Jevon’s Paradox: Implications on the Carbon Credit Market
While there are many different examples of how environmental policies or efficiency improvements have unintended consequences, I wanted to examine the how this may be present in environmental finance, specifically the carbon market. The idea of the carbon market is relatively simple and can be broken down into a trading system, where a single carbon credit equals one ton of carbon dioxide or the equivalent amount of a different greenhouse gas reduced.
Two different types of markets exist in this carbon based currency economy: compliance (created as a result of any national, regional and/or international policy or regulatory requirement) and voluntary (the issuance, buying and selling of carbon credits, on a voluntary basis). Demand for these carbon credits come from private individuals or companies who want to compensate for their carbon footprint. Generally speaking, carbon credits are issued to companies who reduce carbon emissions (ex. Tesla) and can be bought by companies who continue to increase emissions (ex. Chrysler). The overall goal of carbon credits is to reach a net zero, where there is great incentive for those who already are at a carbon zero emission level.
Turning back towards how certain environmental policies have unintended consequences, the article Meddling with EU carbon market could have ‘unintended consequences’, MEP says discusses how intervening in the EU carbon market through speculative positions by various financial actors and further policy from law makers may put the whole market at risk. At the time of this article, the price of carbon credits rose drastically, up 150% over the year to a price of €98.49 per ton. While the European Commission has downplayed these claims, stating that the sky rocking price of carbon credits is not due speculative positions from large financial institutions, but rather the overall EU’s increasingly high climate admission.
Certain parties argue against governmental policy intervention, where flooding the market with additional credits to desaturate prices will result in overall lower incentives for large industries to decarbonize. Furthermore, price instability whether it be from speculative financial practices or government intervention limits the EU’s capacity to become fully green.
While the notion of a net carbon zero through a credit market is a good idea to incentive both high and low producing carbon industries, what we see in practice is the potential abuse for personal gain by financial institutions, followed by overreaction from governing bodies which may in turn allow industries to continue to heavily pollute. While this is hard to gage directly, it will be an interesting case study to monitor in the future.
Auf Wiedersehen und alles Gute!
Max Rajendran
