By Jeremy Williams

Making Climate Policy Work, by Danny Cullenward and David G Victor, could have been more specifically named because it’s about a particular form of climate policy: carbon markets. I’d have called it Making Carbon Markets Work.

Market-based climate solutions, such as cap-and-trade systems, are enduringly popular. By pricing carbon and creating a market for emissions rights, you incentivise emissions cuts without prescribing exactly how to do it. The market can then find the cheapest way to cut carbon, making it efficient.

There’s an “attractive academic logic” to market-based solutions, and they’re also a good ideological fit for many governments. The EU has a carbon market, so does California and the US West Coast. China has been working on it too. For Cullenward and Victor though, there is a substantial divergence between the ideal theory and real-world experience. While there are many powerful voices advocating carbon markets, performance has often been disappointing when it they have been tried. The book investigates how they go awry, what can be done about it, and what the role of markets might be in addressing the climate crisis.

For the authors, there’s basically a one-word reason why markets don’t work as well in practice as they do in theory: politics. When it comes to it, powerful incumbents are able to secure exemptions or allowances that reduce the price of carbon until it ceases to be effective. Low prices are such a widespread feature of carbon markets that one study estimated that only 0.1% of emissions covered by trading schemes were priced high enough to make a difference. (That was Sweden, incidentally – and the book A Bright Future, reviewed here, covered some of that.) Reliance on offsets can also provide opportunities to wriggle out of genuine emission reductions.

The result of a failing scheme is what the authors call a ‘Potemkin market’. Like the fake idealised villages erected to impress Russian royalty, Potemkin markets give the impression of climate action but aren’t actually doing much. Often the heavy lifting of cutting emissions is being done elsewhere, by regulation or industrial policy. Despite some reforms in the EU, in particular, to make it more effective, existing carbon markets aren’t working very well. And as the book explains in detail, the influence of politics is almost impossible to avoid in any future schemes.

Where markets will work best is to accelerate change in already mature sectors, the authors argue, alongside a range of other policies. They name Britain as an example of doing it well, where the carbon price floor has helped to price coal out of electricity generation. Unfortunately, they don’t really tell that story at all, which is a shame, as the carbon price floor isn’t something that I know much about and it rarely gets a mention when discussing Britain’s climate policies. I was also hoping to find a bit more on cap-and-dividend schemes and how they compare to trade based initiatives, but the authors consider them beyond the scope of the book.

I’m not going to lie: Making Climate Policy Work is hardly a thrilling read. It’s technical, narrowly focused and academic. It’s clearly not for everyone. However, the reason for looking at this topic in more detail is that a lot of people who advocate for market-based solutions “have not invested heavily in understanding how these mechanisms work”. Equally, those who oppose markets often do so without understanding the role they could play. Debate divides along ideological lines, and not enough people ask the practical questions that this book aims to investigate: what works?

The result of polarisation is that there is a lack of sophistication, nuance, and expertise in how to use markets to address climate change. “We urge more groups to develop that expertise,” say the authors.

First published in The Earthbound Report.