As economic policy, carbon trading doesn't seem to work. Mandating a market and forcing people to participate is in defiance of what a market is.
Markets for trading carbon emission credits to reduce greenhouse gas emissions are in place in some countries, and even a few US states, so there is at least some idea about what does and does not work.
In a Policy Forum article in Science magazine, Duke University's Richard Newell, William Pizer and Daniel Raimi discuss discuss what it might take for these markets to develop in the coming years and decades. They're fans of the idea, they believe carbon markets are a key part of an emerging global policy framework that includes trading programs and other policies such as renewable energy incentives, carbon taxes, and traditional regulation. They attribute modest reductions in greenhouse gas emissions to cap and trade schemes.
The largest obstacle is that business is already hard enough. Outside the sandbox of academia, economics is not always predictable. If one country, region or nation does not implement carbon markets, they now have a competitive advantage. America and Europe have simply exported the bulk of their manufacturing emissions to China, which as a result is not the only economy doing well.
"With these markets springing up, we have lessons from the past that can be applied to new markets such as the one in California, the one in Quebec, or the ones developing in China," Newell, Professor of Energy and Environmental Economics at Duke. "As a result, they will hopefully avoid some of the problems that others have dealt with in the past."
The European Union's Emission Trading System (EU-ETS) has seen significant challenges recently, with prices falling to historic lows in 2013 and having accomplished little. Australia has decided to abolish its carbon market entirely.
That hasn't stopped the development of new programs. China recently agreed to establish five regional pilot carbon markets, nearly doubling the volume of emissions covered by existing trading programs - as expected, it simply means they are building lots of new factories in places where they have more carbon credits, it isn't reducing any emissions and is simply shuffling money around among the same players. California and Quebec have recently linked their markets.
The authors review how these programs are addressing concerns such as uncertainty over carbon market prices and how to approach differences in policy and structure across programs.
"We are learning from the problems and successes of the past," said co-author William Pizer, an Associate Professor of Public Policy, Economics and Environment at Duke. "As governments revise existing market rules or new markets arrive, the system evolves. It's all being tried and updated in real time."