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Carbon Trading: Unethical, Unjust and Ineffective?

  • Simon Caney (a1) and Cameron Hepburn (a2)

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Cap-and-trade systems for greenhouse gas emissions are an important part of the climate change policies of the EU, Japan, New Zealand, among others, as well as China (soon) and Australia (potentially). However, concerns have been raised on a variety of ethical grounds about the use of markets to reduce emissions. For example, some people worry that emissions trading allows the wealthy to evade their responsibilities. Others are concerned that it puts a price on the natural environment. Concerns have also been raised about the distributional justice of emissions trading. Finally, some commentators have questioned the actual effectiveness of emissions trading in reducing emissions. This paper considers these three categories of objections – ethics, justice and effectiveness – through the lens of moral philosophy and economics. It is concluded that only the objections based on distributional justice can be sustained. This points to reform of the carbon market system, rather than its elimination.

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*Corresponding author.E-mail address:c.j.hepburn@lse.ac.uk

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1 United Nations Framework Convention on Climate Change (UNFCCC): 1992, Article 2, text available at http://www.unfccc.int.

2 We focus on carbon dioxide emissions given their sheer volume and contribution to climate change but we should note, of course, that carbon dioxide is not the only greenhouse gas.

3 Hepburn, Cameron, ‘Carbon trading: a review of the Kyoto mechanisms', Annual Review of Environment and Resources, 32 (2007), 375393.

4 Meyer, Aubrey, ‘Contraction and Convergence: The global solution to climate change’ Schumacher Briefing 5, 2000, Foxhole, UK: Green Books Ltd.

5 For an overview of the EU ETS see the special issue of Climate Policy, vol.6 no.1 (2006).

6 Global Times, ‘Five provinces, eight cities selected for gas-emission cut off’, 11 August 2010. http://business.globaltimes.cn/china-economy/2010-08/562368.html

7 Stavins, Robert N, ‘What Can We Learn from the Grand Policy Experiment? Lessons from SO2 Allowance TradingJournal of Economic Perspectives 12:3 (1998), 6988.

8 Sandel, Michael ‘Should we Buy the Right to Pollute?’ in Public Philosophy: Essays on Morality in Politics (Cambridge: Massachusetts: Harvard University Press, 2005), 94 & 95.

9 Enforcement requires independently verified measurements of emissions (with sensors or flowmeters) or independent calculations of those emissions based on the measured output produced and its emissions intensity, coupled with spot checks by verification agencies.

10 Walzer, MichaelSpheres of Justice: A Defence of Pluralism and Equality (Oxford: Basil Blackwell, 1983), 100103.

11 Andre, Judith ‘Blocked Exchanges: A Taxonomy' in Pluralism, Justice, and Equality (Oxford: Oxford University Press, 1995) edited by Miller, David and Walzer, Michael, 171196.

12 Andre ‘Blocked Exchanges', 175: cf 175–176.

13 Ibid., 176: cf 176–178.

14 Ibid., 178–179.

15 Ibid., 179.

16 Andre ‘Blocked Exchanges’, 179–180.

17 Machiavelli, The Discourses (Middlesex: Penguin, [1531] 1970) edited with an introduction by Bernard Crick, Book 1, Discourse 43, 218.

18 Mill, John Stuart, On Liberty (Middlesex: Penguin, (1859) 1974, 173.

19 The case of voting rights has an extra complication for one might think that although it is a benefit to the citizen it also comes with a duty too (for example, to cast it in the public interest) and that this duty in part explains why it should not be transferred.

20 Andre ‘Blocked Exchanges’, 180–187.

21 This table captures, we hope, the logical possibilities but it obviously does not describe all the kinds of issues that might arise under the various headings. For excellent discussion of the kinds of issues that arise and the relevant normative consideration see Satz, Debra, Why Some Things Should Not Be for Sale: The Moral Limits of Markets (New York: Oxford University Press, 2010).

22 For an excellent discussion of arguments against markets in permits ‘to pollute’ see Goodin, RobertSelling Environmental Indulgences’, Kyklos 47:4 (1994), 573596. For a contrary view and response see Beckerman, Wilfred and Pasek, JoannaThe Morality of Market Mechanisms to Control Pollution’, World Economy 4:3 (2003), 191207.

23 Wiggins ‘A Reasonable Frugality’ this volume.

24 For this line of reasoning see also Goodin ‘Selling Environmental Indulgences’, 578–579.

25 For further discussion see Caney, Markets, Morality and Climate Change: What, if anything, is Wrong with Emissions Trading?', New Political Economy 15:2 (2010), 204205. See also Caney, Justice, Morality and Carbon Trading’, Ragion Pratica 32 (2009) for a discussion of this and other anti-market arguments.

26 Ott, Hermann E. and Sachs, Wolfgang ‘The Ethics of International Emissions Trading' in Ethics, Equity and International Negotiations on Climate Change (Cheltenham: Edward Elgar, 2002) edited by Pinguelli-Rosa, Luiz and Munasinghe, Mohan, 171.

27 For example, Barry, Brian writes that ‘those alive at any time are custodians rather than owners of the planet, and ought to pass it on in at least no worse shape than they found it in’, ‘Justice Between Generations’ in Liberty and Justice: Essays in Political Theory Volume 2 (Oxford: Clarendon, 1991), 258. For discussion of the concepts of ‘stewardship’ and ‘trusteeship’ see Attfield, RobinEnvironmental Ethics (Cambridge: Polity, 2003) chapter 2 and Attfield The Ethics of the Global Environment (Edinburgh: Edinburgh University Press, 1999), chapter 3.

28 Honoré, Tony ‘Ownership’ in Making Law Bind: Essays Legal and Philosophical (Oxford: Clarendon Press, 1987), 161192 at 170.

29 Passmore, JohnMan's Responsibility for Nature: Ecological Problems and Western Traditions (London: Duckworth, 1974), 73.

30 Passmore Man's Responsibility for Nature, 101.

31 We are grateful to Luc Bovens for raising this objection.

32 Note, incidentally, that this argument does not object solely or even primarily to the ‘trading’ of permits. Rather its concern seems to be with a system which distributes ‘rights to use the atmosphere’ whether or not they are tradeable.

33 Michael Sandel has given this kind of argument. See ‘Should we Buy the Right to Pollute?’, 95. Sandel's argument against emissions trading is a part of a more general civic republican concern about the role of markets and the way they encroach into many domains in human life. See Sandel, Michael J.Justice: What's the Right Thing to do? (London: Penguin Books, 2009), 8491 and his discussion of ‘republican citizenship’ in Sandel ‘What Money Can't Buy: The Moral Limits of Markets’, The Tanner Lectures on Human Values delivered at Brasenose College, Oxford, May 11 and 12, 1998, 107ff. This is available at: http://www.tannerlectures.utah.edu/lectures/documents/sandel00.pdf (last accessed on 8 September 2010). See also his first Reith Lecture (‘Markets and Morals’) at http://www.bbc.co.uk/programmes/b00kt7rg (last accessed on 8 September 2010).

34 For further discussion see Caney ‘Markets, Morality and Climate Change’, 208.

35 Waldron, Jeremy, ‘Money and Complex Equality' in Pluralism, Justice, and Equality (Oxford: Oxford University Press, 1995) edited by Miller, David and Walzer, Michael, 152. Waldron's statement may overstate the exceptional nature of in-kind contributions. The challenge, nonetheless, remains: we need an argument for the claim that we must discharge our environmental duty in an in-kind form when there are other possibilities.

36 We are grateful to Luc Bovens for raising the objection presented in this paragraph and the example we use to illustrate it.

37 Sandel ‘Should we Buy the Right to Pollute’, 95. See also Goodin's discussion of the related, but distinct, argument that it is wrong to have a scheme that allows ‘some but not all’ to be exempt from some burden or to enjoy some benefit, ‘Selling Environmental Indulgences’, 584–585. How objectionable we find such schemes will depend heavily on whether the allocation of the scarce good is fair.

38 Tobin, James defends restrictions on trade for this reason: ‘On Limiting the Domain of Inequality’, Journal of Law and Economics, 13:2 (1970), 266.

39 We are grateful to Luc Bovens for pressing us on this point.

40 James Tobin ‘On Limiting the Domain of Inequality’, 271. He makes the same point in a discussion of food vouchers (268).

41 See Shue, HenrySubsistence Emissions and Luxury Emissions’, Law and Policy 15:1 (1993), 58, and Shue, ‘Climate’ in A Companion to Environmental Philosophy (Oxford: Blackwell, 2001) edited by Jamieson, Dale, 455456. This kind of argument is also endorsed by Hyams, A Just Response to Climate Change: Personal Carbon Allowances and the Normal-Functioning Approach’, Journal of Social Philosophy 40:2 (2009), 244. See also 243–244 for further discussion where Hyams discusses what we term the Paternalism and the Unreliable Trustee Arguments. Hyams appears to think that Shue's claims are a paternalistic claim about whether to prevent individuals from selling their own emission rights. Shue, however, is not discussing individual carbon permits and rejecting them for being paternalistic. His point rather is about the dangers of letting states sell all ‘their’ emissions permits, thereby jeopardising the needs of their citizens. See also Shue ‘Equity and Social Considerations related to Climate Change’, Papers presented at the IPCC Working Group III Workshop on Equity and Social Considerations Related to Climate Change, Nairobi, Kenya 18–22 July (1994) especially 389.

42 Shue ‘Subsistence Emissions and Luxury Emissions’, 58 and ‘Climate’, 455.

43 On the moral limits of state sovereignty see Caney, SimonJustice Beyond Borders: A Global Political Theory (Oxford: Oxford University Press, 2005), chapter 5.

44 What about states that do not deny their subjects the emissions needed for a decent standard of living but which nonetheless distribute them unjustly? This raises a number of complex issues that we cannot hope to resolve here. Much depends on factors such as (i) whether emissions trading with this unjust state improves or worsens the condition of the unjustly treated within that state at all, (ii) whether withholding trade incentivises the unjust government to engage in reform or whether, by contrast, engaging in trade is a more effective way of encouraging improvements, and (iii) how much weight we accord to self-determination as compared with securing an internally just distributions. See, further, Caney Justice Beyond Borders, chapter 5 and 7.

45 For further discussion see Caney ‘Markets, Morality and Climate Change’, 206.

46 Sandel ‘Should we Buy the Right to Pollute?’, 94.

47 Ibid., 95.

48 Ibid., 94–95. See also Goodin ‘Selling Environmental Indulgences’, 581–583.

49 For an interesting study of how people may treat what are intended as fines as if they were fees see Gneezy, Uri and Rustichini's, Aldo well-known paper ‘A Fine is a Price’, Journal of Legal Studies 29:1 (2000), 117.

50 On this point see Caney ‘Justice, Morality and Carbon Trading', 210. This point is also made by Hyams ‘A Just Response to Climate Change’, 243.

51 On the regressivity of carbon taxes, see James M. Poterba ‘Tax Policy to Combat Global Warming: On Designing a Carbon Tax’ in Rudiger Dornbusch and James M. Poterba (eds.) Global Warming: Economic Policy Responses. MIT Press, Cambridge, MA, 1991 and Metcalf, Gilbert E., ‘A Distributional Analysis of Green Tax Reforms’, National Tax Journal 52 (1999), 665681. But for the opposite conclusion see Sterner, Thomas, ‘Fuel taxes: An important instrument for climate policy’, Energy Policy 35 (2007), 31943202. On the distributional consequences of command and control policies, see Gianessi, Leonard P., Peskin, Henry M. and Wolff, Edward N.The Distributional Effects of Uniform Air Pollution Policy in the United States’, Quarterly Journal of Economics, 93 (1979), 281301 and Robison, David H., ‘Who Pays for Industrial Pollution Abatement?Review of Economics and Statistics 67 (1985), 702706.

52 Garnaut, Ross, The Garnaut Climate Change Review, Cambridge: Cambridge University Press, 2008, ch. 16.

53 Hepburn, Cameron, Grubb, Michael,Neuhoff, Karsten,Matthes, Felix, and Tse, Max., ‘Auctioning of EU ETS Phase II allowances: how and why?Climate Policy, 6:1 (2006), 135158.

54 See Smale, Robin, Hartley, Murray, Hepburn, Cameron, Ward, John, and Grubb, Michael, ‘The impact of CO2 emissions trading on firm profits and market prices’, Climate Policy, 6:1 (2006), 3148 and Cameron Hepburn, John K.-H. Quah, Robert A. Ritz. ‘Emissions trading and profit-neutral grandfathering’, Economics Papers 2008-W12, Economics Group, Nuffield College, University of Oxford.

55 Parry, Ian W H, 2004. Are emission permits regressive? Journal of Environmental Economics and Management, 47:2, 364387.

56 Helm, Dieter, 2010. ‘Climate-change policy: why has so little been achieved?’ in Helm, Dieter and Hepburn, Cameron. (eds) The Economics and Politics of Climate Change. Oxford: Oxford University Press.

57 Barrett, Scott. 2003. Environment and Statecraft, Oxford: Oxford University Press.

58 Greenhouse gas emissions have been reduced by non-deliberate events or policies, such as the recent recession and the Montreal Protocol on Substances That Deplete the Ozone Layer (1989) to the Vienna Convention for the Protection of the Ozone Layer (1985).

59 Suzi Kerr, and David Maré ‘Efficient Regulation Through Tradeable Permit Markets: The United States Lead Phasedown’, Department of Agricultural and Resource Economics, University of Maryland. Working Paper 96–06 (January); Nichols, Albert L., ‘Lead in Gasoline’, in Morgenstern, Richard D., ed., Economic Analyses at EPA: Assessing Regulatory Impact Resources for the Future, Washington, D.C. 1997, 4986.

60 Ellerman, A. Denny, Joskow, Paul L., Montero, Richard Schmalensee Juan-Pablo, and Bailey, Elizabeth M.. (2000), Markets for Clean Air: The US Acid Rain Program, New York, Cambridge University Press.

61 Stavins, Robert N, ‘Addressing climate change with a comprehensive US cap-and-trade system’, Oxford Review of Economic Policy 24:2 (2008), 298321.

62 Albert L. Nichols, ‘Lead in Gasoline’, 49–86.

63 Carlson, , Curtis, , Burtraw, Dallas, Cropper, Maureen, and Palmer, Karen. 2000. ‘SO2 Control by Electric Utilities: What are the Gains from Trade?Journal of Political Economy, 108:6 (2000), 12721326.

64 Ellerman, Denny, and Buchner, Barbara. ‘Over-Allocation or Abatement? A Preliminary Analysis of the EU ETS Based on the 2005–06 Emissions Data’, Environmental and Resource Economics, 41 (2008), 267287.

65 Barry Anderson and Corrado di Maria. ‘Abatement and allocation in the pilot phase’, Environmental and Resource Economics, 2010. DOI: 10.1007/s10640-010-9399-9.

66 Delarue, Erik, Voorspools, Kris, D'haeseleer, William D.. ‘Fuel switching in the electricity sector under the EU ETS: review and prospective’. Journal of Energy Engineering, 134:2 (2008), 4046.

67 Denny Ellerman, and Barbara Buchner. ‘Over-Allocation or Abatement? A Preliminary Analysis of the EU ETS Based on the 2005–06 Emissions Data’.

68 Indeed, research suggests that fuel taxes might not be regressive in developing countries: Sterner, Thomas, ‘Fuel taxes: An important instrument for climate policy’, Energy Policy 35 (2007), 31943202.

69 Hepburn, Cameron, ‘Regulation by prices, quantities or both: A review of instrument choice’, Oxford Review of Economic Policy 22:2 (2006), 226247.

70 Aubrey Meyer, ‘Contraction and Convergence: The global solution to climate change’.

We are grateful to David Frame for helpful discussions and to Timmons Roberts and Henry Shue for their very instructive comments on the paper presented by Caney at the ‘Commodifying Carbon’ Conference (Oxford, 16 July 2007); to Dale Jamieson and participants the Environmental Studies Research Seminar at New York University for comments on the paper presented by Hepburn on 21 April 2009; to members of the Royal Institute of Philosophy for comments on the paper presented by Hepburn on 11 February 2010; and to Luc Bovens, John Broome, and David Wiggins for their written comments. We are also grateful to Wilfred Beckerman, Rufus Black, Simon Dietz, Mike Mason, Dieter Helm, Nicholas Stern and Ed Page for useful discussions. Caney undertook research on this while holding an ESRC Climate Change Leadership fellowship and is grateful to the ESRC for its support.

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Carbon Trading: Unethical, Unjust and Ineffective?

  • Simon Caney (a1) and Cameron Hepburn (a2)

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