The Proposed Carbon Market: A Non-Market Market

I was standing in the checkout line at my local Kowalski’s Market and asked myself if this is what a carbon market would look like? While the grocery market has lots of fine foods for me to select from, they set the price, no haggling or negotiation. If, after physically examining the product, I like it, I can buy it at their price. Candidly, this is the way I buy most things: stuff from Target, gasoline, meals at Chipotle, etc. Sellers set the price and I decide to buy it if I think it’s a good value.

Ever explored eBay? You can get just about everything and anything there. It’s a different type of market than Kowalski’s. Sellers offer their goods and buyers buy them, either at an offered price or some mutually agreed price between the seller and buyer. I pick up unique floaty pens to expand my collection (see www.floaty.com).

Over the years, I’ve invested in the stock market. A market different from Kowalski’s and eBay…enough said.

So, what would a carbon market look like? Would it be like Kowalski’s where I was a price taker but could directly assess the value of the item I was buying? Or, would it be like eBay where the product would be more uncertain but I might find a price that met the value I placed on the product? Or, would it be like the stock market where too many people have no idea how to value things or what the “market” is doing, yet participate anyway.

But I’ve gotten ahead of myself. For there to be markets there needs to be sellers of something that would-be buyers value. No sellers, no market; no valued-product, no market; no buyers, no market. Therefore, for there to be a carbon market there needs to be sellers of carbon, the carbon needs to be of value to potential buyers, and there needs to be those buyers. As of yet, these elements are just beginning…but people are trying, like the European Union, the Chicago Climate Exchange and the members of the RGGI.

Economists love markets, believing they are the best way to set the value for a product, as well as providing incentives for positive behavior (reducing GHGs) and disincentives for undesirable behavior (emitting GHGs). I share the economists’ love for markets and actually believe that there should be a GHG-reducing market, but as I have already established there are many variations of markets, each having their own set of strengths and weaknesses depending on how they are designed.

This is why I am concerned about the designs for the proposed carbon market. It appears the “market” design has the seller being the government, their product being credits for GHGs which has value because the government “owns” all the GHGs credits requiring would-be emitters to purchase the GHGs credits. Additional twists to this proposed market design are that emitters have no choice but to purchase the credits since at least in the near term they either pay or go out of business. And, the price they pay is set by an unpredictable auction. Finally, the only entity to benefit financially is the government. It’s as if when I get my milk at Kowalski’s, the store took my clothes and made me buy them back or risk citation for indecent exposure. This may make them money since I need to buy milk. It may also prevent me from wearing too many clothes when I go to the grocery store (a thought that should scare you very much!) but it doesn’t sound like a very efficient or effective market. In fact, it doesn’t sound like a market at all....it’s just a way to make money off my clothes.

Instead of creating this non-market market, a true carbon market should be created. Cap emissions, decline the cap over time, then let carbon buyers and sellers use markets like Kowalski’s, eBay or the NASDAQ to value the ability of reducing GHGs. Let these buyers and sellers get the benefit of the exchange, not the government. The government should need nothing more than the satisfaction of the reduced GHGs. This is how I buy my milk at Kowalski’s, how I expand my floaty pen collection using eBay, and how I invest in mutual funds. It’s how a real carbon market should work.