“States have, in accordance with the Charter of the United Nations and the principles of international law, the sovereign right to explore their own resources pursuant to their own environmental and developmental policies, and the responsibility to ensure that activities within their jurisdiction or control do not cause damage to the environment of other States or of areas beyond the limits of national jurisdiction.”
—UNFCCC Preamble, as quoted by Stockholm Environment Institute (2016)
The establishment of UN Framework Convention on Climate Change (UNFCCC) in Rio, 1992, acted as a big disruption to the international commodity market. The framework established by 160 countries and its Conference of Parties (CoP)’s eventual effort to quantify Greenhouse Gasses (GHG) emissions defined as carbon dioxide, methane, nitrous oxide, hydroflurocarbons, perfluorocarbons, and sulphur hexafluoride came to indirectly built up a new highly-sought international market relevant to achieve the consensus gained through Earth Summit—that each participating members need to take suitable measures to save the earth. Greenhouse gas emissions, seen as the main factor contributing to man-made global climate change, was agreed upon to be lessened through national strategies fit to meet UNFCCC’s agreements. For that reason, emissions, especially carbon, started to be commoditized globally.
The vision turned into an economical disincentive through the introduction of “Cap and Stone” policy. In short, the policy used the acknowledged quota of emissions for each countries decided in Kyoto Protocol to limit the excess number of emissions. Quantified volume of greenhouse gasses in the air and other waste are later measured to know each country’s contribution in polluting the environment.
In the country, cap and stone logic is often used to set a limit to businesses’ waste rate. A company can buy a set number of tons of emission quotas allowed each year. It is often compared to carbon taxation, which directly establishes a price on emissions depending on their current production rate without any limitation caps. The debates going around often centered on the idea of how tight emissions should be regulated. The point is that companies must pay for every ton of emissions they produce.
The disincentive put mass-producing companies with high emission rate in a tight spot. Logically, production units considered to have big rates of waste would have to put in bigger budget for tax compared to another that can produce a similar amount of commodity with less waste. This idea itself goes against the basic nature of business cost, which was conventionally only based on the supply-demand flow and using only input units as a basis for production costs.
The recommendation to put a price on carbon had been introduced through UNFCCC since early 2000s, however, it had only made concrete by Kyoto Protocol’s legally binding timeline in 2005. Since then, a number of countries had but up emission policies such as taxation and cap and stone, with United States as one of the earliest. USA, India, and China, however, even with their large proportions of global emissions, have constantly avoided putting mandatory caps for industries and therefore many prefer taxations. The condition then produce a free-market environment for emission in which businesses can produce as many amount with as many waste as they want, as long as they have the money. Some others disadvantaged by the high rate of emission tax in USA, however, made a number of businesses resort to leverage their companies’ productions overseas, especially in developing countries.
While states are free to implement policies as they see fit within the region, globally, countries are bounded by the percentage of emissions need to be eliminated based on Kyoto Protocol and following agreements. Each country now has a personalized cap on the number of emissions to meet the global vision of lessening greenhouse gasses rate as a big contributor to man-made global climate change. In one hand, paradoxically, countries such as USA would have to comply with the set number of limitations, whereas on the other it is more economically advantageous to let businesses grow by not putting mandatory cap in high-sought industries.
The responsibility to put up a line between state sovereignty in economy strategies and global agreement of emission reduction rate that must be met falls to UNFCCC. The framework had recognized greenhouse gas emission as “a new commodity” and recommend a strategy dubbed as “emission trading” to help countries with high production rate such as USA, India, and China to meet their goal in Kyoto Protocol Annex B. The reason behind UNFCCC’s recommendation can be read below.
Emissions trading, as set out in Article 17 of the Kyoto Protocol, allows countries that have emission units to spare – emissions permitted them but not “used” – to sell this excess capacity to countries that are over their targets.
Thus, a new commodity was created in the form of emission reductions or removals. Since carbon dioxide is the principal greenhouse gas, people speak simply of trading in carbon. Carbon is now tracked and traded like any other commodity. This is known as the “carbon market.”
Carbon, or rather greenhouse gas emissions, now seen as a form of commodity that is treated by both business and ethical logics. As a product, emission is understood to have similar fluidity with other processed commodities and therefore can go into different conditions in the supply-demand scale. There can be a situation in which the demand is high and the supply is low, scarcity, and there can be a situation in which the demand is low but the supply is high, overproduction. It has to be noted, however, that these supply and demand dynamics of emissions is not actually talking about the emission itself, but rather on the “allowed amount” set by UNFCCC and respective countries. This term can be understood more clearly with cap and stone logic—globally, a cap is put on the amount of each country’s emissions, but within the country many do not have that sense of supply-demand without mandatory caps.
The emergence of carbon market, oftentimes projected to be the most sought after in near future, allow high-emission countries such as USA to “buy” the overstocked limit of emission in others. This condition can have the potential to shake the current international structure from the economy industry. A country with less production rate can “produce” and sell more quota, and therefore gaining profit without any tangible production cost. It can also change the overall culture of the now non-regulated transnational companies on emission.
In theoretical framework, the implementation of carbon commoditizing and trading can be seen with environmental-economy perspective to achieve sustainable development as proposed by Herman Daly. Daly explained that the “sustained” aspect of sustainable development goes beyond physical aspects. He challenged the neoclassical economists’ proposition that focuses on utility as a mean to be sustained. For Daly, aside from utility aspect, ecological perspective should also be used to maintain the entropic physical flow from nature’s sources through the economy and back to nature’s sinks. (2007:47) This idea embodies the principal values of ecology such as Barry Commoner’s Four Laws of Ecology.
Daly perceived commodities to have more than perceived function as its core value determinant. Some commodities, as natural they are for us to use them, have non-perceived functions such as air and water. The value of natural products in biosphere was not generally perceived to have values that can be quantified. Though, as portrayed by many scientific findings, any form of natural medium, as intangible as it is like air, are limited. This might also be affected by the general idea of “air” as “clean air” that can be used, without considering human impact in the form of waste to its proportions. So is the case with land, water, and other natural resources.
Daly’s idea of steady-state economy is also embedded into the logic of carbon trading. In the global carbon market, UNFCCC is the regulator to stabilize the stock of commodities with consideration to ecological limits, whereas carbon market acts as the stock distributor of emissions quota that manages the flow of constant stocks among constant population (countries).
On the other hand, the implementation of carbon trading can be questionable when we look inside the workings of a country. Daly’s perspective considers earth to be a single organism in which the population have similar amount of power to deconstruct.
This perspective can be irrelevant when used in talking about environment. It should be understood that the commodity sold in carbon trading are the extent of rights to which a country can destroy its own habitat, that the impact would be most severely felt by the country itself. Buying an emission quota from other countries will not make the acid rains in California suddenly stop, because environmental phenomenon happen regionally and centered on the casualties. The only thing carbon trading solves is man-made global climate change that affects the earth as a whole—with different rate of impact in each region depending on their ecology strategy. Using Daly’s term, the carrying capacity of earth is planned out to be constant, whereas each region will have different capacity rate according to their activity.
There is still a limit to what how far a country can exploit its own habitat, yet growth-oriented microeconomic activities within the country are still yet to take socio-ecological sustainability as a deciding factor. Free market system that are driven by market activities implemented by many countries, are encouraging business actors to do what they want within their capabilities. With this system, political construction is minimal, that impacted in the inability of government to put on certain policies similar to USA and its non-mandatory caps. Government intervention in the form of limitations to production process can affect the national economy greatly and the destabilization of governance.
A big percentage of environmental activists are not in support of carbon trading. Aside from the possible local weather extremes phenomenons, some understood carbon markets to have significant players in the number of individuals living on earth rather than only based solely on their countries. For that reason, global increase in population would have to be balanced out with bigger percentage of clean and perfectly usable environment. The idea suggests that every state must keep their emission level to a minimum in any way possible, regulated by UNFCCC. It will, however, diminish the idea of the emerging carbon market as a significant factor to increase global economic activities.
Dali once explained, “Sustainability is one of those troublesome abstract nouns like justice, truth, and beauty.” (2007) Every individual have his or her own way of understanding what sustainability is—does it only go around the idea of transported energy, or does it have to take into account other aspects of development as well? In liberal countries such as USA, the contrasting belief can result in a non-compromising way, in this sense the business players focusing on running their business, and environmental government focusing on lessening environmental impacts.
Daly, Herman E. (1996). Beyond Growth: The Economics of Sustainable Development. Boston: Beacon Press.
Daly, Herman E. (2007). Ecological Economics and Sustainable Development, Selected Essays of Herman Daly. Cheltenham: MPG Books Ltd.
Diesendorf, Mark. (2014). Sustainable Energy Solutions for Climate Change. London: Routledge.
Stockholm Environmental Institute. (2016). Fossil Fuel Production in a 2C World: The Equity Implications of A Diminishing Carbon Budget.
UNFCCC. “Emissions Trading”. Archived in http://unfccc.int/kyoto_protocol/mechanisms/emissions_trading/items/2731.php. Accessed on December 12 2017.