Environmental Markets: Uses or Abuses?

By Emily Duchenne - Geography Student @ Brasenose College, Oxford

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Environmental governance is a broad and dynamic concept that seeks to improve the state of the social and natural environment whilst supporting sustainable development. The use of environmental markets, an approach of increasing interest and funding for environmental conservation through the market mechanism where ecosystem services are assigned monetary value, is being increasingly considered a means of addressing conflicts over environmental resources such as rivers, forests and clean air.

This decentralisation from the state and monetisation of the environment is argued to be an efficient means of managing the environment privately as actors aim to mitigate their environmental impacts through profit-maximising methods such as cap-and-trade schemes, picking up government failures and providing social benefit through taxation. However, many argue that the use of markets continues to prioritise businesses, profit and accumulation in manners that may be considered sustainable, but still depend on environmental and ecological destruction. Here, I will assess the use of environmental markets in relation to greenhouse gases and carbon emissions, where carbon cap-and-trade schemes are being increasingly used to mitigate pollution.

Cap-and-trade schemes are a form of environmental market, where maximum levels of allowable carbon emissions are set for carbon-polluting industries by official bodies such as central governments. Where companies do not reach this maximum limit, they are able to sell their remaining allowable pollution credits to other companies. The profit-maximising nature of this sector means firms are likely to invest in research and technology to reduce the rate of carbon emissions and thus maximise their remaining sellable pollution credits, with supporters arguing this works to promote long-term climate-change prevention strategies. Cap-and-trade markets are therefore a popular way of mitigating greenhouse gas emissions, with the carbon offsets market in 2008 being worth $400m.

One example of carbon trading that has been hailed as a success is in the American Mid-West, where private landowners have been able to convert their land into carbon credits. These credits are then sold to carbon-polluting companies, who then retire the credits, and so the land is kept as cropland and the carbon within it remains sequestered. For example, in 2014, Chevrolet purchased credits using this protocol as part of its corporate sustainability initiative, purchasing and retiring nearly 40,000 tonnes of carbon in North Dakota. Carbon markets here have therefore played a role in keeping cropland and preventing CO2 emissions from being released into the atmosphere from land destruction.

However, the pressing question of why Chevrolet would do this is key in comprehending and critiquing the use of carbon markets. For Chevrolet, buying these credits can be understood as a ‘free pass’ for polluting activities. In this carbon trading context, the purchasing of credits means Chevrolet is still able to pollute 40,000 tonnes of CO2 emissions, therefore the emissions have shifted from the landowners to the company, ‘indulging’ the private sector through the carbon market. This means although the land here was saved, the total amount polluted still remains high, and so the prioritisation of profit over actually not polluting is to the detriment of the environment. Stricter regulations that actually limit the amount one company can pollute is necessary to avoid these loopholes that can be exploited by richer companies that can afford the purchase of thousands of credits, yet such moves require legislation and considerable administration that powerful industries continue to lobby governments against.

Environmental markets are a useful way of incentivising companies to take an interest in using environmental resources more efficiently and well as promote non-polluting activities. However, reliance on the free-market risks long-term inefficiencies as loopholes to continue polluting are exploited in the drive to maximise profits. Integrating environmental markets with the state is important to address these shortfalls and provide proper legislation and infrastructure where needed, yet the impact of lobbying by powerful industries is not something to be underestimated, therefore change and accountability surrounding these inefficiencies is not as simple as it may sound.

Further reading:

1. Goodin, R.E., 1994. Selling environmental indulgences. In Climate Ethics. Oxford University Press.

2. Goulder, L.H. and Schein, A.R., 2013. Carbon taxes versus cap and trade: a critical review. Climate Change Economics, 4(03), p.1350010.

3. Hepburn, C., 2007. Carbon trading: a review of the Kyoto mechanisms. Annu. Rev. Environ. Resour., 32, pp.375-393.

4. Perino, G., 2015. Climate campaigns, cap and trade, and carbon leakage: Why trying to reduce your carbon footprint can harm the climate. Journal of the Association of Environmental and Resource Economists, 2(3), pp.469-495.