“We cannot solve our problems with the same thinking we used when we created them.” Albert Einstein
By Mark Tsang, Head of Data at AgUnity and Concept Creator at AgriUT
While the attribution of this quote to Einstein is likely more folklore than fact the sentiment bears relevance when solving for the wicked problem of climate change. Global warming is a direct consequence of the societal paradigm of industrialisation that demands ever more energy and enables the massive scale transformation of natural landscapes into those that serve humanity. This paradigm has been dominant since the mid 18th century and over this period the cheapest and most abundant forms of energy have been based on the fossil fuels of coal, oil and gas — accompanied by their global warming effect. Market based economics and consumption based capitalism have fuelled the demand for goods and services that reach beyond the Earth’s natural capacity and ability to recover leading to a planetary state of decline. However, global recognition of the problem began in 1992 at the Rio Earth Summit which brought about the United Nations Convention on Climate Change (UNFCCC) and its global treaty.
More recently, the UN COP 26 on Climate Change brought with it a raft of outcomes that address the worsening climate situation. One of the most watched discussions in COP26 was that of Article 6 and the rules around carbon markets. Carbon markets have been operating since the Kyoto Protocol with varying levels of success and failure. McKinsey, the World Bank and many other commentators and economists argue that they are essential in tackling climate change as they provide economic incentives to decarbonise. On the other hand, some argue that the use of market mechanisms isfundamentally flawed and only serves to delay real action. After all, wasn’t it free market capitalism that has contributed to the poor state of the planet? Time to remember Einstein’s quote here. With such opposing views the effectiveness of carbon markets in combatting climate change is contested and will be over the coming years.
Architects of Article 6 prescribe carbon markets to achieve least-cost abatement of greenhouse gas (GHG) emissions. They leverage well-established market methods to create economic incentives toward decarbonisation. They realign private capital and raise public funds toward climate mitigation and adaptation projects. They promote the transfer of climate technology from developed to developing worlds and they internalise the costs of carbon into other markets to alter asset valuations. Carbon markets are based on the principle of the “polluter pays” which incentivises industry to reduce their emissions while the reducing emissions “caps” of regulatory markets ensure a progressive decline of allowable emissions.
Sound too good to be true? Foster et al (“The Midas Effect: A Critique of Climate Change Economics”) and Bachram(“Climate fraud and carbon colonialism: the new trade in greenhouse gases”) argue in their papers that carbon markets are based on the current version of neo-liberal capitalism which was the major cause of GHG emissions in the first place and this system must be replaced with low-growth alternatives along sustainable development paradigms. Brown and Corbera in their 2003 paper “Exploring equity and sustainable development in the new carbon economy”, call out the negative social impacts of carbon markets that concentrate wealth in market participants and thereby exacerbate inequality. Carbon offset projects in developing nations have marginalised local communities and even displaced them from their traditional lands for carbon sink forestry projects or dam building resulting in a form of carbon colonialism. One of the biggest risks of carbon markets lies in the instrument of offsets. While the theory of counteracting hard to abate emissions in the short to medium term holds merit the practical risks are that emitters deliberately hide behind offsets to delay other costly emissions reduction actions — a climate fraud.
Action on climate change is time critical. The longer we stay behind the curve toward our 1.5 degrees of global warming target, the harder it gets to achieve. We no longer have the luxury of time to solely rely on a remodelled social paradigm that intrinsically spawns a low-carbon society. The impact and urgency of climate change warrants bringing all solutions to bear. Carbon markets are a here-and-now mechanism that can allow multi-level scrutiny, progressive adjustment and international economic pressure to be applied (e.g. through border adjustments). Markets, economics and money are a language that all countries understand. They will provide the conduit through which, our collective global action on climate change can speak.
In balance, carbon markets are not the sole saviour to climate change. They are one of an array of policy tools that must be used to both incentivise and enforce the necessary decarbonisation of our societies. Strong governance and monitoring of markets are critical to eliminate “gaming of the system” and to ensure emissions reductions actually happen, because, if left to their own devices, carbon markets can masquerade as Saviour while perpetrating the Fraud.
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