Carbon Debt Trading
By Tovin Gordesky-Hooper
Many market-based climate solutions try to avoid the slow pace of international climate agreements. Unfortunately, market-based solutions often ignore and exacerbate existing social problems (Ciplet & Roberts, 2017, 148). Carbon pricing systems can be an important piece of the puzzle for solving climate change. However, the most popular pricing system, cap and trade, has issues with fairness and impact. Cap and trade is a pricing system where corporations get allowances to pollute, which they can trade. The allowances have value, since polluters are limited to a certain amount of total emissions. The impact of cap and trade could be improved by charging debts rather than giving allowances to polluting corporations. Then, the money could be sent to the communities where the pollution is occurring. This would benefit the communities that are affected by the carbon-intensive industries. This improved system could be less politically feasible since it goes against powerful corporate interests. However, it will be stable since it will create a base of people whose jobs depend on this policy.
The most popular system, Cap and trade, “sets a jurisdiction-wide limit or ‘cap’ on emissions while allowing corporations to save money by distributing emissions cuts among themselves to wherever they can be made most cheaply” (Gilbertson, 2017, 8). Polluting industries get allowances to pollute, which they can buy and sell amongst themselves. Corporations can buy carbon offsets through other corporations. Companies can generate salable credits by sequestering or mitigating carbon emissions through various sequestration projects (Gilbertson, 2017, 31). The amount of allowances are based on how much pollution is deemed acceptable. These allowances are given out by participating countries (Gilbertson, 2017, 26). Cheaper unregulated goods, from countries who don’t participate, have to be accounted for by tariffs or other measures. Since pricing is based on political willpower, the prices are influenced by corporate and political pressures: they do not often reflect a scientifically and economically optimal price (Gilbertson, 2017).
Cap and trade is not very effective, since it pays polluters not to pollute (Gilbertson, 2017). Thus, cap and trade is problematic: it fails to hold guilty actors responsible. Cap and trade doesn’t encourage businesses to emit less. Instead, it creates a market for temporary solutions that pass the burden onto others. For example, one type of project is tree plantations. Tree plantations rely on chemical inputs and could have been otherwise used for food production for locals (Gilbertson, 2017), or could have afforested on their own. Cap and trade ignores these problems and allows the carbon sequestered by the trees to make up for pollution elsewhere (Gilbertson, 2017).
These types of projects just offset the problems in the system, which is not sustainable. Companies that are a large part of carbon pollution can still comfortably continue operations. They might not even have to pay for their offsets, depending on how many allowances they get. This is especially problematic, since the amount of allowances is often excessive and can easily change depending on the political climate. Worse still, these politicians can be influenced by the corporations which they are supposed to clamp down on. All of these political pressures destabilize the value of carbon credits, making their effects less predictable, less effective, and possibly harmful (Van Renssen, 2018, 355; Gilbertson, 2017).
While the current system does not provide enough pressure, it can be improved by charging debts for pollution rather than handing out credits to polluters. Carbon debt trading has the potential to avoid the major problems inherent in standard cap and trade. Carbon debt trading is a carbon market where the carbon price is based on holding polluters accountable by putting them in debt proportional to their impact. These debts could be tied to the cost of either mitigating climate effects or sequestering carbon. The system could be framed as holding corporations responsible for their actions. Like standard cap and trade, the debt can be traded to others who can sequester the carbon cheaper than the set price. However, by tying the price to the effects of the emissions, the credits cannot become a way of hiding from the true cost of their pollution. This also keeps the price high, encouraging innovation in sequestration and efficiency. The debt would only apply to large wasteful households and businesses, so the carbon debt system would encourage income equality.
While some essential industries will not be able to completely go carbon neutral, debt trading will push them to minimize their impact. This would apply much more pressure than traditional cap and trade by tying the cost directly to the burden that polluters put on the world. Emitters put an excessive burden on the earth’s ability to maintain its ecosystems, and on people who are heavily affected by climate change. Although putting pressure on the biggest emitters will be beneficial, this will still have to be balanced with the negative economic effects caused by carbon debt trading. Any impacts caused will have to be accounted for with the distribution of revenues from debt trading.
Additionally, the offsets should be done in the same region as the pollution to avoid taking advantage of the developing world and to keep prices high. Thus, the debt trading system could fix the harm caused by the current system by not rewarding offsetting the problem, but rather putting the burden back on the polluter. Polluters are also discouraged from any harm caused by offsets since that harm is accounted for in the price. This keeps prices accurate to the full impacts of the emitters, so the long-term effects are felt by the polluter. That way the economic costs hurt too much for carbon pricing to allow polluters to avoid the consequences of their actions. This will force businesses to improve efficiency: any businesses which don’t keep up will be at a large disadvantage. Of course these pressures will have to be balanced with human needs when the polluting industries produce essential goods.
The debt trading version of cap and trade will not have its full impact on the public good without ensuring that it helps as many people as possible. Currently, cap and trade can be inequitable since disadvantaged people are rarely included in the solution. They are rarely included in negotiations and are sometimes even framed as the problem (Gilbertson, 2017; Jasonoff, 2018). Cap and trade can also increase prices (Gilbertson, 2017), which impacts the poor the most. It is important that the system be set up to benefit the communities that will be hit with higher prices. This could be done through having communities hold corporations emitting carbon in their area accountable. This has been done successfully through countless environmental organizations which apply various pressures to polluters. However, coding accountability into law provides an extra control mechanism. That way, the communities that are affected by industry reap the benefits of carbon pricing. The economy of these communities could possibly be boosted by this investment since the revenue will go into circulation. The community can also determine, through local direct democracy, how to account for raised prices or other negative impacts. This allows changes to be made on a modular, local scale. These communities would also handle policy relating to managing goods internally and externally. They would decide how to account for differences in carbon pricing between regions. This is essential since pricing differences can reduce the impact of carbon pricing (Baranzini, et al., 2017). Good, democratic management can make it hard for emitters to avoid responsibility for their actions.
Often, disadvantaged people are ignored to make room for sequestration projects in other countries where there is little recourse for any of the locals to protest (Gilbertson, 2017). Such economic pressures can force people to make decisions that hurt their families and the environment (Dalton, 2007–present). This is why it is essential to make sure that the distributional effects of the policies are as fair as possible. To make that happen, more voices need to be brought to the table to make sure that issues of fairness and equity aren’t put aside in the negotiations and implementation. Especially since equality and diversity of perspectives is an important part of developing climate solutions (Comberti et al., 2019, 15; Whyte, 2020, 4; Jenkins et al., 2018, 71). To ensure that negative economic impacts to communities are taken into account (Jasanoff, 2018, 13), corporations would have to get approval for sequestration projects. The positive and negative economic impacts could be balanced on a community level through direct democracy. This would include optimizing the burden on businesses, people, and the environment.
These changes would likely make the system less politically feasible since it goes against corporate interests. This modified system is worse for corporations who are locked in to high emissions, likely causing them to resist it. This challenge is why I recommend starting on a local level, since it is more realistic to make difficult changes one region at a time. Despite this challenge, carbon debt trading should be stable once enacted. It promotes new infrastructure, creating a base of support from people who benefit from the infrastructure. Many jobs will be created through community investment, mitigation, and sequestration. For example, revenues from carbon debt trading could be reinvested into renewable energy job training and infrastructure, providing jobs to engineers and maintenance workers. One example of such investment is the Inflation Reduction Act, which is expected to create almost one million jobs a year (Hammerling, 2022). This makes it stable once implemented, since many people’s jobs will rely on this policy. Thus, politicians will avoid reverting this decision to curry favor with voters. This would promote stability across political cycles, which is important since social change is generally made on a longer time scale (Gibson-Graham, 2016, 198-199).
Creating a carbon trading system with carbon debts rather than allowances will increase the pressure that the pricing system can apply. By basing the pricing and sequestration on local communities, many of the distributional concerns of cap and trade are alleviated. The modular nature of this more localized system will account for some of the implementation challenges. Carbon debt trading will also have less risk of corruption since it would be based in local democracy, which makes it easier for citizens to hold others accountable. In many circumstances, this modified version of cap and trade can be part of the solution. It can work for people, especially those who are struggling under the current trading systems. After all, “Political agreement at high governmental levels will not solve the problem of the global energy transition—not unless the solutions nations find speak convincingly to the hugely disparate needs and aspirations of more than 7 billion people living on this bounded planet” (Jasonoff, 2018, 12).
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