Carbon credit exchanges allow the sale and purchase of a right to reduce a certain amount of greenhouse gases in an effort to mitigate the effects of climate change. They are like stock or commodity exchanges, except the underlying assets have no physical existence and the rights to reduce emissions are traded only intangibly. The creation and sale of these credits has been criticized as unethical for several reasons.
One reason concerns the role of the private sector. A central concern with trading is that it may cause the rich to shift some of their own production of emissions to the poorer countries by purchasing carbon offsets. This is a form of “greenwashing,” and it makes the use of carbon credits ethically questionable. It is also a form of unfair competition as it allows companies to lower their environmental footprint without doing anything more than buying a cheap solution.
Another reason concerns the market design. It is generally agreed that carbon.credit exchange are best suited to a market that offers incentives for all parties involved in the project to lower their emissions. A market that is designed in a Coasean manner should have a large number of buyers and sellers, allowing them to negotiate an arrangement that lowers overall emissions. But carbon markets are often structured in a way that does not promote this arrangement.
There are a number of issues that need to be addressed in order for carbon credits to be a viable tool for reducing greenhouse gas emissions. Many of these issues are related to the design of the voluntary carbon markets.
The main issue is that there are few stringent standards in the carbon marketplace. This is a problem because it gives an incentive to developers of low-quality projects to try to find a standard that will register their product, and it creates perverse incentives for a business looking to make up its carbon neutrality gap to buy the least expensive credits available.
These problems could be solved by creating a set of core carbon principles and a taxonomy that classifies additional attributes to establish a minimum quality threshold for carbon credits. These should be hosted and curated by an independent third party, which would also provide liquidity via reference contracts to enable price risk management and supplier financing.
Other problems include the issue of carbon offsetting, which is a common way for businesses to comply with environmental regulations. This practice is unethical because it shifts the responsibility of lowering emissions to other people and does not address the underlying issue of overconsumption by the rich nations. The asymmetry of this practice is highlighted by the fact that overall emissions have continued to increase despite the use of carbon offsetting, and it is clear that there is a need for more ambitious policies to reduce emissions worldwide.
Lastly, there are issues related to the role of the public in carbon markets. For carbon credits to be an effective tool for lowering greenhouse gas emissions, communities that are impacted by pollution should be included in the bargaining process. This is difficult to accomplish in practice because community residents typically cannot afford to take part in the cost-benefit analysis required to qualify for carbon credit purchases, and because governments often have little interest in the outcomes of these negotiations.