Carbon markets: Effective policy?—Response

Abstract

Cullenward and Wara raise two main issues: (i) Are carbon markets delivering the reductions they were designed to deliver? (ii) Can we use economic theory to calculate the extent to which carbon markets are reducing emissions? They then highlight two problems—leakage and offsets—that suggest carbon markets are not performing as designed. Emission targets and programs are often designed with some understanding of potential problems. The Regional Greenhouse Gas Initiative (RGGI) was fully aware of the potential for leakage to neighboring regions, and intentionally designed their program to operate with low prices that limit leakage ([ 1 ][1]). California may have believed that it could successfully address leakage, but it also implemented a price floor that largely protects the rest of the program if it occurs ([ 2 ][2]). The European Union placed strict limits on the use of offsets, in turn limiting the potential for their abuse ([ 3 ][3]). Similarly, the Bonn and Marrakech conferences after the Kyoto Protocol largely renegotiated the original targets through limits on credits for carbon sinks, highlighting how even credit provisions that are widely acknowledged to influence environmental effectiveness can be part of an intentional program design ([ 4 ][4]). We believe that although leakage and problematic offsets are never desirable, they are often occurring in a way that was anticipated at the time the program was designed. To answer Cullenward and Wara's second question, we do not think that leakage and offsets negate the mitigation effects of the observed carbon price. We argue that carbon markets—even if flawed—are working and are reducing emissions. Leakage and certain offsets can yield reduction credit where it has not actually occurred in aggregate. Such reductions, however, are in addition to all of the real abatement activities that will occur at a given market price. We can certainly imagine subtleties that caution us from being too precise about our rough calculations, but our review suggests these issues are not problematic. 1. [↵][5]RGGI Emission Leakage Multi-State Staff Working Group, “Potential emissions leakage and the Regional Greenhouse Gas Initiative (RGGI): Evaluating market dynamics, monitoring options, and possible mitigation mechanisms” (2007); [www.rggi.org/docs/il\_report\_final\_3\_14_07.pdf][6]. 2. [↵][7]1. H. G. Fell, 2. D. Burtraw, 3. R. D. Morgenstern, 4. K. L. Palmer, 5. L. Preonas , Soft and hard price collars in a cap-and-trade system: A comparative analysis (Resources for the Future Discussion Paper 10-27-REV, 2010). 3. [↵][8]1. D. A. Ellerman, 2. F. J. Convery, 3. C. de Perthius , Pricing Carbon (Cambridge Univ. Press, Cambridge, 2010). 4. [↵][9]1. C. Bohringer , Oxford Rev. Econ. Pol. 19, 451 (2003). [OpenUrl][10][Abstract][11] [1]: #ref-1 [2]: #ref-2 [3]: #ref-3 [4]: #ref-4 [5]: #xref-ref-1-1 View reference 1 in text [6]: http://www.rggi.org/docs/il_report_final_3_14_07.pdf [7]: #xref-ref-2-1 View reference 2 in text [8]: #xref-ref-3-1 View reference 3 in text [9]: #xref-ref-4-1 View reference 4 in text [10]: {openurl}?query=rft.jtitle%253DOxford%2BReview%2Bof%2BEconomic%2BPolicy%26rft.stitle%253DOXF%2BREV%2BECON%2BPOLICY%26rft.aulast%253DBohringer%26rft.auinit1%253DC.%26rft.volume%253D19%26rft.issue%253D3%26rft.spage%253D451%26rft.epage%253D466%26rft.atitle%253DThe%2BKyoto%2BProtocol%253A%2BA%2BReview%2Band%2BPerspectives%26rft_id%253Dinfo%253Adoi%252F10.1093%252Foxrep%252F19.3.451%26rft.genre%253Darticle%26rft_val_fmt%253Dinfo%253Aofi%252Ffmt%253Akev%253Amtx%253Ajournal%26ctx_ver%253DZ39.88-2004%26url_ver%253DZ39.88-2004%26url_ctx_fmt%253Dinfo%253Aofi%252Ffmt%253Akev%253Amtx%253Actx [11]: /lookup/ijlink/YTozOntzOjQ6InBhdGgiO3M6MTQ6Ii9sb29rdXAvaWpsaW5rIjtzOjU6InF1ZXJ5IjthOjQ6e3M6ODoibGlua1R5cGUiO3M6NDoiQUJTVCI7czoxMToiam91cm5hbENvZGUiO3M6NToib3hyZXAiO3M6NToicmVzaWQiO3M6ODoiMTkvMy80NTEiO3M6NDoiYXRvbSI7czoyNToiL3NjaS8zNDQvNjE5MS8xNDYwLjMuYXRvbSI7fXM6ODoiZnJhZ21lbnQiO3M6MDoiIjt9