A carbon price is better than carbon credits
By Katie Zakrzewski
As the United States works toward the goal of reducing carbon emissions 50 percent by 2030, many environmental advocates are realizing that altruism alone will not fix the climate: there should be a powerful financial incentive too.
In recent years, some climate advocates have supported carbon credits as the perfect marriage between environmental healing and financial prowess. But carbon credits, while being a well-intentioned policy, have many loopholes, making them less than airtight when compared to a carbon price.
What is a carbon credit?
A carbon credit is, in many ways, a unique financial permit. Each carbon credit represents one ton of carbon dioxide removed from the atmosphere. These credits are commonly purchased by companies to offset the carbon dioxide that they create while producing and transporting goods.
Voluntary market influences
Carbon credits are usually created through agricultural or forestry practices, although a carbon credit can be created by any project that in some way reduces the amount of carbon in the atmosphere. Individuals or companies can buy those credits through a middleman, or by directly capturing carbon. The middleman, in this scenario, can earn profit along the way.
CCL Research Coordinator Dana Nuccitelli explains how several companies are exploring direct funding of voluntary carbon removal.
“Under this system, some companies are putting serious effort into doing carbon capture and carbon credits the right way. For example, Stripe recently teamed up with several other companies, including Google parent Alphabet and Facebook parent Meta, to create a Frontier Fund that commits nearly $1 billion to purchase carbon dioxide removal from startups. The process would create credits for the participating companies, but they would represent legitimate verified removal of carbon from the atmosphere.”
Dana touches on this in a recent Yale article as well.
Involuntary market influences
The carbon credit process is a little different, however, in an involuntary market setting.
In the involuntary market, governments set a cap on how many tons of emissions certain economic sectors can release. This cap is the amount of greenhouse gases that a government allows to be emitted. This is a component of what’s known as a cap and trade system, which generally includes periodic carbon emissions permit auctions and outside carbon offsets.
By selling only a capped number of carbon pollution permits at auction, and lowering that cap over time, governments can control and reduce the total level of emissions from the covered industries. But when outside carbon offsets are also allowed in cap and trade accounting, that can introduce a number of problems.
Concerns about carbon credits
There are plenty of issues with carbon credits. Not only do they provide polluters with the option to buy their way out of penalties for exceeding their purchased carbon permits, but carbon credits as a whole are fairly unregulated. This means that outside of a cap and trade environment, companies are more likely to commodify pollution as opposed to reducing it.
This can create big problems for carbon accounting, like in California’s cap and trade system. If companies get credit for offsets that don’t represent real or permanent reductions, total emissions are higher than expected or accounted for. This is happening in several sensitive environmental areas worldwide, such as the Amazon rainforest and California’s forests.
Carbon credits are also obscure and not used universally, meaning that specific caps and time periods are not established — it’s hard for carbon credits to have a uniform effect. This lack of regulation, and subsequent breeding ground for corruption through economic loopholes, means that not only are some communities more environmentally vulnerable than others, but it falls on the shoulders of locals worldwide to try to fix what large corporations exacerbated.
Climate advocacy that truly helps the environment is a step in the right direction. But if we’re going to advocate for climate solutions, we should start strong on the right foot. That’s why CCL endorses a carbon price, specifically a carbon fee with a dividend.
What is a carbon price?
When fossil fuels are burned during manufacturing and production, they release greenhouse gases like carbon dioxide (CO2) into the atmosphere. A carbon price puts an extra dollar amount on those fossil fuels and their carbon pollution. The carbon fee is based on the metric tons of CO2 that burning the fuel would release, and it would be assessed at the earliest point of entry into the economy. This carbon price flows through the economy, incentivizing businesses and people to switch to clean energy.
A cap and trade system requires additional bureaucracy to implement and run, and it creates price volatility that is difficult for businesses to keep up with. Additionally, this system contains many loopholes that allow polluters to pay to pollute. This is not the case with CCL’s policy of choice, the carbon fee and dividend. You can read more about the feasibility of a carbon price over other financial environmental solutions here.
For over a decade, Citizens’ Climate Lobby has supported a carbon fee and dividend. Giving money to people so that they can afford a transition to clean energy makes a carbon fee fair and politically durable. A carbon price holds polluters accountable and has picked up traction internationally. This policy is easy for businesses to understand, works within the free market, gives back to Americans — and helps the environment within a matter of months.