Don’t frighten the horses! Emissions trading as “regulation lite”

The advocates of ‘more markets’ and ‘minimal government’ would like us to think they know the secret to efficient and effective regulation of human behaviour. But can we really apply such neoliberal thinking to the climate change crisis? Can the application of more markets possibly fix what Nicholas Stern (2006) describes as “the greatest market failure in history”?

In 2008, Robert Baldwin, professor of law at the London School of Economics, published a working paper that examines the case for and against emissions trading as effective regulation.

What I want to look at here is Baldwin’s analysis of the regulatory philosophy which underpins the current trading approach to reducing greenhouse gas emissions. Disturbingly, he finds an erosion of democratic accountability and reduced expectations of legitimacy; this is what he calls “regulation lite.”

The desire to reduce the burdens of regulation – which originates with the neoliberal ‘more market’ worldview – has, Baldwin notes, “set the search for good regulation at tension with the quest for less regulation and [has] evidenced some philosophical confusion within government. The rise of emissions trading has taken place amidst that confusion” (p.25, italics added).

The lack of critical analysis that has resulted from this confusion has allowed two key assumptions to go largely unchallenged.

Assumption 1: Nobody loses, because emissions trading is cost-effective, accountable and fair.

Baldwin’s paper details the many flaws in this assumption with clarity; in the green movement at least, few would try to defend the assumption since the injustices created and exacerbated by emissions trading are now well understood. In that case, assumption 2 becomes the fall-back position for adherents of emissions trading.

Assumption 2: Realpolitik determines that emissions trading is acceptable because it is feasible.

Emissions trading is designed to appease powerful polluters by accepting their right to pollute; this right is often grandfathered into the initial settings of a trading scheme. However, even if they are not gifted the permits outright, the dominant corporate interests can shape the functioning of schemes through lobbying, and their wealth can dominate permit auctions.

By being so friendly and amenable to corporate interests, emissions trading does not “frighten the horses” and it is therefore seen to be ‘implementable.’ It is welcomed by governments (and other political actors) on that basis because they know they have to be seen to be doing something. However, the argument that “anything that works in the climate emergency is acceptable” fails the test of ‘good’ regulation, on the grounds of fairness and accountability (and quite possibly on the grounds of cost-effectiveness too, as Baldwin discusses in his paper).

In fact, Baldwin writes, “emissions trading systems can raise accountability and legitimation challenges to unprecedented levels” (p.30).

There are several reasons for these challenges, according to Baldwin, but perhaps the most significant is his point that “emissions trading is not a system in which ‘market’ and ‘democratic’ checks and balances can be brought into line with any harmony” (p.30). He explains this as follows:

Normally an observer might view a ‘market’ mechanism as bringing accountability to consumers, shareholders and other stakeholders and might see ‘democratic’ mechanisms as ensuring accountability to citizens and participants.

In emissions trading, however, the ‘market’ is self-regarding and ‘closed’ in nature so that (without strong corrective instruments) there is not even an effective regime of control by consumers, shareholders or others. Governments who institute emissions trading systems allocate permits for trading between polluters, not between polluters and consumers.

Such governments, accordingly, are involved in a process that relinquishes their own roles as holders to account and only reassert this when they supplement trading with further controls or reset the emissions caps or baselines. (p.31)

Proponents might argue that the absence of any effective regime of control is “justifiable” because trading is the only feasible regulatory mechanism and “because the need for some action to combat emissions trumps any needs for legitimation beyond the group of potential compliers.” But Baldwin’s final comment on this score is damning: he describes emissions trading systems as “accountability black holes” (p.31). Without doubt, such inherent flaws mean emissions trading is simply another massive market failure waiting to happen.

One cannot imagine that the “regulation lite” of emissions trading causes corporate interests to lose any sleep. But it must (surely?) cause great alarm among political parties and NGOs that pride themselves on their concern for transparent and democratic processes.

Sources

Robert Baldwin (2008) Regulation lite: The rise of emissions trading. LSE Law, Society and Economy Working Papers 3/2008. (Available here.)

Nicholas Stern (2006) Stern review on the economics of climate change. (Available here.)

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