Anyone in the carbon market has probably had to explain the workings of the EU ETS to someone. There is a bit where you say glibly: “… and the guy can choose whether to buy more allowances or reduce his emissions …”
There is a problem with this choice. It’s like saying you can either buy Balzac in translation or learn French.
The economist gives us a choice between two totally different things which cannot be compared. To buy carbon credits is instant and relatively painless. When it is not your cash it really does not hurt. In fact, it can be quite fun buying carbon credits – bidding on an online exchange, negotiating prices and so forth can get the adrenalin running.
The alternative, to reduce emissions, is an awful hassle. Five years or more of stress and sleepless nights to make an emission reduction project happen. Dealing with managers and boards and employees and suppliers and engineers and authorities and “stakeholders” (wasn’t Dracula a stakeholder?) and people wanting kickbacks and people offering kickbacks and changing regulations and lobbying and more kickbacks and what the hell you’re dead by the time the new boiler is commissioned anyway.
Like who would take the abatement option seriously?
Then the economist gets back to you and says that if it is in the shareholders’ interest then they will make an emission reduction project happen. Aha? The guys who make the projects happen are the management and they are hardly likely to be around when the crunch comes, so they are hardly likely to hassle themselves with the nightmare of a project. And in fact, the shareholders won’t be around either – they will have sold their stock well before the seventeenth stamp is applied to the permit from the Office of Rent Seeking.
A few brave shareholders who are committed to their business and the remaining managers who really believe in the company they work for are assembled at the opening ceremony of their revolutionary $1 billion renewable electrolytic ammonia plant (zero CO2). The local colliery brass band is just about to strike up the anthem of the European Fertiliser Manufacturers Association. A dozen bottles of Tarnów elderberry champagne have been cracked open, and a case of plum bimber has already been consumed. The mayor steps up, slightly wobbly, to the ribbon, which ripples in the fresh breeze. Suddenly a sound is heard in the distance. It was the crash of the carbon price collapsing. The project is dead.