The Economic & Environmental Realities of Carbon Permits

carbon creditsAre tradeable carbon permits an economically efficient and environmentally effective strategy to reduce greenhouse gas emissions?

Climate change is a serious threat to our planet’s natural resources and our way of life. In order to maintain the health of our environment, it is essential for countries, companies, organizations and individuals across the world to work together to protect our planet. There have been a variety of initiatives tried to combat climate change, but one of the most popular approaches may be less effective than many think.

The 1997 Kyoto Protocol has guided much of the world’s efforts to reduce or reverse climate change over the past decade and a half.. One of the key components of the Kyoto Protocol is a market of tradeable carbon permits. This approach essentially makes the right to pollute and the right to be free from pollution commodities that can be traded in markets.

This system works by setting a cap or limit on how much of a particular pollutant may be released during the current year. The central organization then issues or sells permits to allow entities to release their share of that pollutant. Entities are required to have these permits in order to pollute. In theory this incentivizes polluters to pollute less, since they will have to buy fewer permits if they pollute less.

Is this approach working?

Critics point out that tradable carbon permits are essentially an economic solution to what is a social problem. The question is, can economics really solve such a problem?

After nearly two decades, we can ask the question – has this approach been economically efficient and environmentally effective? It seems not.

Yet another popular solution, carbon taxes, has not been very effective either. Only Denmark has been successful in achieving significant reductions in emissions via carbon taxes. Why? It seems that producers/polluters simply pass the added costs along to consumers. In other words, the carbon taxes just become another cost of doing business and the end prices to consumers are increased accordingly.

What about regulations?

Experience shows that a third approach, regulation, may be more effective. The Montreal Protocol on Substances that Depletes the Ozone Layer was an international agreement to regulate and reduce man-made chemicals that damage the ozone layer, especially chlorofluorocarbons (CFC’s). Since 1987, all countries have signed the agreement and CFC levels in the atmosphere have declined.


Tradeable carbon credits have simply not been effective at protecting the environment, yet they still remain a popular option. Part of the reason they remain popular is corporations and politicians prioritizing economic growth. Since economic growth drives prosperity for voters, there is political weight to protect the economy, even at the expense of the environment.

Since a market-based approach is not working, it has become apparent that it is time to implement a regulatory approach for decreasing emissions.

About The Author:

Paul Scanlon, CEO of Prime Capital, is a seasoned financial expert and is currently completing a Masters in Political Economy at Sydney University. You can connect with Paul on Facebook, LinkedIn, and Tumblr.


One Response to “The Economic & Environmental Realities of Carbon Permits”

  1. A market based approach would work if you get government out of the way as they are the worst polluters. With market based regulations polluters would be held more accountable verses government doing it because with the power of government a company that polluted can just pay off some politicians. Bail outs and the like rewards bad behavior so it should not be of any surprise that companies can be protected. Besides, we are talking about carbon dioxide, the substance that plants need that is now considered a pollutant, seriously? The market can solve pollution is we had a real free market, innovators, new technologies, entrepreneurs, more capital to invest with. Need we be reminded that coal is not as dirty as it used to be with newer technologies. It goes for newer nuclear power plants in terms of safety. Solar and wind are not viable solutions, you need to much land for city wide power consumption and even if we can get the amount down, you still have to worry about toxic metals, battery disposal and wind turbines are an eye sore as well as not being to put enough mass output anyways. If someone can prove to me a tiny amount of turbines can power a city, then we’ll talk. Nuclear fusion, thorium salt reactors, hydrogen generators seem to be the way to go. Question is will government get out of the way and allow these technologies to grow into a market. Of course it’s not like oil will run out anytime soon. There is new scientific evidence showing the oil may not be a fossil fuel but something that carbon cycle within the earth’s mantle creates over and over. It’s like primary water, also within the carbon cycle in which case we have plenty of fresh water because where so people think springs and geysers come from. Anyways, we are never going to find a government based solution because that is not how government works, it’s not really in there interests. Any true economist should know this from a laissez faire free market perspective. Trust me, most people want less pollution but government intervention is never a good approach and we can tax until the end of time. Tom Woods and Stefan Molyneux should have plenty of material on this.

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