Abstract
This commentary explains why market signals are insufficient to support a zero greenhouse gas emissions outcome: markets function by sorting based on cost and/or profitability, and there is nothing to sort when the target is zero. It then describes why sorting is ineffective even on the path to zero emissions, given that the most societally critical emissions (i.e. those that should be allowed to continue the longest) are not necessarily the most financially costly to eliminate. This observation also means that even for a net-zero emissions target, where some emissions do continue, markets are unlikely to identify the most societally preferred emissions to preserve without an exogenous declaration of preference, and could distort the development of potentially critical industrial functions along the way. Finally, the commentary concludes with an alternative proposal, for a centrally coordinated transition towards a known end goal – a major difference from settings where markets perform well.
Why is the international community targeting zero, or sometimes net-zero, greenhouse gas (GHG) emissions (Allen et al., 2022; Intergovernmental Panel on Climate Change, 2021)? Climate change poses an extreme threat to global human thriving, both now and into the foreseeable future. Many people have already experienced the worst impacts of climate change: loss of life, loss of homes, loss of loved ones, loss of culture, and many others. The basic mechanism of the greenhouse effect has been understood for well over a century, and international policy attention has focused on climate change for over 30 years. Yet, in a statistic that many find surprising, if not unfathomable, GHG emissions to the atmosphere – the driver of continued and accelerating climate change – continue to grow, with record-high emissions in 2023 (International Energy Agency, 2024).
The large majority of these anthropogenic GHG emissions are the result of burning fossil fuels for energy – accounting for roughly 80% of gross global emissions, in the form of carbon dioxide and methane. These emissions drive devastating global change, with massive international and intergenerational injustices driven by the spatial and temporal mismatches between emissions and the effects of climate change. International agreements have focused on attempting to limit climate damages to those experienced below 2 °C of temperature increase above pre-industrial averages, and preferably below 1.5 °C (UNFCCC, 2015). Yet, January 2024 marked the end of the first consecutive 12-month period where global temperatures exceeded 1.5 °C, though breaching this threshold permanently is not yet locked in (Al Jazeera, 2024). Major impacts on people, other species, and ecosystems are already felt, including devastating and costly storms, heat waves, floods, droughts, and human displacement.
So what is to be done? The obvious solution is to cease emissions as quickly as possible, which means phasing out the use of fossil fuels, in addition to redesigning numerous industrial, agricultural, and other land use patterns. That GHG emissions must stop is, at this point, obvious to anyone actually interested in halting ongoing contributions to climate change. And with some reflection, it is also obvious that a solution often proposed as the most efficient, effective strategy for eliminating emissions – a carbon tax, and carbon markets more generally – is not a viable path forward. In a zero-emissions world, carbon markets have no future.
The remainder of this commentary explains why market signals are insufficient to support a zero GHG emissions outcome: markets function by sorting based on cost and/or profitability, and there is nothing to sort when the target is zero. It then describes why sorting is ineffective even on the path to zero emissions, given that the most societally critical emissions (i.e. those that should be allowed to continue the longest) are not necessarily the most financially costly to eliminate. This observation also means that even for a net-zero emissions target, where some emissions do continue, markets are unlikely to identify the most societally preferred emissions to preserve without an exogenous declaration of preference, and could distort the development of potentially critical industrial functions along the way. Finally, the commentary concludes with an alternative proposal, for a centrally coordinated transition towards a known end goal – a major difference from settings where markets perform well.
Why market signals are not enough
Carbon markets, particularly related to offsets, have been widely critiqued for being ineffective and subject to numerous fatal issues that render them incompatible with strong climate action (Cullenward et al., 2023). This commentary argues a further point, which is that even a well-functioning carbon tax or market is inappropriate for a zero GHG emissions goal. Specifically, this is because emissions are not well sorted with respect to societal function and value. One of the core challenges of transition is that the system we must build to serve the future must develop in the context of the system that currently exists (Grubert and Hastings-Simon, 2022). This is both physically and socially relevant: new clean energy systems need to operate together with and alongside existing, older fossil infrastructures, and they enter into market and other contexts that we know are insufficient for achieving ambitious goals. By way of example, one estimate suggests that for all but one of the US' coal-fired power plants, it would be cheaper to replace the plant with brand new clean energy systems than to continue to operate the plant (St John, 2023) – and yet, coal continues to supply about 20% of US electricity (Energy Information Administration, 2023), in part because of regulatory structures in the utility sector, and in part because of the fundamental reality that decisions are driven by profitability rather than cost (Grubert and Sawyer, 2023).
This observation points also to the idea that implementing a carbon tax, often held out by economists as the most efficient way to decarbonize, is unlikely to deliver a transition: aside from the enormous administrative challenges (including those associated with appropriate GHG accounting), there are many situations where emitters would likely choose to pay even a very large tax rather than stop emitting. As an example that might be intuitive for readers, consider the case of gasoline: a carbon tax that increases gasoline prices by $1/gallon would be over $100/metric tonne of carbon dioxide (Environmental Protection Agency, 2024). Given the volatility of oil, and thus gasoline, prices, we can investigate the effects of large price swings on demand. In the US, gasoline prices were over $3/gallon higher in June 2022 ($4.76/gal) than in February 2016 ($1.68/gal) (Energy Information Administration, 2024a): demand in June 2022 was only 3.5% lower than in February 2016 (Energy Information Administration, 2024c). Such a price differential would require a carbon dioxide tax of about $350/tonne. Gasoline use accounted for 22% of US energy-related carbon dioxide emissions in 2023 (Energy Information Administration, 2024b). Recognizing that taxes can create long-term signals that prompt more durable reactions, this observed behaviour nonetheless illustrates that taxes would likely need to be exceedingly large relative to proposals, or to the estimated social cost of carbon (Moore et al., 2024), in order to deliver zero GHG emissions.
With both international and domestic goals of reaching net-zero GHG emissions, we have left the historical Pigouvian market paradigm of trying to reduce rather than eliminate an externality. When the goal is reduction, market signals are valuable in sorting emissions based on how costly, or unprofitable, they might be to eliminate. This sorting function is no longer needed when the goal is elimination, particularly when the emissions that are most valuable for society might not be the same ones that are extremely costly or unprofitable to eliminate. Consider that simply ceasing rice farming in food-insecure regions could eliminate emissions at a very low cost – but with potentially enormous human impacts. Markets that rely on trading the ability to eliminate some quantity of emissions to preserve another emitter's right to continue emitting (i.e. mitigation offsets) are fundamentally incapable of delivering zero or net-zero emissions (Grubert and Talati, 2024). A carbon tax that was effective at producing net-zero emissions would generate zero revenue, but at potentially large administrative cost that can be avoided by simply banning emissions. In either case, it is likely necessary to carefully coordinate the order and timing of phase out according to human and ecological needs rather than financial efficiency, to ensure that services are continuously provided until the new system is ready.
Can markets effectuate net zero?
In many contexts, stated GHG goals focus on ‘net’ zero rather than zero ongoing emissions. These net-zero goals pose somewhat different questions about the role of carbon markets and carbon taxes, given that allowing ongoing residual emissions (Buck et al., 2023; Lund et al., 2023) does require a mechanism for determining which emissions should be allowed to continue. Is this, then, a role for carbon markets, with their ability to sort? In principle, markets are quite effective at sorting, but in practice, the financial focus of sorting optimization is detrimental in the context of identifying residual emissions. Specifically, in a setting where net zero is designed around justice, human thriving, and durability, it is the function rather than the cost or profitability of an ongoing (residual) emission that should determine whether it is valuable enough to warrant the use of limited and resource-intensive negative emissions as offsets. Particularly because negative emissions are also capable of enabling atmospheric GHG drawdown, a potentially vital global need, allocating negative emissions as offsets rather than atmospheric repair resources should require a high threshold for societal value (Grubert and Talati, 2024). At baseline, markets or taxes sort based on financial attributes: a global sorting based on societal value is unlikely to match the sorting a market would produce, particularly because of the strong role of values in determining which residual emissions are most worthwhile. Forcing a market to deliver the same sorting via regulatory or other distortions would require completing the sorting in any event, suggesting that a more direct approach to determining which emissions continue and will be allowed to access negative emissions offsets is likely more efficient in practice at delivering a net-zero outcome.
The alternative: Coordination for managed transition
The desired future for GHG emissions is normatively clear, known, and quantitative: they should reach zero. This existence of a final goal – eliminating emissions – is substantively different from typical goals in market settings, which often include growth to some unknown final scale, and service provision via an unknown mix of competing providers. Markets can perform relatively well at resolving these unknowns, but such unknowns about which providers (emissions) are most desirable do not exist in the context of needing to completely eliminate emissions. Under net zero rather than zero emissions goals, which do require some judgement about desirable emissions, markets are likely to prioritize preservation of high profit rather than high societal value residual emissions unless they are intentionally distorted to deliver the societally desirable outcome, in which case direct management of which emissions are and are not allowed to continue is likely more effective.
What, then, is the alternative? Transitioning the large majority of global industrial (including energy) systems requires exceedingly careful coordination to support human thriving and avoid service disruption while still progressing towards a normative goal of (net) zero emissions. System redesign is challenging when it needs to coexist with current structures, and even more so when these dynamic systems are sometimes life- and safety-critical to keep operating. It is not good enough for the system that is being built to operate well and justly when it is finished: the whole system, combining older systems that are being phased out with newer systems that are being phased in, at different rates, and with different starting parameters, challenges, and constraints around the world, needs to operate well and deliver crucial services at least harm through this entire period. The ‘mid-transition’ period could last decades at top speed – a sobering reality that should emphasize the need to move faster, rather than slower (Grubert and Hastings-Simon, 2022).
In the energy transition, which occurs with the backdrop of decades of disinvestment and deferred maintenance; significant technological change; and still-accelerating climate change, it is possible, if not likely, that the beginning point (a mostly fossil fuel-based system) and the endpoint (a non-fossil fuel-based system) are both significantly more stable and easy to operate than the dynamic hybrid systems we will rely on in the middle. Again, this is a call to accelerate, rather than decelerate, the transition. Given the normative and directional nature of the transition, centralized coordination is almost certainly required. Given the potential impacts on people, such coordination should be undertaken with a high degree of public responsibility and appetite for erring on the side of financial inefficiency over disruptive societal outcomes. Central coordination for a managed transition towards a known end goal of eliminating emissions, not markets aiming to identify a financially efficient level of ongoing emissions, can facilitate reaching zero GHG emissions.