COP21: A call for leaders to revise carbon pricing

Meeting with Dr. Richard L. Sandor, named ‘The Father of Carbon Trading’ by Time magazine, to discuss the role of finance in the fight against climate change.

“ The power of the financial markets. 

For the last 25 years, emissions markets have been successfully used to facilitate pollution reduction. We’ve seen it in the US with the Acid Rain Cap-and-Trade Program, and in Europe  with carbon trading. Individual U.S. states (e.g. California) and regions (E.g. Northeast through Regional Greenhouse Gas Initiative known as RGGI) are using markets effectively as a comprehensive environmental policy tool. Using markets to shape environmental change is clearly working. The initial challenge in the 1990s was how to put a price on a global pollutant – carbon.  It had only been done before at the regional level – with acid rain - but the idea of using financial innovation at a global level was both daunting and exciting. The creation of an emissions trading exchange enabled us to put a price on air, with positive results. The Chicago Climate Exchange (CCX) was launched in 2003, after a four year design process. During the course of its operations the emissions covered by CCX became larger than that of Germany under the European Union Emissions Trading Scheme. It included 50 states and major sectors of the U.S. economy, including 20% of the largest carbon dioxide (CO2) emitting electrical utilities in the U.S., and 11% of Fortune 100 largest companies. By putting a price on carbon, the CCX was able to change behavior not only in corporate Boardrooms but across farms, forests and villages in a dozen countries in four continents.

Creating incentives to accelerate the reduction of carbon emissions

by innovating tradable pollution permits that promote profit and better risk management as an incentive for good performance.
Through "cap and trade”, emissions are capped and permits (or credits) are created equivalent to an emissions reduction schedule. Trading these permits puts a price on pollution and creates flexibility as to how and where pollution is reduced. Basically, you start with a finite number of permits and lower it over time. 
Via the credit trading system, a company, or sector that reduces pollution below fixed levels, obtains a credit, which it can bank for future use, or sell. This provides flexibility and an incentive to reduce emissions, reallocating efforts from high-cost sources of emissions (who will purchase credits) to low-cost emitters (who will generate and sell credits). Indeed, making carbon reduction commercially logical, and a way to add profitability to a company, will accelerate a global low carbon economy and improve energy efficiency. Companies must carry out emissions third-party audits and measure outputs. The price signal acts as a catalyst for innovation and helps create positive changes in the way companies do business, the way they travel, the way they manufacture, deliver, sell, and help generate greater cuts in carbon emissions.

A plurilateral approach.

There will never be a uniform approach to financing a global low carbon economy. Mechanisms vary from country to country. Some like the EU chose absolute reductions in carbon emissions as the right strategy while others such as China and India chose a carbon intensity approach and energy efficiency approach respectively. China has several carbon emissions trading schemes in operation, and India is implementing energy efficiency markets. With the US, even though the expansion of emissions trading was slowed significantly by its decision to abandon a proposed national policy, regional schemes (such as California and RGGI) are thriving. The challenge is to link these groups of markets to promote a truly global low carbon economy. 

Stay positive. Get creative.

Governments, corporations, businesses, need to come together and share lessons learnt. We need to educate the investment bankers, regulators, governments, lawyers, and engineers. If we don’t do this, we will fail.  COP 21 can help us to have this dialogue. As an economist, I would like leaders present to reset targets, with a revised price for carbon. Do this and the reductions will follow, which is ultimately the aim.