Carbon Markets Biased, Distorted, Undermined Jomo Kwame Sundaram

Carbon dioxide emission taxes, prices and markets have been touted as key to stopping global heating. However, carbon markets have failed mainly because they favour the rich and powerful.

Market Solutions Better?

Mainstream economists believe the best way to check global heating is to tax greenhouse gas (GHG) emissions. Equivalent ‘carbon prices’ have been set for the other significant GHGs. But many have been revised due to their moot, varied and unstable, arguably incomparable nature.

High carbon prices for GHG emissions are expected to persuade emitters to switch to ‘cleaner’ energy sources. Higher prices for energy-intensive goods and services are supposed to get consumers to buy less energy-intensive alternatives.

Positive carbon prices tax fossil fuels, GHG emissions, and products according to their energy intensity. Hence, when carbon prices fall, they deter fossil fuel use less effectively.

Developed countries have set up ‘carbon trading’ systems ostensibly to deter GHG emissions. Firms wanting to emit more than their assigned quotas must buy emission permits from others who commit to emit under quota.

Getting Prices Right?

Conventional economists believe carbon prices should cover the ‘social costs’ of GHG emissions, but disagree on how to estimate them. But policymakers believe it necessary to discount these prices to gain broad acceptance for carbon markets.

A recent International Monetary Fund paper acknowledged, “Differences between efficient prices and retail fuel prices are large and pervasive”. But such distortions undermine the very purpose of carbon pricing.

Gro Intelligence estimated the social cost of carbon emissions at $4.08 per metric tonne in 2022, which is used by the influential Gro-Kepos Carbon Barometer. But Resources for the Future estimated it at $185/tonne, over forty times higher!

While carbon prices are meant to tax fossil fuels, low prices reduce their deterrent effect. Fossil fuel subsidies lower carbon prices, which can even become negative. Such price subsidies undermine carbon markets’ intended effects.

Whenever carbon prices are discounted or deliberately kept low, they are much less effective in deterring GHG emissions. They also distort the price system with many other unintended, but perverse consequences.

Writing in the New York Times, Peter Coy noted the carbon price rose from under $4 per metric tonne in 2012 to almost $20/tonne in 2020 before dropping sharply to around $4/tonne in 2022!

Incredibly, he still concluded carbon prices were “headed in the right direction” since 2012. How low and volatile carbon prices are supposed to discourage fossil fuel use and accelerate renewable energy investments must be self-evident to him alone?

Western Fossil Fuel Subsidies

Carbon prices shot up when fossil fuel energy prices spiked after the Russian invasion of Ukraine in February 2022. But they soon collapsed as European governments intervened to subsidise energy prices.

As the rich nations’ Organization for Economic Cooperation and Development noted, “government support for fossil fuels almost doubled in 2022” to over $1.4 trillion!

State subsidies rise with prices when governments try to mitigate rising fossil fuel prices. Such subsidies negate the purpose of carbon pricing, and can lower them so much as to become negative!

Such subsidies were deemed necessary to retain public support for NATO’s Ukraine war effort and to drive down Russian fossil fuel export prices. Thus, such ‘geopolitical’ interventions have undermined carbon taxes, prices and markets.

Carbon prices dropped sharply worldwide, from $18.97/tonne in 2021 to $4.08 in 2022. In 2022, nine of the 26 countries in the Barometer had negative prices, with only six – not the US – above $25.

Oil and natural gas prices have since fallen from their 2022 peaks, with consumer subsidies declining correspondingly. Hence, carbon prices for GHG emissions have recovered.

Such price subsidies and volatility do not help enterprises plan and invest their energy use – crucial to accelerate needed ‘carbon transitions’.

Unsurprisingly, after over a decade, there is little evidence that carbon markets have effectively cut GHG emissions to avert climate catastrophe. Clearly, they cannot be counted upon to cut them sufficiently.

China, Market Conformist!

Significantly, after China began its emissions trading system in 2021, its carbon price rose to a level higher than the US price in 2022. As its per capita income is much lower than in the West, its higher carbon price is probably a more significant deterrent to fossil fuel use.

China is now the world’s largest carbon emitter, so its $19/tonne price in 2022 significantly raised the international weighted average. Nevertheless, thanks to the subsidies, the weighted average for all other countries was negative at -$4.50/tonne in 2022!

Despite much rich nation rhetoric demanding carbon prices and markets for the whole world, their own commitment to this problematic approach to mitigating GHG emissions has been much more compromised than China’s!

(This article was originally published in Inter Press service (IPS) news on April 9, 2024)