“Our planet is Not for Sale”: How can we make markets solve the climate problem?
Siddhant Mathur
“Our planet is not for sale.”
These words were on a sign presented by a group of protestors from a local ethnic group called the Tupinamba, who had stormed into the conference hall for this year’s Conference of the Parties (COP 30) summit happening in Belém, Brazil.
Indigenous to the country, the Tupinamba people have lived in the Northern Brazilian state of Para for thousands of years, predating the Portuguese colonial settlers. These groups have lived around the São Sebastião River but have suffered from air and water pollution from nearby shipping lanes. This group has faced further challenges with spiralling climate emissions, from forest fires to droughts and floods. Even though this year’s COP Summit had marketed itself as the “Indigenous Peoples’ COP”, the focus on the impacts of air pollution and lack of green financing for indigenous groups has been surprisingly little.
The Tupinamba do have reason to be worried. Progress towards reducing the impact of human environmental damage through climate emissions has been dangerously little, with world temperatures expected to rise by 2.6 degrees Celsius, far higher than the 1.5 degrees agreed at Paris in 2015. The significant climate-related damage poses an existential threat to such groups, with the potential loss of key living environments.
What economic policy options are available to governments to solve this?
Buying and selling pollution?
One highly contentious issue with the COP climate negotiations is the transition away from fossil fuels, a step which is crucial for reducing harmful greenhouse gas emissions. To reach the ambitious target set at Paris of 1.5 degrees Celsius, annual emissions need to fall by over 50% by 2030 and such emissions need to reach net-zero by 2050.
Climate taxes may help create incentives for firms to cut emissions by creating a market for pollution, ironically in lieu of the title, putting pollution up for sale. The principal objective for an effective carbon tax is to tip the scales of costs for a firm in favour of cutting emissions.
The tax would increase the costs associated for firms with polluting the environment at the current level - this cost would exceed the cost of reducing emissions by one unit (marginal costs of abatement). This gives a profit incentive for the firm to cut costs by cutting emissions (since it is cheaper to reduce emissions by one unit rather than pay the tax). This will continue until the costs of reducing emissions by one unit equals the costs to the environment by emitting an additional unit of carbon, achieving net-zero.
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Figure 2: Marginal Costs of Abatement and Damage curves. Note how at quantity B, MAC<t* - it costs less for the firm to reduce emissions than to pay the tax. (Source: Olivier Goddard, ResearchGate, 2023)
The best part is that these taxes work.
Unfortunately, Brazil has never implemented such a tax but a report by J. Grosjean et al. compared the performance of Nordic countries to a synthetic counterfactual (a ‘basket’ of non-Nordic countries which did not implement such a tax to the same extent – this basket included countries like the UK and Turkey). This is called a Synthetic Control Model (SCM).
This counterfactual allowed for a relatively fair comparison between countries which implemented the tax to what would have happened in the same countries should they have gone with “business as usual” policies.
Figure 3: Synthetic Control Model comparing the difference between each Nordic country and their respective synthetic counterfactual. (Source: Tresor Economics, 2024)
There is significant evidence of such a tax being successful in cutting emissions. Looking at the high climate tax economies of Norway and Sweden, CO2 emissions per capita have decreased, with consistently falling emissions relative to themselves if they did not implement the tax. This contrasts with the performance of Denmark and Finland, economies with lower climate taxes. Thus, there is strong evidence to suggest that climate taxes are highly effective in cutting emissions and easing the transition to low-carbon technologies.
Unfortunately, close relationships between fossil fuel giants and governments has led to a slow implementation of these taxes. Many fossil fuel giants have benefitted from a close relationship with governments, engaging in regulatory capture of key environmental regulators, leading to fewer punishments for non-compliance. Governments persisted in not prioritising climate reform, with Bolsonaro’s government hitting the Tupinamba people by pushing for a 200% increase of oil and natural gas production. Thus, significant challenges still remain for the implementation of such taxes in climate reform, particularly in weakening the influence of large fossil fuel corporations on government policy.
Green Bonds
Another key point of contention at the COP 30 Climate Summit has been the role of developed countries in climate financing. So far, developed countries are arranging $100bn in funding for climate-related projects in developing and emerging economies. However, such funds have often been very slow to impact their designated project, partly due to many of such countries implementing austerity measures (measures designed to reduce spending to reduce a budget deficit).
A policy measure suggested by economists seeking to increase green project funding independently of government in the private sector is through financial products like Green Bonds.
These bonds work very similarly to traditional bonds - a corporate or government entity seeking to raise capital issues bonds - in effect, a loan made by the investor to the bond issuer (the firm or government) in return for interest (also known as the yield of a bond) and a repayment of the loan at a given point in the future. The key difference from traditional bonds is the use of funds - the funds raised from these bonds may only be used for financing green projects like energy-saving production methods and pollution mitigation efforts.
A key reason why this market has grown has been due to the opportunity for portfolio managers to diversify their investments. They may support sustainable investments while hedging against any substantial risk, fulfilling institutional demands for investments with lower risk and sustainable impact. This has enabled the market to have a CAGR (current annual growth rate) of 10.8% and a market capitalisation of $2.9tn.
Figure 4: The growth of the Green Bonds market - with a current annual growth rate (CAGR) of 10.8%, such a market has a very strong future. (Source: The Business Research Company)
These products have a range of benefits. The bond issuers benefit with lower financing costs for their climate change mitigation projects, up to 8 basis points (0.08%) lower than traditional bonds due to such significant demand from investors leading to a ‘greenium’ (a premium investors are willing to pay on top of the current market price for a green bond).
However, there are still many significant challenges faced in making green bonds a competitive option relative to traditional bonds. There is no standardised universal regulation for which bonds are considered “green.” This increases the vulnerability of investors to “greenwashing”, where funds are not used for sustainable purposes. This in turn may lead to higher costs for investors in due diligence research to ensure that the bond is legitimate or not, reducing the competitiveness in terms of returns. Thus challenges still persist in using green bonds as a measure to support climate financing.
Overall, current climate policies being pursued by governments are insufficient to reduce average global temperatures to the desired 1.5 degrees Celsius target. Governments may be more effective by developing more strictly enforced accountability standards of funds in green bonds, government relationships with corporations, and specific climate targets.
Whether governments can implement this, only time will tell.