A visual showing how cap and trade can be useful, with the text "Unused allowance, trade allowances, excess emission, trade money".

Climate change is undoubtedly the most pressing environmental issue of our time, which is sure to affect every facet of our lives in the near future. Because of this, experts around the globe are working diligently on solutions to mitigate or adapt to this unprecedented crisis. One of the most popular proposals are market-based solutions to climate change. These proposals would charge individuals or businesses based on the amount of greenhouse gases they introduce to the atmosphere. According to the World Bank, 20% of the world’s greenhouse gas emissions are covered under some type of market-based initiative (“Carbon Pricing Dashboard”). This article will examine various proposed market-based solutions to climate change and assess the benefits and drawbacks of each. The three most widely-used and discussed market-based solutions are carbon taxes and pricing, cap and trade, and carbon offsets.

Carbon taxes are just what the name implies: emitters of carbon dioxide (CO2) are charged a set price for every ton of CO2 they emit. This price is set by the government to encourage the switching off of fossil fuels and adopting new technologies in large carbon dioxide emitting sectors of the economy or to cut back on the consumption of goods that require a high amount of CO2 emissions to produce. In most cases, this would be a tax paid by large carbon emitters applied directly to their emissions, but in some cases it can take the form of a tax applied to a carbon-intensive good or service, which may then be passed along as a cost to consumers (“Carbon Tax Basics”). Many countries and municipalities around the world have already implemented a carbon tax, such as Mexico, France, Spain, and Colombia, and many more countries are working on adopting one currently. It is a policy position that garners bipartisan support and can curb emissions drastically if implemented correctly (Coren, 2019). This is due to the large amount of revenue a carbon tax could raise for infrastructural or other improvements, as well as the effect it would have on mitigating climate change. A 2017 US Treasury study found that “a tax of $49 per metric ton of carbon dioxide could raise about $2.2 trillion in net revenues over 10 years from 2019 to 2028” (Horowitz et al, 2017). This is a huge amount of money which could be spent in a variety of ways, such as a carbon dividend to every citizen or improvements on infrastructure like public transportation. However, carbon taxes are not a perfect fix which will slow the climate crisis. They must be implemented equitably and effectively for them to have an impact. In many areas around the world where carbon taxes are currently implemented, the price just isn’t high enough to significantly change the behavior of large emitters, who still end up saving money by using the same methods and simply paying the tax over investing in  new technologies or upgrading operations. According to a Rhodium Group study which analyzed three different prices of carbon taxes, “none of the taxes considered are likely to achieve the long-term US emission goal of 80 percent below 2005 levels by 2050” (Roberts, 2019). Depending on the point of implementation, carbon taxes may also disproportionately affect low-income households. If taxes are levied on those consuming energy and carbon-intensive products instead of those producing them, those that spend a greater portion of their income on things like gas or their electricity bill would be more heavily burdened by this tax. Overall, carbon taxes are a great way to discourage large polluters from emitting large quantities of carbon dioxide, but we must make sure they are implemented with a cost that reflects the severity of the emissions and also takes low-income individuals into account. A carbon tax is a great start, but must be supported by other policies to have maximum effectiveness and equity.

Another market-based climate change mitigation policy is cap-and-trade programs. In these programs, a cap is put on the amount of carbon dioxide that can be emitted each year. Every year after implementation, the cap is lowered so less and less can be emitted. This cap could vary by economic sector, or encompass the entire country, depending on the scope of the program. The government then issues allowances or permits to every entity covered under the program, allowing them each to emit a certain amount of carbon. Entities that produce less carbon than their allowance are then able to sell excess allowance, or permits, to entities that have trouble keeping carbon emissions  below their allowance. Thus, the market establishes the price of the permits, and businesses or other entities have a financial incentive to lower their emissions. If they can keep emissions below their allowance, they can sell their permits and make money. If they cannot, they must spend extra money purchasing permits to keep their emissions within their allowance. Like carbon taxes, cap and trade programs have also seen widespread implementation globally. The European Union implemented a cap and trade program in 2005. In 2018, capped emissions from stationary structures were 29% lower than when the program started (“How cap and trade works”). California even has its own cap and trade program in partnership with Quebec, helping reduce carbon emissions across country boundaries (“California Cap and Trade”, 2018). Cap and trade programs let the government know how much carbon dioxide is being emitted by each sector of the economy, and lets them directly regulate this amount. A cap on one industry could hypothetically be higher than that on another based on the amount of emissions. Again, however, the effectiveness of the policy depends on implementation. The cap must be set effectively to lower the amount of carbon dioxide by a significant amount, and allowances must be allocated in a way that ensures the price is high enough to incentivize emitting less rather than just buying more permits. Furthermore, an effective cap and trade program needs effective enforcement to catch entities emitting more than their allowance. This is difficult due to the resources required to have third-party audits of emitters. If companies are allowed to report their own emissions, there is no guarantee they are telling the truth, but this is the much cheaper and easier option to implement. Overall, cap and trade programs are an effective way to reduce carbon emissions but must be implemented properly for them to work as intended.

The final market-based solution that we will discuss is carbon offset programs. Carbon offset programs allow individuals or companies to invest in environmental projects around the world to offset their own emissions. For example, a company may purchase carbon offsets to invest in a renewable energy project after sending its employees on international flights to a conference. The idea here is that one buys offsets equal to the amount of carbon that they are producing. There are many different types of carbon offset projects, such as distributing clean-burning stoves, planting trees, investing in renewable energy projects, capturing landfill methane, or sequestering carbon. Carbon offsets can be a win-win for everyone involved if investments are made in the right projects. It is important to choose a project that has measurable, verifiable, and concrete emissions reduction benefits and would not have otherwise existed without this carbon offset funding. Researching what project is best is important. Just last year, the University of San Francisco began purchasing carbon offsets to help meet its goal of carbon neutrality. These offsets were in line with the social justice mission of the university and went towards “reforestation projects, capturing methane gas in garbage dumps, or replacing dirty stoves with clean ones in Africa” (“University of San Francisco Achieves Carbon Neutrality More Than 30 Years Ahead of Goal”, 2019). The main criticism of carbon offsets is that they are simply a bandaid on top of the existing problem. They do not reduce carbon emissions, but simply keep them as they are. It is a way to ease the conscience of companies, letting them still emit without actually reducing those emissions. However, buying carbon offsets is much better than doing nothing at all. Carbon offsets can be purchased to offset your personal carbon emissions as well.

Effective use and implementation of these three major market-based strategies would be extremely effective in lowering worldwide emissions and mitigating the destruction that will be caused by climate change in the near future. Now that we have discussed some of the most common market-based solutions to climate change, it is important to note some of the consequences of using market-based solutions in general. The driving force behind  these solutions is dependent on the current political and economic system staying in place and relies on that system to abate or fix climate change. However, this system was responsible for the climate crisis in the first place. Thus, is it wise to utilize the system that put us in our current position to try to solve the issue, or should we be looking at ways to change the system entirely so it functions better overall? On the other hand, is that unrealistic or too much to ask for, and should we focus on amending the current system as much as we can before we run out of time to act on climate change, or because it is the more pragmatic option? These are all questions I consider, which goes to show there is no best solution. In my opinion, while we search for the answer to these questions, we should work with the resources and the system we have to mitigate the climate catastrophe we have created as much as possible. Maybe then, when we show that there is a better option out there, will people be ready to change the system as a whole.



Works Cited

California Cap and Trade. (2018, March 16). Retrieved from https://www.c2es.org/content/california-cap-and-trade/

Carbon Pricing Dashboard. (n.d.). Retrieved from https://carbonpricingdashboard.worldbank.org/map_data

Carbon Tax Basics. (2019, August 12). Retrieved from https://www.c2es.org/content/carbon-tax-basics/

Coren, M. J. (2019, January 22). Americans: “We need a carbon tax, but keep the change”. Retrieved from https://qz.com/1529997/survey-finds-americans-want-a-carbon-tax/

Horowitz, J., Cronin, J.-A., Hawkins, H., Yuskavage, L., & Yuskavage, A. (2017, January). Methodology for Analyzing a Carbon Tax. Retrieved from https://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/WP-115.pdf

How cap and trade works. (n.d.). Retrieved from https://www.edf.org/climate/how-cap-and-trade-works

Roberts, D. (2019, June 27). The 5 most important questions about carbon taxes, answered. Retrieved from https://www.vox.com/energy-and-environment/2018/7/20/17584376/carbon-tax-congress-republicans-cost-economy

University of San Francisco Achieves Carbon Neutrality More Than 30 Years Ahead of Goal. (2019, December 11). Retrieved from https://www.usfca.edu/newsroom/media-relations/news-releases/carbon-neutrality