The Case for Market-Based Emissions Initiatives

By Min Jae Kwak, August 8, 2023

To effectively tackle the issue of climate change, pragmatic approaches that balance the goals of sustainability and economic development are critical.

From rising sea levels that threaten the very existence of island nations to the disruption of the ecological balance of the species on Earth, confronting climate change has become not just a political issue, but an existential one. However, many climate change initiatives are often at odds with economic development goals. As a result, many nations are faced with having to balance the long-term need for climate change policy with the short-term need to prioritize development. Implementation of a coherent, international environmental policy that aligns with economic realities is a necessity to move towards a more sustainable future. 

One such initiative is carbon pricing. The concept of carbon pricing has gained traction for being a potential market mechanism solution that gives firms an economic incentive to lower emissions. Carbon pricing can come in the form of a carbon tax, which puts a definitive price tag on carbon emissions on a per ton basis. While carbon pricing has already been implemented to varying degrees in countries like Japan and Canada, the setting of an international carbon price has remained elusive. By financially penalizing companies in accordance with the amount of pollutants they are emitting, carbon pricing will incentivize innovation to reduce emissions and could prove to be more fruitful than outright bans on exceeding emission standards given a long history of companies failing to limit carbon emissions by their own standards.

A more experimental market initiative toward approaching sustainability is a cap and trade system. Cap and trade refers to a system in which companies and organizations are given emission allowances, which dictate how much they are permitted to be emitted within a given time frame. These allowances are transferable, meaning a company that wishes to exceed their allocated allowances can purchase allowances from other companies. If implemented correctly, this system not only caps net carbon emissions to a specific level for all applicable companies but also gives companies a financial incentive to innovate and reduce emissions. Any reduction in emissions becomes a financial asset that can be sold. California implemented a cap and trade system in 2013, resulting in a 10% reduction in emissions from sources subject to the cap while maintaining the state’s economic growth. However, the ongoing issue with cap and trade continues to be the lack of universal coverage of emission sources. While large swaths of the world have implemented forms of cap and trade, most notably the European Union, its overall effectiveness hinges on greater coverage. The United States should seek to implement a national cap and trade system to bolster its ongoing goal of making the United States a net zero emissions economy by 2050. 

To effectively tackle the issue of climate change, pragmatic approaches that balance the goals of sustainability and economic development are critical. Market approaches to emission reductions such as carbon taxes and cap and trade have shown success, but require further implementation around the world to realize their full benefits.

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