The Role of Carbon Pricing

Michael Green serves as Executive Director of Climate XChange, a non-profit focused on carbon pricing advocacy, media, and research and is a Founding Partner at Carbon Capital Advisors, a start-up focused on using innovative technology and finance to address climate issues. He has been asked to speak at the White House, and he has served as a representative to the United Nations climate forum since 2012. In 2016, he was recognized as a Champion of Change by President Obama, for his commitment to climate change as an equity issue. The Journal of International Affairs spoke with him about the role, the variants, and the future scope for carbon pricing and policies. 

Michael Green
February 17, 2020

Journal of International Affairs (JIA): How did you become involved in climate policy and environmental advocacy? 

Michael Green (MG): I think everyone who is working on climate change has some root force that pushes them to work on the issue and I am no different. I am from a small town in upstate New York where the snow industry fuels the economy. When I grew up, I noticed climatic shifts and told myself that I’d be a forest ranger. However, I soon realized that just being out in the forest wasn’t going to be enough to save it from climate change. 

After this realization, I first went into activism, working for Greenpeace and Rainforest Action, and then I grew interested in climate science. I found myself doing research in Geneva, Switzerland, focusing on communication and scientific consensus-building at the International Panel on Climate Change (IPCC), through which I worked on the relationship between science and policy. At that time, I realized that climate science was still disputed in the political sphere, which I felt was wrong. While the solutions to the crisis merit debate, the scientific facts don’t. I believed that a quick way to overcome this challenge, was to work more closely with the private sector, which funded and fuelled a lot of the debate, and was also ultimately responsible for building solutions. 

Working with several of my closest colleagues, I launched the ‘Climate Action Business Association (CABA)’ in 2013. Today, it represents over 450 businesses from across the Northeast United States, and is expanding nationally. CABA helps member-businesses address sustainability and resiliency goals in their operations, works with them to better understand the political landscape, and creates what we call a community of shared values. Businesses can come together to leverage their mutual interests and share best-practices. One of the policy related agendas which quickly surfaced to the top of members’ interests was the need for market-based policies to address the climate crisis. 

So, my background is somewhat meandering, but it has allowed me to work on climate change from many different angles. 

JIA: How would you define carbon pricing for a general audience? What are some types of national or subnational variants? 

MG: Carbon spewed into the atmosphere is a form of pollution that is responsible for the climate crisis we are in today. It has a massive external cost to our economy, health, society, and future generations that currently not accounted for in the price we pay for the fuels that produce it. If we price this external cost accurately, we can not only steer markets away from pollution, but also generate meaningful revenue for funding infrastructure such as electricity and transportation grids. 

Some examples of carbon pricing schemes are the Regional Greenhouse Gas Initiative (RGGI) and Transport Climate Initiative (TCI), and the California Climate Investments (CCI). RGGI is a sub-national cap and invest policy covering the electricity generation sector in northeastern states, where revenues help fund energy efficiency projects. As a result of it, homeowners receive incentives to upgrade infrastructure, replace lighting, or install more insulation. TCI is a similar market based policy for the transportation sector, which focuses its generated revenues on transportation systems—for highways, public transportation, and transportation access opportunities. CCI covers the entire economy and it reinvests cap-and-trade dollars into creating meaningful investment opportunities and funding rebates, i.e., giving money back to low-income households to lessen the burden of increased costs. One further example at the city level is the city of Minneapolis, Minnesota, which is set to move forward with a carbon pricing scheme. In 2019 alone, 16 states in the United States introduced state-based carbon tax or carbon market policies. 

Carbon policies, while different, all confront the same two questions: “How do you set the price?” and “What do you do with the revenue?” How you set the price forces you to answer: (a) Where within the supply chains are you seeking to set a price?; and (b) Is the price borne through a tax or a fee? What you do with the revenue forces you to consider: (a) How do you create transparency, openness, and understanding across businesses and communities that will be impacted by the process and the carbon price?; and (b) How do you avoid political opposition which may not allow the carbon markets to fully develop? 

JIAHow do other countries’ carbon pricing policies compare with those of the United States? 

MG: According to the World Bank, 96 of the 185 parties to the Paris Agreement, have stated that they’re planning on considering, or using, a carbon price or carbon market as a tool to meet their Nationally Determined Contributions (NDCs). A lot of policies that are taking shape right now are also cap and invest markets, or have some element of trade within them. This is good because it offers countries a better ability to interconnect with other regional or global markets in the future. Of course there will be political obstacles to linking and regulating carbon markets across state boundaries. But bands of countries have already been getting together in Latin America, in Southeast Asia, and even in North America, such as with the Quebec and California Western Climate Initiative (WCI). The ability to connect markets offers opportunities for liquidity and cost-efficient abatement, which are both becoming really important in a market’s success. 

It is the success of carbon markets at a state and regional level, that can help attain compliance at a national or multinational level. In order to attain the deep emissions reductions to meet the ambition of the Paris Agreement, countries will need three things (i) a meaningful carbon price commensurate with the social cost of carbon ($40 to $60 per ton), (ii) investment not only into reasearch and development, but also into technological development rollouts, and (iii) transparency and accountability across states. 

JIAIs carbon pricing able to help vulnerable populations in emerging markets who are facing the negative externalities from emissions? 

MG: There are two different ways to think about vulnerable populations. First, there are frontline communities in environmental justice corridors, that have been disenfranchised from the political process for too long and that need to have an opportunity to be engaged in the development of a carbon market–not just on the price itself, but also how the revenue is spent. Second, there are communities sidelined in the past who are looking at opportunities to build critical infrastructure and create new development opportunities through a low carbon economy. 

The starting point should not be, How do you move a market away from fossil fuel-intensive means? Rather, it should be, ‘What problems exist within the impacted community?’ Carbon pricing can have a positive impact in that it can draw outside investment, bring access to capital, and be a solutions multiplier. An example of this is the TCI market I referenced earlier. For too long, we had communities that were cut off from bus-routes, or that just lacked prioritization in the urban planning landscape. Carbon pricing revenues can help connect these communities again. 

On the latter, it is about working with countries or communities that are looking to join the global economy and by using carbon pricing as an opportunity to incentivize endogenous development initiatives. It is important to first figure out what problems are a priority, and how not to compound any challenges to development that already exist. It’s also vital that you’re not building infrastructure that looks like the past 50 years, but rather looks like what we’re going to need in the next 50. An interesting statistic is that $1 spent on one ton of carbon opens up up to $17 in SDG-related financing. This is because when you’re investing in a community, you’re not just investing in that one ton of carbon being removed, but maybe you’re also investing in creating better education or food systems. There are a lot of ways that we can actually see amplified impact in development as a result of carbon pricing. 

JIA: How is technological and financial innovation helping in the integration of global carbon markets and emissions trading schemes? 

MG: If states are trading carbon abatement outcomes, or countries are trading Internationally Transferred Mitigation Outcomes (ITMO) as per Article 6 of the Paris Agreement, then a basic ledger showing carbon reductions in one country is no longer going to be enough. We’re going to need to utilize the best technologies and new ways of thinking. There are two big challenges in making sure we’re accounting for carbon reductions or carbon abatement properly. One issue is called ‘additionality’–i.e., Would this project have happened or continue to happen, with or without the ton of carbon purchased? A second issue is ‘double counting,’ which is generally observed in voluntary markets, where several market entities purchase the same ton of carbon. 

These challenges can be fixed through some recent technological breakthroughs namely, Internet of Things (IoT) devices and blockchains. Through IoT devices, regulatory administrations such as American Carbon Registry can ensure that the carbon offset calculation being used by a government or compliance entity is valid. Through blockchains we can create an immutable ledger to better track the buying and selling of a carbon offset across international boundaries. This allows us to know exactly how many times a credit has transitioned hands, something that’s really key for transparency. Leveraging new technologies is also important to ensure that large financial institutions do not exploit buying and selling credits to take advantage of mispricings, and also to ensure actors on the ground stay true to their end goals of carbon reduction. 

JIA: How does Climate-XChange bring about greater transparency and advocacy to the field of carbon pricing? How do you deal with business, civil society, and other actors to drive forward climate action goals? 

MG: Climate-XChange provides research, media, and advocacy support for the state-led development of carbon markets in the United States, through which we believe we can move the needle on federal policy. We have our roots in working with the private sector. Shared values are the reason we are trusted by the business leaders and impacted industries we work with. In Massachusetts, where our home office is located, we’ve been working on carbon pricing policies since the beginning. When we started, there were only four other states that were considering implementing carbon markets. When those states met political inflection points, and implementation did not come to fruition, any institutional knowledge they had created during that campaign was lost. Now we have 16 such states, and it’s important that their government, private sector, and community leaders do not start from scratch. Hence, we provide technical assistance for process and policy promulgation. We’ve been able to (i) create synergies across states, for example connecting agriculture groups in the Midwest with people who are concerned with it in the Southwest; (ii) identify best practice, for example publishing a study titled, “The Role of Carbon Pricing in a Just Transition” that encapsulated some of the best practices for other states to consider replicating; and (iii) facilitate connections across various levels of governance by opening up key conversations to government officials, the private sector, or advocates who just don’t know about them. 

JIA: Can you also share more about the work done by Carbon Capital Advisors (CCA)? 

MG: At CCA, we want to understand how carbon markets are developed from the very start– i.e., from the point of carbon asset generation. One of the first projects that we’re looking into is cookstove deployment. A cookstove is something that can be deployed at the household level for basic cooking and water sanitation. 

Traditionally, communities that don’t have access to clean cookstoves use open pit fires. Open pit fires require quite a bit of fuel procurement and also add to airborne pollution inside the home. This takes time away from education and other pursuits, and also leads to felling forests. Providing a fuel-efficient cookstove frees up more time for women, upon whom much of this responsibility generally falls, and also creates tons of economic opportunity. Traditionally, cookstove deployment required human capital intensive field assessments to evaluate the benefits. The cookstoves we deploy are fixed with IoT devices that will report usage to an offsite server and show us carbon abatement in real time. We’re also going to be scanning the areas of deployment with satellite imagery in order to make sure that we can guarantee forest regeneration and growth. Each verified credit then goes on to a blockchain ledger and out to the markets or preapproved CCA clients. This way, we’ll be able to trace and follow the progress from the cookstove all the way to the compliance entities that will eventually purchase the offset and retire it on a global carbon market. Both of these technologies give us added validity and create more trust in our approach. 

JIA: What are the top three legal, regulatory, or economic challenges facing your work on climate action in emerging markets? What do you expect of this industry in the years to come? 

MG: The top three, in no particular order, are: (i) Access to best practices and knowledge on market development; (ii) Trust, i.e., proving to the communities that the markets are not being created to benefit only the large financial institutions or compliance entities, and (iii) Ambition around pricing. The first challenge is about ensuring that governments have full information on processes, goals, methodology, modelling, and outcome assessment. The second challenge is about ensuring that community leaders and frontline communities are engaged and that markets are being developed for the progression of the community itself. The third challenge is that the price should be high enough so that markets shift away from carbon intensive means. The price should also meet what the scientific community recommends in order to achieve the desired level of abatement. 

The reality that we face, is that we need to see dramatic changes not in the next 50 years but in the next 10 or 20 years. To be honest, we should have started up this pathway 10 years ago. This means that the solutions we now seek to develop need to be commensurate with the problems that we face. 

However, there are two reasons for optimism. First, carbon pricing will continue to take hold because countries are making this a priority within their NDCs. For organizations such as CCA and Climate-XChange, the challenge is to make sure that we’re building carbon markets and supporting policies that develop carbon pricing solutions. Second, urgency is something that will become second nature to climate solutions. Every year matters. Every vote that a politician will take on developing a carbon market matters. We need to be making sure they’re making those decisions with the best information and the best technology, and really setting themselves up for success. We know what we need to do, we know how we need to do it. Now it’s just about getting the right stakeholders around the table and giving them the ambition and the support needed to move forward.