Market failure exists when the competitive outcome of markets is not
efficient from the point of view of the economy as a whole. This is
usually because the benefits that the market confers on individuals or
firms carrying out a particular activity diverge from the benefits to
society as a whole.
Carbon markets have lost us more than 15 years in the battle against
climate change yet we continue to plough forward with scaling them up.
Why?
Some hope that this global expansion of carbon markets will revive
their fortunes, helping to raise billions for investments in low-carbon
and climate change mitigation technologies. Others, including myself,
take a more evidence based approach, arguing that this hope of the
pro-market lobby is unfounded, given the inefficient and even corrupt
nature of carbon markets so far. There is an urgent need for
alternatives to be considered, as the world is running out of time to
curb the most serious impacts of run-away climate change.
The principles of carbon markets were established in the 1997 Kyoto
Protocol, but to date there have been few, if any, measurable reductions
in greenhouse gas (GHG) emissions that can be attributed to these
measures. The two most important carbon markets so far – the EU Emissions Trading System (EU-ETS) and the UN's carbon offsetting scheme, Clean Development Mechanism
(CDM) – are failures, yet, new carbon markets based on these schemes
are being planned in both developed and developing nations.
The EU-ETS is in turmoil at the moment, as the scheme is more over
supplied with carbon allowances than ever before. This means that power
stations and factories have been allocated more allowances than they
actually need, due to the serious recession in many countries, but also
due to intense industry lobbying. There has also been a flood of cheap
CDM carbon credits, which has contributed to the price of carbon being
so low that it currently is a negligible cost to industry, and, more
importantly, it does not incentivise investments in low-carbon
technologies.
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