The new green marketplace
assesses the effects of market forces on the environment and the role of economic instruments in addressing global warming
New markets in greenhouse gases are likely to take their place alongside the traditional ones in commodities and financial instruments as a result of the Kyoto Protocol, a watershed in the history of multilateral environmental cooperation. The seeds of these markets are contained in the Protocol's provisions for trading 'assigned amounts', 'emissions reduction units', and 'certified emissions reductions'.
Vast new areas of business activity are likely to emerge, from investing in technological innovation to new roles for financial analysts, project developers, accountants, certifiers, brokers, insurers and data providers. The result would be a significant transformation of the way we live and trade, the way economies grow, and the relationship between those countries which are now rich and those which are now poor.
For most of the past 15 years, we have been living under the intellectual, political and practical hegemony of a current of thought and action that - starting with von Hayek, Popper, Coase and Friedman - rehabilitated the market as the central mechanism for achieving growth and balance in the economic sphere. After the collapse of the communist regimes in the early 1990s, a tremendous boost was given to the accelerated unification of the economic space worldwide with the final goal of establishing a single, unified, global market for production and trade. Ironically, the environmental movement has simultaneously been moving in the opposite direction.
For those committed to the defence of our planet's ecosystem, the market as a pricing mechanism is of little help as long as the current pattern of price formation does not adequately reflect environmental costs. This is why the environmental movement has relied much more on regulation and on the power of the state as arbiter - at the very moment when economies as a whole are actively promoting deregulation and the withdrawal, or containment, of the state in the fields of production and trade.
Markets and accounting systems often fail to recognize natural resources, such as air and water, as assets in the true sense of the term, or to value resource-based goods and services properly. Misleading information about scarcity values is the source of this failure. In turn, this creates a faulty decision-making process in relation to managing, utilizing and enhancing natural resources. Too many resources are allocated to activities that generate external costs, and too few to those that generate external benefits. If these resources are to contribute most effectively to sustainable development, their prices should reflect the full range of the costs involved in utilizing them - including the costs of the external effects associated with exploiting, transforming and using them - together with the cost of future uses forgone. Broadly speaking, these could be seen as forming a package of environmental costs, to which a notional price can then be attached.
Unfortunately, this desirable process rarely happens. Indeed, without government intervention, and in the absence of well-defined property rights for public goods or goods to which access is generally open - such as clean air, clean water or biological diversity - these environmental assets have been treated as free goods in the economic production process. Consequently they have been overused in production activities. There is a clear need, in these cases, for governments to intervene in order to create the conditions for internalizing the external costs associated with such overuse, especially where the sustainability of environmental services is endangered. The basic principles of internalization within an appropriate regulatory framework - which creates the necessary correct regulatory conditions for the pricing system to perform effectively what economists call its allocative function - are as valid in the case of climate change as with any other environmental problem.
The international emissions market is a good case in point. Some have argued that we cannot leave the climate problem to trading, and that serious governmental action is required. This ignores the fact that emissions trading is first and foremost part of a regulatory mechanism. Trading is possible only within a framework of legally binding numerical limits - established, supervised and enforced by governments. The market plays a complementary role - its allocative function - mobilizing private resources in pursuit of the public good.
Special consideration needs to be given to the position of developing countries in this process. They have contributed little to the build-up of greenhouse gases in the atmosphere and have not enjoyed the benefits of the economic growth that generated it. Most are still in the initial stages of their development process. They therefore cannot be denied their right to grow, nor should their development be constrained by the imposition of undue costs and hindrances.
If developing countries are to increase their per capita incomes beyond current intolerably low levels, they must continue their industrial growth. In doing so, they are likely soon to become significant sources of additional emissions, even while these remain at relatively low per capita levels. Many have already undertaken voluntary measures designed to limit the environmental impact of their needed growth. They have also indicated their willingness to cooperate in global efforts to reduce the risk of climate change, so long as their interests can be protected and their needs met on a fair and equitable basis.
While the Kyoto Protocol imposes no new commitments on developing countries, the prospect of trading certified emissions reduction under the Clean Development Mechanism opens up interesting possibilities. Voluntary participation by developing countries in emissions trading also needs to be given proper consideration. Indeed, effectively combining Clean Development Mechanism operations with the appropriate level of integration of developing countries into the wider emerging global emissions trading market is essential if the Mechanism is to realize its full potential. Without a vibrant and liquid international emissions market, in which the private sector is allowed to play its proper role, the Mechanism could well fail. While developed countries must take the first step in reducing emissions of greenhouse gases, developing ones must be careful to avoid being left out of the new emerging markets.
A new paradigm
The new incentive structures bearing on technological innovation and diffusion, investment, finance and trade will bring both new challenges and new opportunities. There is a clear need better to understand, articulate and promote the interest of developing countries 'in the new environmental markets paradigm'. With almost eight years of experience in emissions trading, the United Nations Conference on Trade and Development Secretariat is well placed to assist the international community to design and implement a sound and truly global emissions market.