Voluntary Market Carbon Pricing — Explained

Press Release March 22, 2024 by Carbon Credits.com

The basic premise of capitalism is that the price of a good or service reflects basic market forces — supply & demand. But what if the price doesn’t accurately measure the true cost? If the government subsidizes me to buy a pencil, then I’ll buy more pencils, and for some reason, the government has decided it is a worthwhile use of tax revenue.

Subsidies are generally written into law, much like the Biden Administration’s Inflation Reduction Act put subsidies for electric vehicles, solar, wind, and energy efficient products into codified law, which has resulted in almost 200,000 new clean energy jobs in the US because market demand for these clean tech products is growing alongside the price reduction.

However, what about subsidies that aren’t written into law? These are called externalities (or externalized costs), and they’re the crux of pretty much every problem in the world that has been caused by capitalism. The cost of pollution, including climate changing pollution, is not included in the cost of the products and services we buy. That cost is instead externalized onto society, who has to deal with its consequences.

Putting a price on carbon fixes this broken part of capitalism, at least in terms of climate change. To explain carbon pricing, it helps to break it down into the two primary ways to do that.

One is a carbon tax. It’s simple. For every ton of carbon emitted by a company, the government would add a tax. The company then has to internalize that otherwise externalized cost (IOW, it shows up on their Income Statement, whereas an externalized cost does not), and pass it on to their customers. Customers do not like extra cost, so it is now in the company’s best interest to try to eliminate that carbon pollution, and thus reduce the cost of their product.

The second is carbon trading. It’s a little more complicated, but essentially an Emissions Trading System (ETS) establishes a market for one company to buy a carbon emission chunk (a ton, a metric ton, etc.) from another company that is not using it anymore because they’ve become more efficient. Again, higher cost for the polluter, lower cost for the nonpolluter.

And in terms of capitalism, now the true(r) cost of a product is reflected at checkout, and the customer can make their choice from there. The net result is less pollution, either way you cut it.

What Happens When Our Government Can’t Agree?

Fundamentally, we get stagnation on climate action because vested interests have a lot of lobbying power. Fossil fuels have historically held tremendous power over our political system, and have so far derailed any attempt to make them pay for their pollution through any regulatory mechanism.

Enter The Voluntary Carbon Market

Companies like Patagonia, REI, Microsoft, Google, Starbucks, and others have set ambitious goals to achieve carbon neutrality. They can’t stop polluting right away, so while they still have carbon pollution, they buy carbon credits through a voluntary carbon market. There are three main parties in this. One is the buyer — Patagonia, etc. The second is the third party certification body. The last is the carbon sink, more or less. So in essence, companies wanting to get to neutrality buy carbon offsets that are certified by a third party and the money goes to projects that reduce or eliminate carbon pollution.

It’s a very powerful mechanism, and is pushing a LOT of money into projects that are otherwise far less likely to happen. One of the sticky points is that middle man — the certifying body. When trust in those institutions fades, companies might be accused of greenwashing and stop buying those credits. Restoring that trust is critical to a functional voluntary carbon market.

If you’re curious, you can check out live carbon prices here.