Carbon markets have a future in a (net) zero-emissions world

Abstract

This commentary explains why market signals are vital to support a zero greenhouse gas emissions outcome. This is a critique of the commentary ‘carbon markets have no future in a (net) zero-emissions world’ and seeks to foster conversation around this topic. The commentary herein is a defense of carbon markets and how their integration within a cap-and-trade system represents currently the most efficient mechanism in coordinating the anarchy of nation scale emissions reductions, both in reaching net-zero, and beyond. The commentary describes why the total centralized control of emissions reduction without markets is ineffective on the path to zero emissions, why it places significant economic and bureaucratic burden upon a nation, and why those impacted the most by this are the poor.

Commentary

The fundamental premise of both market based or centrally coordinated emissions reductions starts from the same base premise: climate change poses an extreme threat to global human thriving, both now and into the foreseeable future (Grubert, 2025). Recognition of this hazard has led to global action – marked globally with the Paris Climate Agreement and since continued with individual countries' net zero goals (UNFCCC, 2025). These emissions result significantly (80% of gross global emissions) from the burning of fossil fuels into CO₂ (and from other gases such as methane and nitrous oxide) and it is internationally recognized that these emissions must be mitigated in order to prevent global warming (IEA, 2025; US EPA, 2016).

Recognizing this, voluntary pacts such as the EU have put in place large cap and trade systems in order to reduce emissions. This system – the EU Emissions Trading Scheme – places and overall limit (cap) on emissions that decreases over time, where industries are permitted to emit up until this cap is reached through emissions permits, where permits can be freely exchange between companies (European Commission, 2025). Simply, if company A emits 50 tones of CO₂ and company B emits 20, company A needs a permit for 50 tones, and company B needs 20. However, if the overall cap on emissions lowers to 60 tones of CO₂ between company A and B combined, the two companies have three choices: (1) reduce emissions; (2) buy permits from companies who have reduced their emissions; and (3) pay a tax penalty on the emissions they are not permitted for.

As the cap decreases, permits rise in price, emissions reductions are incentivized, and emissions are penalized. The permit market then reflects this chaos of multiple emitters tussling back and forth to reduce emissions for the lowest price with each other due to a dwindling supply and increased demand of the permits. It would be impossible for any individual to account for every company in the EU's emissions reductions and how they can be optimally traded with each other, so the price on emissions reflects this. It is the same mechanism for any other item. Taking bananas for example, their cost is intertwined with the shipping exports in South America, the tariffs in North America, the fuel efficiency of shipping containers from Europe, and the average rainfall in Brazil. The same is true of emissions. In the EU, the cost per kWh from a powerplant in rural Italy and the precise efficiency of Japanese made trucks in Spain carrying wind turbines to France is all accounted into the dynamically and constantly changing costs of permits. Something no individual must guess.

The pricing and bidding system also allows CO₂ emissions to cleanly account for the random and dynamic nature of change and innovation into the future. In the EU, who knows what sectors can easily reduce their emissions in 20 years? Who knows which method of carbon capture will be the most cost-effective in 14 years in southern France? A hospital in the suburbs of Berlin can go net-zero because of a carbon capture facility off the coast of Amsterdam, or a University in downtown Paris can sell their permits earned through a student net-zero campaign to a steel plant in greater Rome. Can you image a room of individuals trying to centrally coordinate 15 years in the future between suburban Berlin, offshore Amsterdam, downtown Paris and greater Rome through an email chain, all before they go home at 5?

Also integrated within this cap-and-trade system is carbon capture and sequestration, whereby instead of reducing emissions, you can remove atmospheric CO₂ as an offset. This accounts for the critical threshold whereby the cost to reduce emissions by even 0.1% might be greater than the cost to capture. This accounts for those final few emissions companies simply cannot reduce, such as the CO₂ associated with building wind turbines or mining uranium.

No matter how vastly these remaining emissions are penalized, to reach net-zero, some form of carbon capture must offset these base and vital emissions (Calvin et al., 2023). Thus, within this cap-and-trade system, an entity can reach net zero even if they themselves cannot reach net zero – but instead by paying someone who can. Additionally, if they cannot meet the permit, the taxation penalty allows re-investment into green infrastructure that benefits everyone. It functions as a quasi-environmental tax: large emitters are taxed the most, and small businesses and households benefit from the taxes funding local green energy systems.

With the case summarized, the subsequent commentary focuses on Grubert's commentary ‘Carbon markets have no future in a (net) zero-emissions world’.

The first argument presented against market signals system by Grubert is that ‘emissions are not well sorted with respect to societal function and value’. They then go on to state

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.

This argument is well made by Grubert, however, it misses two fundamental facts: firstly, in the USA, we are already conducting greenhouse gas emissions accounting (so the administrative challenge doesn’t enormously rise), and this is shown by Grubert as they reference these accounted emissions in their commentary. Secondly, companies paying a very large tax rather than emitting is precisely the point of the cap-and-trade system. That tax firstly can pay for the aforementioned administrative challenge, but also it funds R&D supporting net zero. If the fundamental flaw in a cap-and-trade is that large emitters must pay more tax for emitting, then within a net-zero framework, isn’t that exactly who should be taxed? That company is losing profit by not transitioning, and as their taxes rise, they will either stop emitting or go bust (and stop emitting). Most businesses are not maliciously emitting because they want to – they are doing so because in the process of emitting they make a profit. Remove the profit on emissions, remove the emission.

In Grubert's argument that emissions are not well sorted with respect to societal function – say a rural hospital cannot reduce their emissions to the same extent as a well-connected and profitable global enterprise – then would the hospital suffer an emissions penalty and be forced to buy permits from a large transnational corporation? This hits at a key point in free markets – a small percentage of the market generates and maintains a significant amount of the wealth. It is to this same point that the vast share and most dramatic emissions reductions will likely be seen by a small selection of gigantic companies. But to this I pose the question – isn’t significant emissions reduction by giant transnational corporations the goal?

There is also a very simple solution to this problem. Just as a rural hospital will not generate as much income as a well-connected one, to maintain a base standard of care, the government intervenes. A cap-and-trade system is not Laissez-faire anarcho-capitalism, especially in the case of the EU that represents the most socially democratic countries in the world. Like any market under a government structure, the government is there to intervene to protect injustices, individual freedoms, and greater societal needs.

In Gruberts next argument, they summarize that

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.

Stating that an effective carbon tax would be administratively expensive, their proposed ban on emissions requires ‘careful coordination’ – that sounds administratively expensive. Simply banning emissions also sounds expensive. It also doesn’t sound simple. Seventy-nine percent of new vehicles in the US rely on fossil fuels, and 60% of the US grid comes from fossil fuels (EIA, 2024, 2025). Simply, the cost of electricity, fuel, and heating would skyrocket, and all these costs would be felt the most by those who can’t afford them. Then, in this world of rising costs, a central planning committee would tell you precisely when you need to cease working your job to reduce emissions for the greater good. Make an omelet, break some eggs. Why not pay the individual to reduce their emissions, have large emitters pay taxes that are reinvested into green energy for the individual, and then purchase carbon removal offsets from the lowest bidder?

Grubert states

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.

I do not call a room full of officials dictating when businesses must be terminated ‘justice’. I do not call rising costs ‘thriving’. And I do not call anything left in the aftermath as having ‘durability’.

The alternative to coordination for a managed transition

Grubert states

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.

An entire system redesign of the foundational systems of global infrastructure and development through a coordination committee who can account for every variable. Who is doing the coordinating?

I worry about this vision of the future.

I worry the systematic inefficiency will result in a worse outcome for everyone. I worry that a small group of officials will orchestrate a nation based upon what they think we should want. I worry that our individual efforts to achieve net zero won’t matter – if I cut my CO₂ emissions, will I benefit in any way? Will I have my business terminated by the government because I am not being ‘just’ or I am not perceived to have ‘durability’. Make an omelet, break some eggs. I worry about control in the name of ‘justice’. And whose justice? I worry about the entire restructuring of everything. Surely what we have – a liberal democracy – is what we want?