<aside> <img src="/icons/info-alternate_gray.svg" alt="/icons/info-alternate_gray.svg" width="40px" /> Throughout this article I leave optional paragraphs indented. They contain useful commentary/notes, but if you just want a quick read feel free to skip over them!
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A carbon market is a market where participants trade carbon allowances. A carbon allowance represents permission from the government to emit CO2.
When you emit carbon (i.e. by burning fuel in your car) you must forfeit allowances, which you acquire from the open market.
When you absorb carbon (i.e. by owning a tree), the government grants you allowances, which you can sell on the open market for financial gain.
I did not come up with the idea of carbon markets, there are even existing implementations of things like carbon markets such as the EU Emissions Trading System. However, these existing systems all have significant differences from carbon markets as presented here which I believe cripple their effectiveness.
Instead of first introducing the status quo and criticise them and suggest improvements, I think it is best to present what I see as the ideal version of a carbon market and work from there.
In most economies, more carbon is emitted than absorbed. To account for this fact, the government must print allowances out of thin air and introduce them back into the market. If they do not do this, they will be enforcing a net-zero economy overnight, which would cause economic ruin.
I suggest these newly minted credits are distributed evenly to every citizen, instead of being sold to fund government programs. This means the system overall is a transfer of wealth from people who emit more carbon than average to people who emit less carbon.
If you don’t give the generated allowances back to the population, the system will increase consumer costs by taxing the production of goods without replacing these increased costs.
Here is a pretty picture depicting the situation:
CO2 emitters (left) buy carbon allowances (red) off of the free market, and give them to the government whenever they emit carbon. CO2 absorbers (right) are given allowances by the government when they absorb carbon, and sell them on the free market for profit. To allow the country to emit carbon on aggregate, the population are granted allowances evenly, which they sell on the market for profit. The government does not touch any money.
For example, if a government wanted to force the country to only emit 300MT of CO2 in a given year, it would only mint 300MT worth of carbon allowances that year. These newly minted credits would be awarded to every citizen evenly, who would (probably) then in turn sell it on the open market.
As a carbon emitter you either buy your allowances off an absorber, or a citizen who got them for free. If you buy it off an absorber, your emission is offset internally within the UK; if you buy a newly minted allowance off a citizen, you’re taking one of a finite many allowances out of circulation, which means the UK’s net emissions are capped by the amount minted.
As a government this gives you direct control over how much carbon your country will emit in total, the market will then work out the most profitable way to emit this carbon.
So that’s the extended elevator pitch for carbon markets which has hopefully given you enough of an idea of what I think carbon markets could be. Below are a few interesting follow-up topics/elaboration of things that were glossed over, pick your favourites!