In the wake of the Glasgow climate summit, governments must now return to the daunting challenge of making good on their emissions-reductions pledges, which at this point remain insufficient to hold warming below 2 or even 1.5 degrees C above pre-industrial levels.
That means some low-cost mitigation opportunities — such as replacing coal-fired power plants with natural gas facilities, funding transmission lines to renewable energy sites, or letting trees grow for longer periods before cutting in managed forests — will invariably be missed by government rules and regulations.
One potential solution is to pay for these missed opportunities through voluntary and offset carbon markets.
A prominent example of a carbon offset market is the timber offset program of the California Air Resources Board, which was created in 2006 as part of the cap-and-trade program for greenhouse gas emissions in California.
For example, regulations may overlook some technologies, such as more energy-efficient combustion engines or more energy-efficient air cooling and heating equipment, that help reduce greenhouse gas emissions.
Finally — and maybe most important of all — voluntary markets could support mitigation in jurisdictions with governments that are unable or unwilling to mitigate.
Although voluntary and offset markets have great potential, both have consistently failed to show that they lead to a net reduction in carbon emissions — what is known as additionality.
Did the carbon payment cause the investment to occur, or is it just rewarding a company that would have made the investment in any case? If the carbon market simply rewards actors for doing what they were going to do anyway, the market is having no additional effect and is not leading to any emissions reductions.
If the experts can see that the funds paid by the market led to the project being financially viable, then it passes the additionality test.
For example, as much as 80 percent of the California forest offset credits failed an additionality test because most of the alleged additional carbon being stored was going to be stored with or without credits.
If markets are going to become serious about helping address climate change, they must move away from funding small, individual projects and toward paying entire companies to reduce emissions.
If a livestock operation can reduce its emissions per head of cattle, it would get a credit for each ton of methane or CO2 reduced.
How difficult is it to predict industry-level emissions for a ten-year period? This task was readily accomplished by several teams for the Intergovernmental Panel on Climate Change’s 2014 mitigation report.
Although companies are not yet required to publish their annual emissions, this will eventually be necessary for government programs to implement carbon taxes or mandatory mitigation.
Of course, if future regulations are imposed on an industry, the market will have to change the predicted industry emissions accordingly.
Given that utilities have monopolies over their customers, it could make sense to measure not only a utility’s own emissions but also the emissions of its customers.
As suggested by Glasgow, this might be an excellent mechanism to obtain private funding for mitigation in developing countries, with the money coming largely from private entities in rich nations.
Robert Litan is a non-resident senior fellow in the economic studies program at the Brookings Institution, a program he formerly directed.