Capitalism, Not Collectivism, Will Be Key To Carbon Mitigation

15 january 2013

The Kyoto Protocol emerged from the Doha COP-18 negotiations with an extension up to 2020, but much weakened with only a few developed countries agreeing to commit funds. Even with this treaty still intact, what has become clear is the mandatory nature of carbon mitigation is now in flux. The worldwide common effort has begun to splinter into separate systems across the globe. China and California now join the EU in each having their separate cap and trade systems, while Australia is forging ahead with its carbon tax. The next time we may see a worldwide common climate treaty to replace the Kyoto Protocol, assuming we do see one, is planned for 2020.

Amid this situation, free market capitalism driven by individual voluntary choice can contribute to carbon mitigation. For years, some free market economists and their ilk have attacked carbon mitigation, but this is perhaps because it was being pushed via collectivist mandated quotas, which remind some of old-style Soviet centralized planning. But this does not have to be the case.

Free market economics, sometimes blamed unfairly as the cause of climate change, can be the key to solving it. It is, after all, really a question of technology and costs: the use of fossil fuels, and not economic activity, is to blame for climate change. If we were all doing business with cheap stable renewable energy and energy efficient loads while earning steady profits, would we even be having this discussion?

Capitalism spurs innovation and the development of new tools, and perhaps we have not fully utilized its full potential. One such emerging tool is the voluntary carbon emission market, a place where corporations voluntarily buy emission credits to offset their own carbon emissions without regard for any requirement like a carbon cap.  Unlike the Kyoto Protocol Carbon Development Mechanism (CDM for short, commonly referred to as “carbon credits”), the voluntary market does not rely on a treaty that mandates emission cuts for its survival. For its 2012 report, Bloomberg New Energy Finance said that U.S. companies purchased more voluntary carbon offsets than any other country, to support American climate change projects in the absence of a U.S. federal cap and trade scheme.

For example, large companies like Google and GM purchase emissions credits from the carbon markets to allow them to claim that their overall carbon emissions is zero. These credits then help fund other renewable energy and energy efficiency projects to displace or lessen the need for fossil fuels as companies tap these markets in the same way they tap the financial markets to fund their activities. While some have criticized offsets as giving buyers a license to continue polluting, nevertheless it remains an important tool for funding carbon mitigation and adaptation activities. As an analogy, do we argue that people exercise so that they can stuff themselves during the holidays? Probably not.

A successful voluntary carbon market will reduce the need for the U.S. government to spend taxpayer money on carbon mitigation and adaptation, as the success of a voluntary carbon market ensures funding for renewable energy and energy efficiency projects. This in turn reduces the deficit, but still ensures funding for the clean energy and energy efficiency sector. It drives green employment, such as people who will install solar panels on rooftops, do energy audits, or help install and maintain wind turbines, thus generating its own economic multiplier effect.

More importantly, a successful voluntary carbon market moves green low carbon economic activity into the free market domain, rather than the mandatory one we currently find ourselves in. The challenge is how to strengthen demand for its services, minimizing our need to rely on mandatory carbon cap economics.

Dennis Posadas is currently an Asia-based fellow of the Washington D.C. based Climate Institute and concurrently a technical consultant on clean energy matters. He is the author of Jump Start: A Technopreneurship Fable (Singapore: Pearson Prentice Hall, 2009) and Rice & Chips: Technopreneurship and Innovation in Asia (Singapore: Pearson Prentice Hall, 2007). His new business fable on clean energy will be published in 2013 by Greenleaf Publishing in the UK.