There’s an unacceptable dichotomy between regular financial markets and the reality of carbon markets. Financial markets are there to make money. Carbon markets are there to avert an environmental disaster. But nobody seems to know how to express this on a daily basis.
For the time being, carbon traders have little to go by to determine what prices ought to be other than supply and demand, what’s happening in the oil and power markets at large, validated emissions data (once a year) and the odd government decision to mandate or change existing regulations, if you read the monthly market reports on Carbonpositive.net.
A trader trades carbon credits to the best of his/her abilities on regular market data. But even though the numbers-based information works, it has little bearing on the real purpose of carbon trading: mitigating an environmental crisis. Factors truly influencing carbon emissions are found in what’s happening in the world of nature itself. If you’re buying carbon credits hoping to prevent global warming and you never pay heed to reports indicating the levels of melting ice, the number of bicycles sold, or the severity of pollution in the world’s rivers, then you’re missing out on a large chunk of reality.
Just over ten years ago, Robert Constanza first put a monetary value on natural resources, saying this was realistic economics. He was seen as a radical. But more and more people are coming round to his point of view and carbon markets are a direct result of this kind of thinking. Constanza estimated the planet’s water resources, air, soil, vegetation and animal life to be worth around USD33 trillion (in 1997). The further sophistication of this type of accounting we’ve seen in the past few years marked a coming together of the economics discipline with a fiery environmentalism. Turns out that these extremes are not at all incompatible.
Recently researchers at Ecosystem Marketplace issued a database with information on practicalities involved with the creation of new markets for offsets. Ecosystem Marketplace highlights two things; ‘environmental services’ (i.e. nature) and valuating them economically.
Central to the effort to streamline the creation and trading of carbon and carbon-like instruments will be to agree on an economic valuation. In the carbon markets you can see how difficult this actually is. The Washington Post ran an article today outlining the immense political dimensions of putting a firm number on the carbon valuation. After years of carbon trading, no one as yet dares to firmly put a price tag on carbon.
The current US political attitude regarding the environment is not going to be representative for the long haul though and Europeans hopefully soon will get their act together. If you’re interested in finding out more about valuation issues, check out Ecosystem Marketplace’s recently launched Matrix, a live database covering all aspects of valuating nature’s ‘services’ economically. The Matrix points out ways in which industry or companies could pay for resources it uses. The database has been kept live because of the rapidly changing concepts that you see in ecosystem markets. Key questions addressed include ‘what are the major markets for ecosystem services’, ‘how big are they’, ‘who’s involved’ and ‘where are they heading’.