Implications for Carbon Trading

We know that the atmosphere is a public good, and that greenhouse gas emissions intensify the greenhouse effect and thus cause a negative global externality. Although this externality may be costly, individuals, businesses, and even countries lack incentives to take action on their own to curtail greenhouse gas emissions. From the preceding discussion, it is clear that the world currently lacks effective global policies that limit greenhouse gas emissions. Until such limits exist, a well-functioning market for carbon and other greenhouse gas emissions reduction credits will not exist, and carbon dioxide and other greenhouse gas emissions will not be priced at their marginal social cost.

Interestingly, attempts have been made to create "markets" for carbon — such as the Chicago Climate Exchange — before governments created legally binding caps on emissions. Some recent "trades" of carbon contracts have occurred at prices less than $10 per metric ton, leading some analysts to conclude that carbon sequestration would not be profitable for farmers. Yet, it should be clear that these prices for carbon emissions credits are heavily discounted below the marginal social value. Indeed, studies of the opportunity cost of reducing carbon emissions find values that range from $10 to $100 per metric ton and higher, depending on the quantity of emissions reduced (Antle et al., 2002).

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