From the University of Edinburgh
Free market is best way to combat climate change, study suggests
The best way to reduce carbon emissions and combat climate change is through the use of market forces, according to a new study.
Researchers who monitored the effectiveness of the European Climate Exchange (ECX) – the world’s biggest carbon trading platform – found it to be as efficient as Europe’s two biggest exchanges, the London Stock Exchange and the Euronext Paris.
Using free market platforms like the ECX to combat climate change could provide the basis for the introduction of a mandatory emissions cap and trade scheme worldwide.
The report found that the value of the trades on the ECX were higher after the market closed, a sign of growing sophistication within platforms. It means that trades were made with greater confidence based upon increasingly detailed information.
Researchers said there are also signs of maturity based on increased liquidity – the immediate availability of a party to trade with – and price efficiency, which means all available information is incorporated into prices so they are traded in a relatively transparent manner.
The ECX was created by the EU Emissions Trading Scheme (EU-ETS) in 2005 to help the European Union (EU) achieve its obligations under the Kyoto Protocol to reduce carbon emissions.
The EU set limits and issued permits for how much carbon firms could emit into the atmosphere. If companies exceed their limit, they incur regulatory penalties.
To avoid this, the EU-ETS allows firms with high emissions to buy the permits of other companies on platforms such as the ECX. By creating a market, it gave firms a financial incentive to reduce their carbon emissions.
Researchers said that changes are needed to ensure the EU-ETS survives Europe’s economic downturn. Since the study appears to confirm the ECX’s effectiveness, researchers say the EU-ETS should be allowed to self-adjust emission caps in reaction to changes in the Eurozone’s fortunes and industrial production.
Gbenga Ibikunle, from the University of Edinburgh Business School, said: “While individual responsibility for combating climate change is important, much needs to be done to incentivise companies – especially those who emit most of the world’s carbon – to cut back too. This study shows that free market mechanisms such as the EU-ETS can be effective in doing that. Several other schemes around the world are already learning from this and adopting it as a model.”
The paper is published in the International Journal of the Economics of Business.
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kretchetov says:
July 16, 2013 at 4:49 am
““There are many ways to lose money, and they just keep inventing new ones, when old ones work just fine”, I believe Warren Buffet said something along those lines.”
Warren also knows the one and only way to make money. Have some friends in DC.
A solution that doesn’t work for a problem that doesn’t exist.
How appropriate.
One word – “Enron”
WOW!
“The EU set limits and issued permits for how much carbon firms could emit into the atmosphere. If companies exceed their limit, they incur regulatory penalties.”
And maybe Mother Nature will give them a spanking on their little fannies for being so bad…how about ACTUALLY EARNING MONEY AND PRODUCING SOMETHING OF VALUE?!?
I don’t have time to read all the comments so far, so maybe this point has been made.
The concept of a free market in emissions is a good one, provided the particular emission being addressed is one that should be limited. It makes more sense than government-mandated rules because it will more efficiently allocate resources. This is just basic economics. The person purchasing the emission credit has a better economic case for using it than the person selling it. To implement such a design fairly, you should establish a baseline period in the recent past and measure all party’s emissions at that time and allocate annual emission credits based upon that past usage, for free. Then let them trade the credits. If you want less future emissions, you set the total credits at a sum less than the past usage. If you just want no increased growth in emissions in the future, you set the total credits exactly at the past usage.
One of the benefits of such a system is that it allows for, and encourages, innovation. A company that devises a way to produce their output while generating far less emissions than in the past will not need to purchase credits, and will be able to sell what they have been allocated. Eventually, as their innovation spreads, the price of the credits goes to zero because they’re no longer needed by anyone. In that way, the market-based policy drives the desired policy result, i.e., lower emissions overall.
The real problem is in the determination that something is an emission that should be controlled. CO2 is not such an emission. That’s where the market-based strategy goes awry, not in the design itself. Also, the politicians designing the system are unlikely to award the annual allotment of credits at no charge, as they should. Instead, they will charge for them, in effect instituting yet another tax on business.
Carrying this approach further, imagine that instead of the government mandating a mpg standard for vehicles, they instead used such a market-based approach. The government could set 30 mpg as the standard, and set a certain amount of credits for every ton of vehicle sold, for example one credit per ton per mpg it gets above or below 30 mpg in testing. So, if a 2 ton car gets 35 mpg, the manufacturer gets 10 credits for selling it, and if a 3 ton SUV gets only 20 mpg, the manufacturer has to give up 30 credits to sell it. Give all manufacturers an allocation based upon their 2012 production values and let them proceed.
Note that a new entrant, coming in with only 30 mpg vehicles, would not be disadvantaged. That company would not generate or use credits. If they chose to sell trucks, they would have to purchase credits from others. If they chose to sell small cars getting 40 mpg, they would generate credits to sell to others once their baseline was established. And if people want to buy SUV’s they’d be paying for the privilege by financing the cost of the mpg credit the manufacturer was spending. This would be a far more efficient process than just having the government decree, as it now has, that the vehicle average must top 50 mpg in the near future, an edict that will almost certainly be repealed, but will cause untold harm to the industry, and its customers, in the meantime.
There is no evidence that CO2 has any effect on climate. Such an effect does not appear in the paleoclimate record and there are sufficient negative feedbacks provided by H2O to mitigate any effect that added CO2 might have. There are many good reasons to be conserving on the use of fossil fuels but global warming is not one of them. Carbon credits may be a good revenue generating tool but it has no effect on climate. Under such a carbon credits scheme I would think that one could open a company that is nothing more than an email address and sell carbon credits to other companies who actually expect to do something. What is the government going to do about unlicensed termite nests?
The real greenhouse gas problem is not Carbon based molecules but Hydrogen based molecules Nations should develop a Hydrogen credits trading scheme. Where I live, there is so much Hydrogen based greenhouse gas in the atmosphere that it often condenses out as a liquid. The city collects the liquid in a network of underground pipes but instead of destroying this liquid, they just dump it outside of the city limits where it is allowed to evaporate back into the atmosphere. To date our EPA has done nothing to mitigate this problem. A Hydrogen credits scheme may be the only solution.
Rod Everson says:
July 16, 2013 at 7:53 am
“I don’t have time to read all the comments so far, so maybe this point has been made.
The concept of a free market in emissions is a good one, provided the particular emission being addressed is one that should be limited.[…]”
Notice that once their parody of a market didn’t behave as they wanted to they decided to change the rules. Which is what unaccountable unelected tyrants always do.
As a consequence long term investments in the EU become irresponsible. What is left is get-rich-quick schemes.
And that is what they will get.
King of Cool says:
July 16, 2013 at 5:30 am
“Rudd said “Next thing Abbott will be saying is air is invisible!””
He said “It’s a bit like saying because air is invisible, it’s not real,” Mr Rudd said”. I support making fun of him but we should stay factual – not to be nice but to maintain credibility.
More silly nonsense, why is carbon trading needed when clearly the US experience in reducing so called CO2 emissions has proceeded without a trading system and more effectively than any existing CO2 trading system ever produced? The US market has reduced CO2 emissions organically without the imposition of false costs and needless bureaucrats to oversee it.
If it ain’t broke don’t fix it!
The dirty little secret of Capitalism is that in the drive to increase the bottom line the expense of waste in any form minimized and that includes energy consumption of any kind.
The truth is that IF solar power conversion efficiency jumped dramatically from the miserly percentage levels existing now, inverter costs dropped and a viable cost effective battery storage system existed, no one would be objecting to a wholesale move to solar other than the utilities losing out on charging high prices for KW demand. Those stranded costs can be killer as they found out under electric deregulation. In the meantime, an off-grid solar home is a rich person’s status symbol or an island nation’s necessity. It’s all about the dollars and don’t let some fool of a greenie tell you otherwise.
Yup, trading bits of paper with “Your SINS are forgiven” on them will certainly help the temperature….
“International Journal of the Economics of Business.” doesn’t even blink when the EU-ETS is described as a “free market mechanism”?
ISTM about as “free-market” as the West’s trade in East German Marks before the wall came down.
Maybe the author could explain to me what’s free about a free carbon market.