Get the free This article was downloaded by: University of Oxford On: 10 November 2010 Access det...

This article was downloaded by: University of Oxford On: 10 November 2010 Access details: Access Details: subscription number 773573598 Publisher Routledge Inform Ltd Registered in England and Wales

Trading as Political Economy: Lessons from the Canadian Experience John Lutz and J.M. Schloss er (eds), Transaction Publishers, 2010, ISBN 978-0-97339619-4, pages 89, 121 Abstract The Canadian carbon offset markets are a major example of a new kind of market. They were set up in response to an urgent need by companies to reduce the greenhouse gas emissions linked to production of their products by buying allowances and paying a levy for the right to emit carbon dioxide. Carbon offsetting is often said to serve economic ends by offsetting the energy-related CO 2 emissions of industries, homes, vehicles, and other industries. However, it is also often claimed that carbon offsetting serves political ends by compensating for negative impacts such as negative environmental impacts, land-use changes, local unemployment, and population growth. The Canadian carbon offset markets also raise questions about how to structure other markets for carbon. There is no central clearing house for emissions allowances or compensation costs. Rather, offsets are purchased, sold and traded locally. Although some have tried to structure markets in these and other ways, there is no single credible approach. This paper provides an analysis of the Canadian carbon markets, and argues that they provide important lessons for the United States considering their similarities and differences. It also examines other recent carbon markets to see how they have responded to the challenges of a market system that must simultaneously address two major aspects of the problem of fossil fuel emissions: limiting the emissions resulting from fossil fuel use while compensating the negative environmental impacts and the land-use effects, and generating a market revenue stream by permitting activities that are not prohibited under government regulations. Carbon markets are complex and difficult to analyze because there is no central clearing house for offsets, or for compensation of carbon costs. Instead, offsets are traded and purchased for emissions allowances in local market-based markets, in which sellers have incentives to keep the prices low. This limits a firm's ability to efficiently reduce its emissions. The high costs are one of the chief drawbacks of carbon markets, and the costs associated with compensation are the other. The Canadian systems are particularly interesting because they provide a case study of how different market structures can handle two types of emission pricing: those that require the government to adopt and enforce strict rules and those that provide compensation through the permit-based system. This provides a useful comparison to understand the differences within a larger economic system and to draw lessons about the challenges associated with addressing carbon offsets.

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