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Gitanjali Maria's picture

When world leaders from around the world descended in Paris to help save the planet from the perils resulting out of climate change, the world waited for a grand international political accord to be signed with various measures for reducing carbon emissions. To some extent the summit seemed successful with countries voting for the measures to restrict temperature increase to 1.5oC, setting up of frameworks for monitoring, measuring and verifying emission reductions, financial help for developing countries for reducing pollution and voluntary cooperation between countries to meet pollution-control goals.

While the governments have agreed on a broad outline to mitigate pollution levels, implementing the same on the ground level requires the participation of several others, including businesses, industrial giants and ordinary citizens.

Climate change is not an issue only of the private sector nor is it a cause of concern only of the government bodies.

It affects the whole humanity and is a concern for every soul on this planet. It is a matter of survival for all species, including plants and animals. And hence it needs a collaborative solution and a sincere and genuine effort from all bodies - private, public, government, self-help groups, NGOs and each and every individual, and therefore political accords alone will not do; there is also a need for market-based approaches that incentivize businesses and factories, who are some of the leading polluters, to reduce emissions. Market-based approaches can be a huge step in reducing climate change since companies with their immense resources and technical capabilities will strive to reduce emissions to remain profitable and to capture market share in a more green-conscious market. Market-based approaches are generally competitive in nature and therefore will force companies to be innovative and cautious with regard to their carbon emissions.

The government, in its capacity as the policy-maker and enforcer, will need to help chalk out the long term roadmaps, the goals and the checks and regulations necessary to guide the market-based methods. The mechanisms enforced can include carbon taxes, cap and trade mechanism, carbon-pricing and other newer ones that can include additional charges on products that produce emissions to be charged from end-users.

Over 1000 companies and 70 countries have voiced their support for market-based approaches like carbon pricing to reduce carbon emissions. Such measures will also encourage companies to make investments in clean technology and make everyone aware of the gravity of the situation. The CEO of Engie, the world’s largest electricity producer, has highlighted the need to incorporate market-based approaches also in the COP 21 agreement.

A global agreement in Paris to limit global warming must be built around a carbon price, building a framework for a global market.”  - Gérard Mestrallet, CEO, Engie

The South Korean president too voiced similar sentiments when speaking about his expectations from COP21 in Paris.

“A price on carbon is the single most important thing we have to get out of a Paris agreement. It will unleash market force.” Kim, President – South Korea

Both governments and businesses understand the necessity of market-based approaches in curbing the issue of climate change.

With political accords failing to produce any concrete results, countries are more willing to try market-based solutions. Of the 183 countries that submitted climate commitments before the summit, more than 80 mentioned market-based mechanisms. Businesses too wanted a stable regulatory framework for the global market that encouraged new schemes and that could link connect cross-border permit trading schemes. The European Union, some U.S. states like California and emerging nations like Brazil, China, South Africa and South Korea have implemented regulatory and market-based policy instruments across their economies to promote cleaner technologies and behavior change while still promoting economic development and growth. While market-based solutions can be more effective since they directly penalize the emitters and give them the flexibility to decide how to unburden themselves out of the taxes/carbon pricing mechanisms, it can also affect the economies of the developing nations whose contribution to pollutions levels in the past century have been low. But these developing countries cannot be absolved of their current pollution levels too. Hence they need to be supported through financial and technological assistance if the markets have to be fair. And these can result only through governmental efforts.

Carbon pricing is one of the main market-based carbon solutions often advocated. Carbon price can also stimulate investments in clean technology and market innovation, fuelling new, low-carbon drivers of economic growth. But no private sector player, all of a sudden comes with the idea of charging themselves or their customers or partners for the carbon they generate. A political accord is therefore needed to regulate the carbon markets, just like in other markets such as the financial markets. Many companies like Unilever have also adopted the mechanism of carbon credits and carbon pricing within their organizations to better their internal practices.

While paying carbon taxes and charging emissions beyond a limit can act as the stick, the carrot also needs to be made juicy so that it encourages innovation and designs to reduce carbon emissions and create cleaner mechanisms.

In an era, when corporates and others are known to pay their way out, helped by the huge money bags they carry, a market-only approach will see no genuine interest in aiming to re-design processes to make it greener. It will only strangle out the poorer nations whose citizens and enterprises often do not have the money to match and pay for their emissions. They also do not have the technology and investment required for innovation and complete adoption of clean energy. This is where governments from around the world need to step in and reach agreements as to the varying levels to which market-based carbon solutions should be enforced. They should also agree on the financial assistance to be offered to developing nations and small enterprises.

Market-driven mechanisms cannot be put into effect easily because the free-market economy has reduced concentration of power in the hands of any single player or group – buyer or supplier. Hence there needs to be a push given to the market-driven mechanisms. And this has to come through political accords, bilateral and multi-lateral agreements and regulations issued by government departments. These will help give a framework to the market-based carbon pricing mechanisms across the world. This will also help ensure stricter enforcement and punishments. Even Adam Smith, the champion of laissez-faire capitalism, noted that markets only function well with appropriate rules and regulations. 

Carbon credit mechanisms have largely failed because of the low price of carbon and the limited countries/companies that adopted it. But these market-based mechanisms can gain wider adoption and acceptance if the governments too approve and enforce them and provide assistance, monetary and otherwise.

A market-based carbon solution is the better way to penalize and thereby force emission reductions, but it simply doesn’t work if there are no political accords in place. The governments and the market, both have to be a part of the solution, for it to be implementable across geographies.