Sometimes, markets don’t function quite how they’re intended to. Incentives are out of wack, regulations are too complex, there is a lack of trust, or the rules just weren’t made the way they should have been. Maybe the costs aren’t concentrated on the consumer, like in the case of emissions. More often than not, the first instinct of regulators and lawmakers is to simply add new regulations to the amorphous blob of existing regulations that they think will prevent the bad outcome. However, there’s only one way to solve the problem: reorganize the market so incentives are properly aligned with what we are trying to maximize. Continuing on the theme of last week, let’s look at how maligned incentives impact green markets and why carbon pricing could help solve that problem.
For environmental markets, the biggest problem is something called an externality. There are costs to everyone for CO2 emissions or methane emissions or a number of other waste products, but costs are not borne by the consumer or the producer of the product. Rather than taxing or limiting these emissions, US policy has been to attempt to influence emissions through things like fuel economy standards. The CAFE standards have, unfortunately, been a dismal failure even at raising the miles the average car can travel per gallon. Have you ever wondered why vehicles have been getting progressively bigger over time? CAFE standards make exceptions for bigger vehicles, so automotive producers here are able to sell bigger cars for less relative to smaller cars. This does nothing to account for the true costs of fuel emissions, but, in reality, the cost should be through the fuel. Consumers can then choose the size of their vehicle or its fuel efficiency and automakers would adjust to consumer preferences.
Instead, once again, we have reached into the grab bag of regulation to push electric cars on consumers. It may be that they are the best solution, but many of them are currently charged using coal power plants. That makes them less environmentally friendly than gas-powered cars. Batteries, on top of that, need rare earth metals that are often mined using damaging methods like strip mining. This is not to say that electric cars are bad; they can be great and they might even be a good solution to vehicle emissions. However, we are still avoiding the obvious answer: price the ‘consumption’ of the emission.
Where the government has fallen short, some intrepid private individuals and corporations have stepped up. We have a robust voluntary market for carbon offsets in the US and a myriad of projects rushing to fill the demand of environmentally conscious consumers. This voluntary market has led to some fantastic innovations. Farmers are using regenerative practices that sequester carbon to the soil through the roots of their crops and cover crops. This even leads to higher yields over time. A new process of creating concrete pulls carbon directly out of the air and combines it with calcium to create concrete. It’s even cheaper underwater, so it may lead to artificial islands someday. Building with cross-laminated timber from trees harvested sustainably could knock off a few percentage points from global net emissions. Insulation using straw packed tight is both flame-retardant and incredibly effective, all while sequestering a significant amount of carbon (but don’t tell the Big Bad Wolf). A new form of cattle feed can significantly reduce their gaseousness and pig fecal matter has been purified to provide natural gas. It doesn’t take much. These incentives have sparked a boom. If we’re not careful, though, it can all vanish with a poof (sorry).
These voluntary markets have been made possible by a coterie of verification standards. Several nonprofit organizations, such as Verra and the Climate Action Reserve, have taken it upon themselves to create registries for projects relying on independent verification. The initial market failed because of fraud, but it has come back stronger with that simple change.
Sustainability is not really sustainable without profit, though. Societies assets go where there is money to be made and we make it extraordinarily difficult to innovate sometimes. The US, unlike Europe, has no central emissions market. We have a plethora of zoning restrictions that sometimes make it nigh on impossible to build new infrastructure including green infrastructure. North Dakota took it upon itself to protect the coal industry by handicapping the wind industry. Our success is not a foregone conclusion. We must get out of the way of innovation by lifting silly restrictions and putting a price on the things that actually matter, such as carbon and methane emissions. We can leverage existing verification standards and build upon them to prevent fraud. This can all be made a lot easier with a few simple tweaks to existing markets.