While climate policy in the U.S. Congress appears stalled, debates about the best approach to advance decarbonization continue at the state level and around the world. A critical choice is between two different philosophies for carbon policy: One option is to pursue some form of pricing on carbon (e.g., cap-and-trade or a carbon tax) and allow the market to advance the best tools to reduce carbon emissions. The other option is to embrace a range of non-market strategies, such as regulation, subsidies, and support for research and development. In making this choice, policymakers must weigh important questions such as the economic cost of a particular policy, whether a policy can even be enacted in the first place, and the effectiveness of a policy in achieving the ultimate goal of reducing carbon emissions.
There have been many electrons spilled in these debates. However, a recent book by two leading scholars in the field—Danny Cullenward, with the climate policy think-tank Carbon Plan and Professor David Victor of UC San Diego—entitled Making Climate Policy Work, provides a thoughtful assessment of this critical tradeoff and comes down on the side of non-market alternatives.
Cullenward and Victor’s critique of carbon markets is both comprehensive and devastating. In their view, carbon markets offer prices for carbon that are too low to meaningfully drive the investment and innovation we need to develop and deploy the technologies required to decarbonize our economies. Additionally, carbon markets are unlikely to produce the high prices needed to drive investment. Setting high prices would require imposing heavy costs on politically powerful incumbent industries and interest groups—all for the benefit of nascent technologies and future generations that are politically weak. Carbon markets cannot provide deep policy integration across multiple economic sectors because each sector’s technological, economic, and political challenges can be so divergent that any market linkage undermines the overall market’s effectiveness. Carbon markets that were touted as ways of integrating climate policy across multiple countries around the world have instead generally failed to sustainably connect across international borders. Moreover, in integrating across jurisdictional borders, markets have all too often relied on approaches such as carbon offsets (in which an emitter pays another actor to reduce their emissions elsewhere) that can be susceptible to fraud and abuse.
Given these flaws, it’s no surprise that the authors characterize most existing carbon markets as “Potemkin” markets that appear to be functioning at reasonable costs–but in fact, most progress in decarbonization (whether it is in reducing carbon emissions or advancing innovation) is driven by regulatory instruments.
Cullenward and Victor’s analysis flows from a relatively simple political model that includes the major actors (such as interest groups) and institutions through which climate policy is established and implemented. To buttress their points, the authors draw on a series of examples, including the European Union’s Emissions Trading System.
The book provides a refreshing counterpoint to the regular invocations of markets as the solution for our climate policy dilemma. Cullenward and Victor have done a remarkable job of summarizing the existing policy literature that has increasingly undermined the case for the dominant role for markets, as well as their own contributions to that literature.
The authors do not call for completely abandoning markets, as they note, markets can be made to work as part of an overall portfolio of climate policy that also includes regulation. For instance, markets can focus on areas where smaller price signals function well. However, the authors make clear that markets will not play the leading role for much of our climate policy in the near future. Given the urgency of the task in front of us for decarbonization, knowing which policies are more effective in the here and now is tremendously important.
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