Carbon Trading: Who Gets What, When, and How?

Abstract

The six articles in this special issue shed a fascinating light on the global diffusion of carbon trading and advance our political understanding of emissions trading systems (ETSs) all over the world. They show the various interactions and spillovers that occur and that push for the extension of carbon trading to more sectors and more countries, now including such diverse jurisdictions as China, Vietnam, Kazakhstan, New Zealand, and California. The studies also highlight the role of learning and how choices about design are very often deeply rooted in domestic politics. The authors thus nicely combine analyses of international top-down processes with an understanding of national circumstances and local power structures.In this forum piece, I want to push the argument that carbon trading is a highly political, multi-actor, and multilevel process. ETSs are artificial and would not exist without public regulation, but thanks to various analyses like the ones in this special issue, we know in much more detail who gets what, when, and how (Lasswell 1936). In the following sections, I will build on these insights and try to highlight, on the one hand, where we still need more research, and on the other, what follows for the politics of carbon markets. I will first recapitulate why carbon markets have been set up in the first place and why they have been criticized so strongly. Then I will describe the current regulatory trends at the national level, before global aspects of emissions trading are highlighted. Lastly, I will contemplate the question of who benefits from carbon trading.Trading carbon is one way of dealing with the danger of climate change, and particularly at the transnational level, various forms of interventions have evolved, which include ETSs but go beyond market-based approaches (Bulkeley et al. 2014). Trading carbon seems to be the most contested form of climate politics. On the one hand, there is a convincing economic argument to be made that emissions trading is an efficient and effective instrument for mitigation (OECD 2016). On the other hand, in theory as well as in practice, various problems arise (Aldy and Stavins 2012). Currently, prices in all ETSs, but particularly in the European one (EU ETS), are very low; thus, investors are reluctant and politicians are doubtful what to do. Also, criminal activities have surfaced in many of these nascent markets, and various civil society groups—for example, Carbon Trade Watch (www.carbontradewatch.org/)—are hostile toward carbon trading (Böhm 2013). Critics thus argue that the diffusion of market mechanisms resembles “flogging a dead horse,” or in the words of Oscar Reyes, watching “Carbon Market zombies stumble on” (Reyes 2012, 28). Even more fundamentally, trading carbon is for some the final attempt to use capitalist means to solve problems that capitalism has brought about in the first place (Klein 2014; Lohmann 2009). Critics of carbon markets thus often plead for non-market-based alternatives, such as degrowth strategies or top-down regulation (e.g., Jackson 2009).Nevertheless, emission trading is a fact and is very much in vogue; it may even best represent what Bernstein has labeled “liberal environmentalism” (Bernstein 2002), or Newell and Paterson’s proposed “climate capitalism” (Newell and Paterson 2010). In 2016 seventeen ETSs were in operation, covering 9 percent of all greenhouse gases, and in 2017 this number could reach 15 percent (ICAP 2017, 22). In 89 out of 160 Intended National Determined Contributions that were issued before the 2015 climate conference in Paris, carbon markets were either considered or planned (ICAP 2016, 25–26). In nineteen jurisdictions an ETS is actually working (ICAP 2017, 19). One should, however, be careful not to extrapolate a linear growth trend, since the cases of Australia and New Zealand show that regression is also possible, and Australia has even repealed its plans to set up an ETS.Furthermore, the articles in this volume show that the establishment of an ETS is only one instrument that governments are prepared to employ. In California, for example, the ETS is even considered to be only a “backstop,” there to “sweep up remaining cuts” (Bang et al., this issue); likewise, the EU ETS covers only 45 percent of European greenhouse gas emissions, and the rest are covered by other regulatory measures. Emissions trading is enjoying particular salience in political discourses because it symbolizes the hope that market mechanisms can be employed to reduce emissions. The cases of the EU, Australia, Kazakhstan, California, China, New Zealand, Thailand, and Vietnam that are analyzed in this issue show that a highly interesting mix of transnational diffusion processes and domestic policies is evolving. They also go beyond dichotomous pro/con argumentation about whether carbon markets should be used at all, by focusing instead on actual practices, without being naïve about the political consequences. Because trading carbon will be a political reality for the time to come, future scholarship will be well advised to also look at the empirical reality of what is happening, leaving behind a purely ideologically grounded evaluation of carbon trading.For carbon markets to work, demand must be created, and this can only be achieved through governmental or intergovernmental actions. In a nutshell, when it comes to carbon, there are no spontaneous markets. Thus, at the beginning of each ETS there is public regulation, and the articles in this volume convincingly argue that stringent regulation is happening on either the national or the subnational level. Although for a few years hopes were high that a global carbon market would evolve, or at least strong global linkages between national or regional markets (Flachsland et al. 2009), demand in these markets is now mostly set at a national scale. Of course this is not true for the EU, where European legislation sets the cap for all member states, or for California, where the California Air Resources Board plays a pivotal role (Bang et al., this issue), but these exceptions rather prove the rule that a strong public agency must be in place to guarantee that the market can evolve. In some jurisdictions, however, the question does arise whether governmental agencies can deliver a strong regulatory framework. This questioning seems particularly prevalent for some emerging economies, which can no longer rely on classical donor support and now seem to have turned to ETSs for a new source of revenue, without having enough government capacity to actually establish such systems (for the cases of Thailand and Vietnam, see Smits; for Kazakhstan, see Gulbrandsen et al., both in this issue). China is the most interesting case, because it is set to transform its seven carbon-trading pilot schemes into one national one from sometime in 2017, and then it will most likely evolve into the largest carbon market in the world. Capacity within the administration has been increased, and various donors and other countries have played important roles, although it remains a challenge to establish a market in a nontraditional market economy (see Biedenkopf et al., this issue). However, we should not underestimate such “second-best” institutions, which currently are working quite well.In most cases a central government agency has been set up and has evolved as the focal point of regulatory activity (in California, the California Air Resource Board; in China, the National Development and Reform Commission; in New Zealand, the Emission Trading Group and the Treasury; in Australia, the National Emissions Trading Taskforce; in Kazakhstan, first the Ministry of Environment, and since 2014 the Committee on Environmental Regulation and Control). Furthermore, although ETSs are highly varied—for example, in the sectors they cover (New Zealand’s system includes forestry, whereas RGGI in North America deals only with electricity generation)—there is an overall tendency to shorten the leash of price mechanisms. Thus, more and more systems are setting up price floors. California, for example, has introduced one (see Bang et al., this issue), and other jurisdictions are taking functionally equivalent steps to influence the price mechanism—for example, the Market Stability Reserve of the EU ETS. It thus seems fair to say that regulators in all jurisdictions that employ carbon markets realize that the invisible hand of the market needs a lot of visible public guidance for it to work (for a similar conclusion, see ICAP 2017, 2).The political economy of carbon markets and the diffusion process across various countries are deeply embedded in domestic politics, including interest group politics, (sub)national regulatory traditions, and bureaucratic turf wars. The studies in this volume focus particularly on diffusion and learning, but they also highlight nicely that diffusion is not a neutral and apolitical process—quite the contrary. Transnational and transgovernmental chains of influence are anything but one-way streets, for three reasons: first, regulators do not simply copy good practices elsewhere, but also learn from mistakes in other jurisdictions; in particular, the good and bad experiences of the EU ETS have influenced the practices in other countries. Regarding positive lessons, California, for example, took up various design properties from the EU and successfully included them in its subnational design. Regarding negative experiences, the unambitious reduction targets and overallocation of pollution allowances within the EU ETS have been closely scrutinized and taken into account all over the world, although overallocation is still a major issue. For example, Australia started auctioning off at least a part of its emission rights from the very beginning, realizing that the initial free allocation of permits had not been helpful in the EU (Müller and Slominski, this issue). Second, the setup of an ETS is often adapted to specific domestic circumstances; for example, New Zealand was strongly influenced by international mechanisms only at the beginning, but at a later stage its design features were dominated by domestic concerns. The government thus intended to include the country’s large agricultural sector, and adapted the mechanism to its rather atypical emissions portfolio (Inderberg et al., this issue). Similarly, pressure from current industrial players in Kazakhstan considerably reduced the ambition and slowed down the timing of introducing that country’s ETS (Gulbrandsen et al., this issue).Finally, domestic actors deliberately and strategically choose which experiences they think of as relevant. Such forms of “political learning” took place, for example, in Australia, where the government opted for high compensations for fossil-fuel-based electricity companies, similar to the compensations in the EU ETS, although its own experts advised against this, and although even most observers of the EU ETS say that such compensations have had highly negative effects on the system (Müller and Slominski, this issue). Selective learning also takes place in the sense that governments deliberately choose their experts. None of this implies that transnational or transgovernmental influence is negligible, as the case of capacity building in China (Biedenkopf et al., this issue) and the role of ICAP in Vietnam and Thailand (Smits, this issue) show. Gulbrandsen et al. (this issue) thus rightly state that we should not expect full convergence between the various systems, but rather a pick-and-choose strategy that can best be explained by focusing on the level of domestic politics. In particular, Southeast Asia will be quite interesting in the coming years, since a lot of selective political learning will likely occur as the Chinese ETS evolves to become a new blueprint for states with traditions of state-led development similar to those of China (Lederer 2014).Carbon markets are thus embedded in broader trends of polycentric climate governance, and besides transnational and top-down diffusion, we can expect various feedback loops to evolve. This will not necessarily reduce the high level of fragmentation that climate politics in general, and carbon markets in particular, are experiencing. Furthermore, any plans to link markets across jurisdictions will have to take into account the current trend toward protectionist policies, including the current US administration’s stance on free-trade agreements. Regional linkages will thus be of much greater importance within the coming years, and Southeast and East Asia are where some form of integration seems most promising (see also Smits, this issue).Analyzing carbon markets should imply the question of who benefits from an ETS, and we are only beginning to understand who the losers and winners of carbon trading might be in the long run. From a monetary perspective, we know that the auctioning of permits generated public revenues of close to US$ 30 billion in 2016 (ICAP 2017, 2), but who gets what share, and can we say anything about nonmonetary benefits? The studies in this volume undertake a first cut at highlighting the benefits for various constituencies, as the authors take into account the input of domestic players and show how they could influence the payoffs of carbon trading. In California, for example, disadvantaged communities could profit from the revenues of the Greenhouse Gas Reduction Fund (Bang et al., this issue), whereas in Australia the coal industry was able to successfully lobby for large exemptions (Müller and Slominski, this issue). In state-led countries like China, Kazakhstan, Thailand, or Vietnam, the input of nonstate actors was much lower, but no instances of outright capture have been observed, either. Besides these rather general observations, however, we hardly have a systematic understanding of which parts of the populations, which sectors of the economy, and which individual companies actually profit from emissions trading, and how they do so. We also do not know whether any lessons learned in this regard have been transferred to other jurisdictions. On the one hand, we should doubt the functional promise that those who emit the most carbon will be most negatively affected, but on the other hand, we should also be skeptical of extrapolations, from individual cases in which specific groups have faced negative externalities, that the whole mechanism is in peril and that no collective goods are being created. Another interesting but rather neglected issue is the question of whether spillovers and feedback loops of diffusion and learning are also feeding back to the EU ETS. Particularly with China’s national ETS starting soon, policy-makers as well as academic observers should be open to possible lessons that may be learned from the experiences of a nontraditional market economy. Such lessons could illuminate design aspects in a range of sectors, as well as highly political issues like the direct influence on prices that the national government will employ.Finally, we have to remind ourselves that market-based instruments cannot work if there is not enough demand, and all institutional innovations or forms of diffusion will be futile if there is no political will for a serious cap that in turn will lead to higher prices. In this, the critics of carbon trading are both right and wrong. Right, in that ETSs by themselves will not solve the problem of anthropogenic climate change, and politics will need to play a bigger role. Wrong, in that carbon markets per se are less the problem than the missing political ambition that is reflected in their low prices. Currently, 90 percent of all emissions from energy use are being priced below US$ 30, in the form of gasoline taxes and such, and the OECD claims that this rate is the minimum that could account for the current damages these emissions generate (OECD 2016, 3). It is obvious that higher rates would also lead to more substantial innovations in the field of low-carbon technologies. At the end of 2015, however, only California, the EU ETS, and the Korean ETS had a price range that was slightly above US$ 10 (ICAP 2016, 27), and the current prices have fallen even more; for example, European certificates cost less than €5 at the time of this writing (April 2017). At the current price levels, ETSs and the accompanying diffusion processes provide a good chance to learn transnationally and to build up capacities, but they are not serious and effective instruments to avoid dangerous climate change. However, if we take into consideration that some of the proposed alternatives—ranging from the degrowth movement to Promethean promises of climate engineering—are from technological, economic, and above all political perspectives even more problematic, we will find that carbon trading, in combination with the promotion of low-energy technologies, is still one of the best instruments available.