Elaborations on a lecture by Gareth Bryant (Political Economy, Sydney University) although probably not accurately, and I’ve probably added some inaccuracies.
The aim of carbon trading and taxes is to keep capitalism and economic growth while making them more ecologically sensitive. We are in no way certain that we can keep corporate capitalism or keep economic growth while reducing pollution and ecological destruction, but that is the hypothesis. It could be wrong to begin with.
Assuming that it is possible, the idea is that by allowing the market to set prices on Greenhouse gas (GHG) emissions, they become more expensive and this diminishes their attractiveness. It lets ‘the market’ seek the answer to how this reduction is done. That contemporary corporate markets can succeed in this, is also a hopeful hypothesis.
If you go with emissions trading you have to set up an artificial market in which emissions can be traded. The idea is that people who cut emissions have ‘carbon credits’, ‘carbon permits’ or ‘carbon allowances’ which they can sell to others, allowing those others to pollute. What this does in reality is keep the emissions stable, unless permits are regularly removed from the market – which can be difficult unless taxpayers buy them.
Both allocating and removing the credits are political processes open to influence, so large companies usually end up with larger amounts of credits than they should have. In the EU trading system there was a massive over-allocation of permits, which may have made the market under-priced and under-responsive with little incentive to reduce GHG.
Some companies, predicting a trading system is coming, can increase their emissions deliberately, so as to receive larger numbers of credits than they should have. When the credits are introduced, the companies reduce their emissions back to normal and sell off the excess. This increases emissions rather than lowering them.
If people don’t want to change, or there is a severe lock-in effect, then this can just increase prices for everyone, without reducing emissions.
‘The market’ is advocated, because it is supposed to remove the knowledge and planning problem from the process. That is, if the State is going to promote Green energy, reduced emissions and so on, then it has to know what it is doing. It has (in the terminology) to “pick winners”.
In neoliberal theory, the State is inefficient and always stupid and the market always knows what is best or finds the best way of doing it. Neoliberals do not like the possibility that ordinary people could influence corporate behaviour or diminish profit, through effective use of the State.
The problem with this idea is that the ‘best way’ can just mean cheapest and most profitable in the short term, Or, perhaps, the method that requires the least actual change. The market may crash or opt for destruction in the long term.
The idea also forgets that many uses of the environment are actually destructions of the environment, and once the environment has been destroyed, or transformed into waste, it takes massive amounts of energy to put it back together again (more than it took to demolish it). Corporations are nearly always primarily concerned with whether the process of destruction and waste makes them a profit. They are unconcerned about generating waste and pollution, especially if it could significantly diminish profit to tidy it up.
While government planning is given up, as it potentially interferes with the market, the scheme pretends that there is no significant corporate planning, and that corporations do not crony together for their own benefit. Unfortunately this happens – many boards have shared members for one. So the markets get distorted in the interest of the more powerful players, and this is not perceived or considered to be part of the market process, while State planning (which could possibly be in a more general interest, and have a general input, not just a corporate input) is defined as interference in the process.
In general, carbon markets diminish the tools available to a government, and make politics become about saving the carbon market rather than dealing with climate change. As already suggested, any governmental action, or target setting, whatsoever can be construed as interfering with ‘the market’ and as stopping it from working with its supposed efficiency. It is always possible to blame the State for market failure.
However the market does not have to go in the direction intended. Markets do not force emissions reduction. If it becomes more profitable to increase emissions (perhaps they are under priced because of market collapse), or prevent decrease, or to emit false information, then that can happen.
Financial markets, such as carbon markets, depend on volatility for both their profitability and financial-trader interest. We would essentially be trying to use a volatile financial market with its continuous stream of bubbles, crashes and information corruption in order to stabilise the ecology we depend upon for life. This makes no sense at all.
Let us be clear, there is no evidence that carbon trading anywhere in the world has successfully reduced emissions by any significant amount, but such markets do reduce the possibility of demanding emissions reduction in a relatively democratic way.
Carbon taxes are better because they set a relatively predictable price and can be moved up or down depending on the results being attained. Money from a carbon tax can also be distributed to the consumers to lessen their costs nd allow them to make market choices with greater ease. However, Carbon taxes do not seem politically possible, as all Australians know. This is probably because they are step towards letting the State interfere with the markets, rather than letting corporations interfere with markets.