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The Past, Present, and Future of Carbon Markets

Jan 22, 2013

The Past, Present, and Future of Carbon Markets
RFF Feature
January 22, 2013

Even though a global carbon emissions trading market—as originally envisioned in the Kyoto Protocol— has not been implemented, various types of discrete carbon markets have emerged around the world. Experience in these markets can reveal important lessons and help ensure that future markets can benefit from that experience.

In “Carbon Markets: Past, Present, and Future,” Duke University and RFF authors Richard G. Newell, William A. Pizer, and Daniel Raimi look back at the development of proposed and existing carbon markets to identify “lessons learned” in market design, cost-effectiveness, flexibility, and efficiency. Specifically, they review carbon market theory and practices in the United States, Canada, the European Union, New Zealand, Australia, and other markets. They explore various lessons from these market experiences, including the following:

  1. Positive prices imply emissions abatement, but how much is unclear.
  2. Despite some rough patches, markets have generally matured and operated effectively.
  3. Banking matters.
  4. Allowance allocation can involve large revenues and distributional impacts.
  5. Significant competitiveness impacts and emissions leakage are not inevitable.
  6. Offsets can work, but they are complex.

The authors also identify some key issues facing carbon markets in the future, such as linkage between markets and the new role of international negotiations in focusing on a bottom-up approach (versus the earlier top-down approach). They note:

“In this new architecture, jurisdictions with emissions trading have to decide how, whether, and when to link with one another, and policymakers overseeing carbon markets must confront how to measure the comparability of efforts among markets as well as relative to a variety of other policy approaches.”