Making Climate Policy Work

Danny Cullenward, David G. Victor

• Publisher: Polity
• Year: 2020
• ISBN:
  9781509541812
• Edition: 1
• Topic: Politik & Internationale Beziehungen
• Subtopic: Umwelt- & Energiepolitik

For decades, the world's governments have struggled to move from talk to action on climate. Many now hope that growing public concern will lead to greater policy ambition, but the most widely promoted strategy to address the climate crisis – the use of market-based programs – hasn't been working and isn't ready to scale.

Danny Cullenward and David Victor show how the politics of creating and maintaining market-based policies render them ineffective nearly everywhere they have been applied. Reforms can help around the margins, but markets' problems are structural and won't disappear with increasing demand for climate solutions. Facing that reality requires relying more heavily on smart regulation and industrial policy – government-led strategies –to catalyze the transformation that markets promise, but rarely deliver.

1
A turn toward markets?

In the late 1980s, global attention started to focus on the problem of climate change caused by pollution from carbon dioxide (CO₂) and other greenhouse gases. In tandem, analysts and policymakers argued that the best strategy for dealing with pollutants that harmed the whole planet would be to create environmental markets that also spanned the globe. These market schemes would, in theory, create strong price incentives to cut emissions anywhere and everywhere. The scale of the policy response, it was thought, must be matched to the scale of the problem. And beyond scale, powerful market forces would help ensure that cuts in pollution were achieved at the lowest economic cost. The use of markets became the watchword for smart, efficient climate change policy.

Although the use of markets to control carbon pollution has never been without controversy, its dominance in the climate policy debate is hard to overstate. Market-based strategies were built into every major international agreement on climate change and formed the rhetorical core of the most ambitious countries’ climate strategies. Most of these schemes envisioned setting caps on emissions and allowing firms and governments to trade credits – policies known as carbon markets or “cap-and-trade” programs. Governments would negotiate the desired pace and extent of emission reductions by setting pollution caps. Through trading, the collective genius of the market would discover the best allocation of effort. Many of the world’s biggest emitters – starting first in the West, and now spreading to South Korea, China, and other emerging economies – have considered or adopted cap-and-trade programs. A few countries have taken a different market-based climate strategy and set prices directly via carbon taxes. Whereas cap-and-trade fixes the quantity and lets the market find the cost of emitting pollution, carbon taxation does the opposite: it specifies the price and lets the market discover the volume of pollution that aligns.

Market-based policies on a planetary scale, the theory goes, would empower firms and governments with the flexibility to focus investment on the least expensive options for controlling emissions. Flexibility would reduce costs, allowing more environmental protection with fewer resources; in turn, frugality would make it easier to mobilize business and voter support for ever-deeper climate pollution reductions. Ever since the early 1990s, when active efforts to develop climate policy began, the politics of crafting and sustaining policies needed for achieving deep cuts in emissions have been stymied by concerns that deep decarbonization – as the transformation to a climate-friendly future is known – would be expensive, difficult, and could even harm economic competitiveness. That’s why policy strategies to keep costs as low as possible were seen not just as good for the economy, but also as essential to mustering political support to protect the planet.

Today, the original vision of a globally coordinated, market-based policy solution lies in tatters.

Many pollution markets exist, but nearly all are smokescreens that create the impression that market forces are cutting emissions when, in fact, other policies are doing most of the real work of decarbonization. Almost everywhere that market systems are in place they operate at prices that are so low as to have little impact on key decisions such as whether to invest in or deploy new technologies. After thirty years of policy attention to climate change and twenty years of active efforts to design market systems, jurisdictions with reasonably ambitious carbon prices – say, $40 per ton of CO₂-equivalent¹ – account for less than 1% of global emissions (Figure 1.1). Those with carbon prices approaching $100 per ton of CO₂-equivalent – a strong signal more consistent with the level of effort the best new science suggests is needed for deep decarbonization – are an even tinier sliver of the global picture.

In a few places, carbon prices from market-based policies have been powerful enough to induce some changes in emission patterns – such as when firms decide whether to produce electricity from high-emission coal plants or lower-emission rivals. Those impacts, however, have nearly always involved commercially mature technologies competing in stable environments and under other highly restrictive conditions. In the United Kingdom, for example, a climate policy strategy that included carbon pricing accelerated the extinction of coal from electric power because other technologies, notably cleaner natural gas and renewables, were readily available and much more competitive when coal-fired power plants were required to pay the extra cost of their emissions.² Those are important roles for markets, but those roles are not central to the challenge of creating a global transition to near-zero emissions.

Figure 1.1 Carbon prices around the world in 2019

Source: Figure redrawn with permission from Jesse Jenkins, “Why Carbon Pricing Falls Short and What to Do About It,” Kleinman Center for Energy Policy, University of Pennsylvania (Apr. 24, 2019); underlying data from World Bank, “State and Trends of Carbon Pricing” (2019).

Nearly all the real challenges of deep decarbonization require incentives for governments and firms to back novel, risky, and untested technological systems – not simply to deploy known, proven options that are sitting on a shelf ready for use. In 2019 a team of scholars supported by the Energy Transitions Commission took a fresh look at exactly where the world stands with respect to deep decarbonization. The results, summarized in Figure 1.2, use the standard S-shaped curve for explaining the emergence, diffusion, and then reconfiguration of infrastructure that is typical of technological change. Strikingly, in nearly all of the ten sectors that account for the bulk of climate pollution, technological progress on deep decarbonization is in the very early stages – when, typically, the best choices are unknown, risks for investors are high, and active policy support is essential. The power sector is furthest along (at least in some countries), which is precisely why marginal market incentives have been able to achieve significant impacts in some contexts by affecting choices of known, proven technologies in that sector. But even the power sector requires comprehensive transformation with new technologies and investments – such as in advanced control systems, building electrification strategies, and bigger electric grids – that carbon pricing, alone, is unlikely to deliver.

What’s needed nearly everywhere in the world is to test and deploy novel technologies energy, industrial, and agricultural systems. Even in electricity – where there has been a lot of progress in developing clean production systems – the next frontier will involve electrification of many end uses, including space heating and cooling, which requires continued progress in early-stage technologies such as reliable heat pumps. Carbon prices, even at high levels, won’t be enough to induce the necessary investment in and adoption of novel technologies.

In addition to having little impact at home, the world’s efforts to create market forces that encourage decarbonization have generated almost none of their promised international benefits. Despite nearly three decades of diplomatic and other policy efforts, no global carbon market exists today. Interregional emissions trading is a footnote in climate policy, not the main attraction. Various efforts to create regional carbon markets – such as in the European Union, across subnational governments in North America, and within private firms – remain inspired by the vision that these decentralized markets will become stitched together in time as the coverage of markets broadens and climate ambitions deepen. Yet in the real world there has been little stitching together and almost zero deepening.³

Figure 1.2 The state of decarbonization technology by sector

Source: Redrawn with permission from David G. Victor, Frank W. Geels, and Simon Sharpe, “Accelerating the Low Carbon Transition: The Case for Stronger, More Targeted and Coordinated International Action,” Energy Transitions Commission and Brookings Institution (2019), based on assessments of technological development that rely heavily on the work of the Energy Transitions Commission (http://www.energy-transitions.org/).

The most visible example of market links – the joint trading program involving California, Québec, and Ontario – recently shrank, with a conservative Ontarian government pulling out of cap-and-trade after winning power in 2018. Years earlier, nascent links between the Australian and EU markets dissolved as soon as Australia abandoned emissions trading. China, meanwhile, is in the middle of an opaque and years-long effort to develop a national emissions trading program in the power sector, where a small number of powerful state-owned firms dominate, environmental regulators have struggled for influence, and the state planning system has historically been much more potent than marginal market incentives in determining investment and environmental outcomes. Only one integrated international market has proved sustainable – the market for pollution across the European nations – because that market is built on top of a powerful superstructure of common European economic institutions, common rule of law and administrative procedure, and common confidence that the superstructure is robust. Those are highly demanding conditions to meet and unlikely to be seen anywhere else in the world anytime soon. This success within the EU bodes well for Europe, but the continent’s share of global emissions is only about 9% and shrinking. As a leader, what it does is relevant to the global problem of climate change primarily if its leadership inspires and directs followership in the places where emissions are rising.⁴

As the sheen of markets dulls, it has also become clear that the world is making little progress on decarbonization. Since around 1990, when diplomacy to address global climate change first began on a sustained basis, world emissions have risen by two-thirds.⁵ In only one sector (electric power) and one group of countries (the Western industrial democracies) have emissions declined a bit. Most of that is due to fortuitous changes in fuel markets, the decline in the cost of wind and solar power, and policies that have mandated a shift away from coal toward c...