1,000,000 per year.

By the way, there is a difference between a carbon credit and a carbon offset. If an emitter is under a cap and trade system and it gets its emissions below its cap (imposed on it by the government) then it can sell the amount of “extra” emission reductions to a company that could not get down to its cap. This is called a credit. If a company, however , is not subject to the cap system, let’s say because it is a wind power generator, then the company that fails to make its cap can buy a emission reductions offset created by this wind power company. So, the two are pretty much the same thing; the difference is a matter of whether the entity producing the carbon reduction is in or out of the cap system. It is possible to have a carbon market without a cap system. Then, it would be a voluntary market and everything in it would be an offset.

Carbon allocations are how carbon credits are created.  When a cap and trade system starts, the authorities issue or allocations to each now regulated emitter to allow them to continue to emit to a determined level. They can issue them for free or auction them. Then each subsequent year they reduce the number of allocation that each regulated emitter will keep, thereby ratcheting down emissions. They are tradable like carbon credits.

There are several important reasons for carbon markets.

Credits and offsets mean that companies and others can buy the cheapest carbon reductions. Why should they spend more money than necessary when others might have cheaper ways to reduce carbon emissions? Companies (like all of us) hire others to do work that we do not do as well. Carbon offsets and credits can be viewed as just another service or good.

Carbon markets also allow a market to set the price for carbon rather than an arbitrary bureaucratic process.

Now, the sceptics have tried to discredit offsets with all kinds of weak arguments. I would like to answer them here and add several arguments for why carbon markets are fundamentally a good idea:

Sceptics’ Argument: Credits are an excuse for big companies to avoid reducing their pollution.

If companies can reduce more carbon emissions by paying someone else to do it than they can by reducing their own emissions, then why would we not want to get more reductions for the same amount of money? And, at the same time allow emitters a period of transition until cheap credits and offsets are used up which will increase demand, raise prices and make reductions of their own emissions more compelling.

Sceptics’ Argument (this is a variation of the first one): The rich will use credits and offsets to buy their way out of changing their lifestyle to reduce their emissions.

The rich generally pay higher taxes than most and therefore pay disproportionately for all kinds of things for society.

Sceptics’ Argument: Credits/offsets markets will be scammed by unscrupulous dealers.

The industrialized world has been trading stocks and bond for decades.  Many North American investors invest in stocks on European and Asian markets without concern for the integrity of the markets. We invest in the stocks of say, banks, here in Canada everyday in great numbers and it would be to say the least very difficult for most investors to really understand how a bank works.  So, how do we do all of this? We have faith in these markets and in the system of developing and verifying stocks (and bonds) because there is a great infrastructure that verifies the integrity of stocks and in turn the markets they trade on. This structure involves market regulations, information transparency, and generally accepted accounting principles. There are already international agencies that verify carbon credits. And there are functioning markets. In BC, the government has set up its own group to verify carbon credits and to help develop them. This can be done effectively.

Sceptics’ Argument:  The European experience with a carbon market has not worked because too many carbon allocations were given away n the first place.

If we expect every initiative in dealing with climate change to be perfect right out of the gate, then we would never get going. We hardly expect every other government initiative or business initiative to work perfectly immediately. We would never have had oil sands oil if the process of extracting it had to be economic right away. It took years for it to be economic. It took some time for Europe to get it right but we can now benefit from that experience.

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