At a basic level, climate change is an economic problem: rising seas mean damage from storm surge and flooding; warmer waters mean more intense and damaging hurricanes; and higher temperatures can mean more droughts that harm agricultural productivity. But the challenge is the activities which exacerbate climate change usually have a high economic value—often one that can’t easily be forgone. People still drive cars, fly planes, rely on industrial goods and purchase products shipped from around the world. The costs of climate change are also “externalized,” meaning everyone has an incentive to undertake the emitting activities because the costs of the actions are dispersed across the globe, while the benefits of the emitting activities are concentrated to the individual.

Emissions have been falling in the United States, with total energy-related carbon dioxide emissions falling by 15 percent since 2005. Almost all of this decline has come from the power sector, with more than half due to replacing coal plants with cheaper natural gas. While the power sector allows for ample opportunities to replace emitting sources with lower-emitting ones that result in net savings, some sectors either can’t avoid emission, or the current technology is cost-prohibitive.

A National Bureau of Economic Research (NBER) paper compared economic estimates of climate policies and found that a low-carbon fuel standard would cost between $100 and $2,900 per ton of carbon dioxide abated. Low-carbon aviation fuel emission abatement costs range from $260 to $4,800 per ton. For reference, the estimated benefit per ton of carbon dioxide abated is roughly $50. As a comparison, a national clean energy standard—like the one President Joe Biden has proposed—would cost between $51 and $110 per ton. But the NBER study also noted that there are low-cost opportunities: reforestation in particular is the least expensive, at an estimated $1 to $10 per ton, meaning it easily passes benefit-cost analyses for climate policies.

This begs the question: “If it’s so cheap, why aren’t we doing more of it?” We are pursuing reforestation to a certain extent, with efforts like the Trillion Trees Initiative getting widespread recognition, but government is a slow moving and inefficient vehicle for producing outcomes. It takes a long time to get resources to where they need to go, and political processes dictate resource allocation. Government usually does not reward efficiency, and other equally worthy political objectives—like healthcare or infrastructure—compete for the same resources, principally derived through either taxes or debt, which entail their own tradeoffs.

This is why carbon markets are so important—they allow private actors to purchase emissions offsets, creating a financial incentive for emission abatement, while saving taxpayer dollars. Multiple carbon markets already exist, with third-party verifiers. Importantly, the market dictates the appropriate price of the offset, which signals which activities are profitable for reducing emissions, and which are too costly. Those prices spur private actors to become more efficient in their practices, finding ways to store more carbon at lower cost, and incentivize entry from new participants when carbon offset prices are high.

Private capital, also, has a significant appetite for reducing emissions. Major investment firms like Vanguard and Blackrock have committed to climate action, as have banks like Wells Fargo and Bank of America. Airlines like United and Delta have also joined the fray. These firms are going to have a difficult time meeting their commitments without the ability to purchase offsets; indeed, carbon removal through forestry is a major pillar of Delta’s emission neutrality proposal.

But maximizing the environmental and economic benefits from carbon offsets and carbon markets requires confidence in the quality of the purchased emission offsets. They must be “additional,” meaning that the sequestration of carbon can’t be from an activity that would have already taken place—exactly the critique recently leveled at The Nature Conservancy. Additionally, the carbon that is removed from the atmosphere must stay trapped, as a tree that dies and then decays will simply release its stored carbon. Traditionally, there has been some skepticism regarding effective verification of carbon offsets, especially ones administered by government.

Improving carbon offset verification to a point where confidence in quality is balanced with ease of access, and ensuring that carbon markets flourish, is more important than ever. With President Biden’s reentry into the Paris Agreement, along with various nations bolstering their commitments to it, there will be a growing international demand for carbon offsets. Already airlines and transoceanic shipping are expected to be under obligations from existing international treaties to reduce emissions, and Article 6 of the Paris Agreement will allow for international trading of carbon offsets. Importantly, if U.S. carbon markets are excluded from international trading, these global carbon markets could end up dominated by low-quality, poorly verified offsets that result in no additional carbon mitigation.

Robust carbon markets are not just about offering opportunity for emission offsets in the United States to private companies, but are about ensuring that global, difficult-to-abate activities can seek out the lowest-cost means for reducing total emissions. The result would be an economy that is overall both cleaner and more productive, especially when compared to alternative, costlier climate policies.

If Biden and other politicians are serious about reaching their 2030 emission objectives, they are going to need to amp up carbon markets in a big way, and policies which improve their accessibility should be a priority. Legislators seem to agree, as bills like the Growing Climate Solutions Act and the Rural Forest Markets Act have garnered bipartisan attention. Details regarding additionality, subsidies and ease of verification will need to be ironed out for future legislation, but there is growing agreement that carbon markets are an effective means of stimulating private sector investment in environmental conservation and emission abatement.

Image credit: S.Borisov

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