Emission trading caps- (14.01.07)

Climate change is something of great uncertainty. The assumption that it can be solved through market mechanisms in isolation arguably ignores that climate change may be a market failure in the price of fossil fuels and their use in the first place. This leads us to question the role of emissions trading caps, that embed a certain type of behaviour, before it is known with more certainty as to what level of response on climate change is required.

The idea of emission trading is to create a market that encourages and rewards more efficient behaviour in terms of carbon dioxide emitted to the atmosphere. It does not answer the questions about whether certain types of polluting activities are sustainable in themselves. There is a risk that emission trading caps embed certain activities that if climate change is to be seriously tackled should be banned.

There is a role for an emissions trading market. However the price of carbon should be regulated to reflect the change in knoweldge on the relationship between carbon and temperature change. As the price changes, the emission trading relationship and the volume allowed by the cap would also change. To be effective, however, this would need to operate across the globe and not just in one trading block like the EC.

We would also suggest that uncertainty is signalled by a forward projection built into emission trading of an increasing price of carbon over the years. This would allow long term planning despite the uncertainty. An example of this in operation is the advance signalling of landfill tax increases that encouraged (successfully?) an increase in recycling and a move away from landfill. A similar approach for carbon may yield similar benefits.