A Ton is Never Really a Ton

I was recently on a panel at the “Australia US Dialogue on Carbon Pricing.” The focus was on linking the various markets for C02 that exist around the world.  For those of you not enmeshed in the exciting world of cap-and-trade policy, linking is a term used for combining markets and making emissions allowances essentially fungible between the markets.[1]

Despite a general theme of how wonderful linkage would be, what really struck me is how high a bar markets will have to clear to make this a reality.

  • The EU is focused on the benefits of linking with other deep and liquid carbon markets (Sorry, California!)
  • California only wants to link with markets with certain standards for emissions offsets, a bar the EU currently does not reach. (Take that, EU!)
  • Australia would only link with a sub-national (e.g. State-level or regional) market if the emissions savings were consistent with national emissions accounts.  I didn’t get to ask this during the session, but this seems to mean that, a sub-national market would have to demonstrate that there was not substantial leakage or reshuffling with neighboring markets.  (Looks like California won’t be linking with Australia anytime soon).

While I certainly would agree that linkage will not be the solution to all our problems, these criteria struck me as picking nits in the context of the other obvious challenges that regional cap-and-trade markets face.   Each market is focused on defending the integrity of their own cap by making sure that “a ton is a ton”, meaning that an allowance (for a ton) bought in one market can be compared to an allowance from another market.

At first glance this sounds like common sense, but as I pondered this I came to reflect on the fact that even if the rules are exactly the same in two markets, a reduction in one may have very different impacts on global emissions simply due to  their relative position in the world economy.   Is a ton in California, with its challenges with addressing electricity imports, really the same as a ton in Australia, where the emissions associated with exports of coal are roughly double the entire emissions of the country?  Why does Australia have a problem linking with one US State if there is leakage, but seems to be ok with linking with a small country (e.g. Singapore) that may face the same kinds of leakage problems?  For that matter are emissions reductions at facilities on the edge of eastern Europe, where energy can be imported from uncapped countries like Ukraine, really fully comparable to those in the U.K.?  The potential for leakage, reshuffling, and even rebound, will vary from country to country, and product to product, so absent a global carbon market on every product and activity, a ton will never be a ton.   This is true even for an emissions allowance within a specific market, let alone across different regional markets.

Its interesting to see how dramatically different standards are applied in different contexts.  There has been a lot of focus on policing what is perceived as the potential for “fake reductions’’ (if not outright fraud) in the offset markets.  With biofuels, the attempts to include general equilibrium effects – particularly indirect land use impacts – go well beyond what one sees in other contexts.  Regulators and activists really obsess over making offsets comparable, but apply a different standard to the imperfections of their basic allowance trading frameworks.

Economists and policy-makers alike frame the choice of a cap-and-trade vs. taxes as one of “prices vs. quantities.”  The logic of this is that caps give you certainty over quantities of emissions while taxes (prices) give you more certainty over the per-unit costs of the regulation.   But we need to come to grips with the fact that a cap that covers only part of the sources in part of the world is a long way from providing quantity certainty in the classic sense.  I still believe that caps can be desirable in a political-economy, get-things-done sense, but in the Climate arena, we should not cling too tightly to the fiction of quantity certainty.  A ton is never really a ton.


[1] Australia is planning to adopt a cap and trade market for CO2 starting in 2015, and already has a treaty with the European Union to link their market with the EU ETS.

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