There Did All the Markets Go!Or: Sustainable Carbon Markets and How to Get There

Sven Rudolph, Elena Aydos, Takeshi Kawakatsu and Achim Lerch

Discussion papers from Graduate School of Economics , Kyoto University

Abstract: “Where Did All the Markets Go?”1 was a question prominent amongst environmental economists in the 1990s when they realized the lack of market-based approaches in environmental policy practice with despair. Public Choice, the economic analysis of politics, answered that question by claiming a “market tendency for the political process to resist market mechanisms for rationing scarce environmental resources.”2 And, while recently climate policy cap-andtrade programs have spread across the globe and even different governance levels, most carbon markets’ ambition have to be considered insufficient. But despite of all criticism of the “The Brave New World of Carbon Trading“3, carbon markets offer a number of advantages over alternative policy instruments, and in view of the tremendous challenges of the Paris Agreement and the necessity to decarbonize the global economy within this century, any policy option should be (re-)considered without prejudices. Yet, exactly because there is no time to waste, carbon markets can only be considered a valuable policy option if they are both sustainable and political feasible; a contradiction? Can sustainable carbon markets ever be made politically feasible? We think: yes! In order to support this, first, we will summarize environmental economics’arguments in favor of cap-and-trade and add a sustainability rationale for carbon markets, but from selected case studies we will also identify problems representative for many carbon markets in practice. We then identify the political barriers of sustainable carbon markets applying Public Choice reasoning. Last, we show how to overcome political obstacles and implement efficient, effective, and fair carbon markets by referring to best-practice examples and lessons from modern environmental governance literature.

Date: 2017-04
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