Public Policy Center, University of Nebraska
Date of this Version
2001
Abstract
The earth has a limited atmospheric capacity to absorb more greenhouse gases generally, and carbon dioxide in particular. It also has a limited capacity for agricultural lands to store a stock of carbon that might be drawn from the atmosphere and thus help alleviate the global warming problem. There are alternative mechanisms and mixes of mechanisms that might be used to address both scarcities and to work within the atmospheric limits on emissions and agricultural limits represented the capacity of soil and land to store carbon. These include a) government regulation, b) tax and subsidy programs, c) spontaneous evolution of markets, and d) cap and trade mechanisms.
An overview of each type of mechanism highlights the problems they incur. While subsidy and regulation programs have helped address a variety of natural resources conservation problems, some level of these problems generally persists and may be affected by changes in funding levels. Also, while a number of new activities have been stirred by the Kyoto Protocol, including carbon banks, international carbon certification firms and environmental product financial and brokerage firms, and unique public-private sector partnerships, perhaps none of this will produce much of substance unless governments first set carbon dioxide emission limits. It has become clear that in order to solve such public good problems, i.e., where there is little individual incentive to invest in solving the problem, that government approaches and markets must be jointly designed and implemented.
The public policy experiment with sulfur provides an example of how a market system might work if emission caps were in place. Government set emission limits in 1990. During the last 10 years or so, we have experienced the emergence of an active and quite effective sulfur allowances market. The market is helping firms find the least cost way to meet the emissions limits set through governmental action. Lessons learned in setting caps, distributing initial allowances, and facilitating sulfur allowances trading suggest that marketing can work; politics may play a lesser role than we might anticipate; markets where no markets existed before can develop; trading is surprisingly adaptive and can handle surprises; and, care must be taken to not give away too many allowances at the outset. Generally, the sulfur market has been deemed by most observers to be a success, reflecting a joint legitimization of both the government and the market. It is worth exploring the degree to which factors involved in carbon markets may be similar to or different from those involved in the sulfur market.
In regards to carbon sequestration the direction most often discussed in the U.S. and on the global scene moves away from direct regulations; green payment and subsidy, as well as programs that tax pollutants. The direction, rather, seems in part toward the baseline and credit systems that are largely spontaneous responses by the private sector to governmental emissions caps or the prospect of those caps. The latter involves both proactive government and equally proactive private parties to the market,.. A case study approach could be taken wherein a carbon storage market mechanism could be designed and tested in Nebraska. A simulated market might be developed as a case study and perhaps tested with actual trades in carbon offsets in stock (COIS) certificates representing carbon stored in Nebraska land.
During the interim, and while such a test case is demonstrated, Nebraskans need to carefully watch the progress of two pieces of legislation moving through the U.S. congress, one titled the “Conservation Security Act of 2001” and the other “The Clean Power Act of 2001.” The former proposes green payments to farmers and ranchers for applying certain kinds of conservation practices and technologies that, among other things, lead to more carbon being sequestered and stored in agricultural land. The latter set carbon emission limits on U.S. power plants at the level of emissions in 1990, which could well lead to emission allowance markets in carbon. Intriguingly, the two acts run somewhat counter to each other, in that the former does not propose to use market forces to solve the carbon problem while the latter does so. It remains an open question as to where the U. S. Congress will move on these two fronts, with the outcome having substantive implications for the next steps that Nebraskans might take to be a part of the solution to the carbon and global warming problem.
Comments
Published by the University of Nebraska Public Policy Center, 1-43, (2001)