The Sin Exchange Market

There is a market for all goods and services imaginable, why shouldn’t there be one for sins, especially ones involving environmental pollution.

If you have been following these blogs, you might be familiar with carbon emission. Annual increase of CO2 gas, which is released through human activities such as deforestation and burning fossil fuels caused major environmental issues such as temperature rising, oceanic change and melting of ice caps [1].

The WBCSD took on board an economist’s solution to carbon: put a price on it.

The idea is that climate change leads to severe, pervasive and irreversible impacts for people and ecosystems, so why should the public alone must pay for these damages to crops and health care costs or to property. Instead, businesses operating in the area are responsible for pollutions, so they should compensate the community accordingly. As Corporate Citizens, business should give back and strive to offset negative influences. This is a concept within the literature of Corporate Social Responsibility (CSR) [2].

While carbon pricing takes the form of governmental legislation, it is not necessarily traditional taxation. The local government can set allowances on the total level of greenhouse gas emissions. These allowances are transferable through trade and have a value – the carbon price. This means industries with low emissions to sell their extra allowances to larger emitters [3].

Economist Milton Friedman, who saw no value in CSR said: “The most important single central fact about a free market is that no exchange takes place unless both parties benefit” [4]. In some industries such as chemical and the energy sector, it requires significant investments, risk and time for companies to switch to more sustainable practices [5]. Conventional regulatory approaches create unpredictable complexities and disruptions to industries. The cost of tax can also negatively impact domestic industries’ competitiveness. A carbon trading system, on the other hand, avoids such distortions by allowing a sector to buy allowances instead of taking expensive mitigation actions. Carbon pricing also ensures even economic distribution carbon emission cost and create a win-win that solves Friedman’s question. It further rewards company with a powerful monetary incentive to switch to cleaner energy and gain revenues by selling allowances to those that are slower to change [6]. In this sense, carbon pricing has more in common with competition laws than environmental protection policies.

For a free market to operate effectively, it has to be an open market with global participants. Otherwise, activities that are penalised through the action of the carbon price will progressively shift to areas where the penalty doesn’t exist. Hence, there is a dire need for large economies to act in concert to avoid market distortions [4]. But very recently, the chief of the US Environment Protection Agency (yes, it still exists) promised that the US government will stop using the ‘social cost of carbon’ in crafting regulations [7]. One can question whether it is still feasible for carbon trading to become a real market. I believe that the first step is to recognise that it can be a global trade. During a discussion at WBCSD, a topic of disagreement was the use of the word “carbon offsetting”, as it appears accusatory and implies businesses can pay to pollute. I think that the word “carbon trading” perhaps sounds more attractive to businesses and governments alike, but definitely not “sin trading” though.

By Nam Le

Image: Flickr (Creative Commons)

 

[1] https://climate.nasa.gov/vital-signs/arctic-sea-ice/

[2] Carroll, A. B. (2015). Corporate social responsibility: The centerpiece of competing and complementary frameworks. Organizational Dynamics, 44(2), 87-96.

[3] http://www.worldbank.org/en/programs/pricing-carbon

[4] http://www.avp-group.net/wp-content/uploads/Download-9-PM-Interview-in-Solar-Quarter-Oct2015-copy.pdf

[5] http://docs.wbcsd.org/2018/04/CARBON_Pricing_Report.pdf

[6] https://www.carbontax.org/whats-a-carbon-tax/

[7] https://www.theguardian.com/environment/climate-consensus-97-per-cent/2018/apr/23/pruitt-promised-polluters-epa-will-value-their-profits-over-american-lives

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