The thoughts expressed in this Guest Opinion are those of the writer and do not necessarily reflect the views of S&P Global.
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We all contribute to climate change, through the products and services we buy, which in turn are manufactured or produced in ways that emit greenhouse gases. Collectively, individuals and businesses, do this because none of us have been required by law to fully “internalize” – by regulation or through the tax system -- the social costs these emissions cause to our climate.
Changes in the law, through direct regulation or carbon taxes, or both, can and should change this calculus over time, inducing existing and new firms to invent ways to reduce what Bill Gates calls the “green premium” – the additional cost of adopting cleaner technologies (those that result in less GHG emissions) in all the sectors of the economy. Likewise, public investments in R&D into the basic science of clean tech, including ways to “recapture” greenhouses already in the atmosphere or even oceans, plus architecture that facilitates the deployment of certain cleaner technologies – such as many more charging stations to encourage the purchase and use of electric vehicles – should have similar effects. In August, Congress enacted much of the Biden Administration’s infrastructure plan, which contained funding for such investments, although the Plan eschews carbon taxes that would put an explicitly higher price on carbon-producing activities (even with lump-sum rebates for Americans that would especially help lower income households), in favor of less efficient mandates, either through legislation or regulation.
What makes tackling climate change so difficult is that success depends not on the actions of any single country – even as large a GHG emitter as the United States or China – but on the combined actions of all countries. The Paris Agreement adopted by 196 nations in December 2015 was the most important international climate change agreement of its time and serves as the benchmark for continuing global efforts to address climate change. Shortly after it went into effect in November 2016, many companies across America began to make efforts to control their greenhouse gas emissions, but without a standardized methodology for tracking those emissions or for fully accounting for all the GHG impacts of their entire supply chain.
Prior to the Paris Agreement, the Kyoto Protocol, an international treaty established in 1992 under the United Nations Framework Convention on Climate Change, committed state parties to reduce greenhouse gas emissions. Unlike the Paris Agreement, the Kyoto Protocol only binds developed countries and places a heavier burden on them under the principle of “common but differentiated responsibility and respective capabilities.”
Perhaps the most important element of the Kyoto Protocol is that it endorsed flexible market mechanisms to address climate change, all of which are based on the trading of emissions permits. The Protocol also offers countries additional means to meet their targets through three market-based mechanisms: International Emissions Trading, Clean Development Mechanism (CDM), and Joint Implementation (JI).
The CDM involves investment in emission reduction or removal enhancement projects in developing countries that contribute to sustainable development. The JI enables developed countries to carry out emission reduction or removal enhancement projects in other developed countries. Projects that are aligned to the CDM can sell certified emission reduction (CER) credits, each equivalent to one ton of CO2, which can be counted towards meeting Kyoto targets.
The Kyoto Protocol allows countries that have emission units to spare - emissions permitted, but not “used” - to sell their excess capacity to countries that are over their targets. In this way, the Kyoto Protocol created a carbon market where market participants can trade emission reductions or removals “credits” – per ton CO2 reduction – across organizations and firms. Today, the “voluntary carbon market” treats carbon like a commodity traded in the Chicago Board of Trade market.
Scaling carbon markets entails many complexities, especially the absence of standardized methods for measuring any company’s carbon or GHG “footprint,” discussed in more detail later this essay, as well as difficulties in validating reductions in GHG emissions, especially when compared to an accepted “baseline” assuming “business as usual.” Our first profile relating to climate change describes Cool Effects, founded by Richard Lawrence and his family, is working to overcome these challenges.
Meanwhile, young people have been powerful voices advocating actions to curb climate change – understandably so, since they will have to live with the consequences of inaction. Education about ways to reduce and ideally recapture greenhouse gas emissions can never start soon enough. That’s a lesson that Ciara Byrne and Kim MacQuarrie, the subjects of our second profile relating to climate change, have taken to heart in forming a non-profit, Green Our Planet. GOP helps provide hands-on experience to students from low- income families about ways they can help – with something as simple as planting gardens, since trees and plants naturally absorb carbon dioxide from the atmosphere. While GOP is scaling its own activities, the concept behind it is so simple that it is easily replicable throughout the country.