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Trading in the right to emit greenhouse gases is emerging as one of the foundations of climate-change policy. Trading is widely recognised to be a way to reduce emissions cheaply, because it permits flexibility in where and how firms make their reductions. The EU has been at the forefront, with the establishment of an Emissions Trading Scheme or ETS. Now Australia and the north-eastern states of the United States have signalled their keenness to introduce carbon trading, and even to connect their schemes to Europe?s scheme. In fact, worldwide trading in carbon has already in effect begun, because firms in industrialised countries can buy emission reductions in developing countries, for example through what is known as the Clean Development Mechanism, one of the successes of the Kyoto Protocol. To illustrate how quickly these markets are developing, pension funds are now signing deals to finance clean household cooking stoves in China.
This rapid growth raises, however, a number of important questions about the potential of carbon markets to achieve climate-change goals. On the one hand, they have the potential to drive widespread change, and to address equity concerns by driving large flows of money from industrialised countries, which buy emission reductions, to developing countries, which can sell them cheaply. On the other hand, the problems with, for example, the EU ETS, as well as the market for carbon ?offsets?, sound a cautionary note that much more needs to be understood. This research programme aims to do just so, drawing on internationally recognised expertise in finance and financial economics at the LSE and working closely with the growing carbon finance and trading industry to identify ways in which carbon markets can be made to work more effectively, efficiently and equitably.
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