And Justice for All! Or: Justice in carbon market design: Insights from Theory and Experiences “Down Under”

By Sven Rudolph and Elena Aydos

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“Halls of justice painted green, money talking, …
money tips her scales again, make your deal.
I can't believe the price we pay. …
Nothing can save us, justice is lost!”

… is what the heavy metal band Metallica bemoaned in the title song of their 1988 album. For greenhouse gas cap-and-trade programs (GHG CaT), a.k.a. emissions trading or carbon markets, some observers such as Altvater/Brunnegräber (2008) pose the same accusation, though admittedly in a more scientific phrasing, claiming that GHG CaT is “not in line with principles of social justice in a globalized world”. But is it really impossible to design truly sustainable GHG CaT, which not only fulfil ambitious requirements of environmental effectiveness and economic efficiency but also criteria of justice?

Do we at all need carbon markets?

Without doubt, anthropogenic climate change is one of the biggest threats to humankind with yet incalculable consequences for ecosystems and human livelihood. The Paris Agreement, however, despite of its many shortcomings, can certainly be considered a major diplomatic success and an important step towards dealing with this threat. However, the 2018 Special Report of the Intergovernmental Panel on Climate Change (IPCC) warns that limiting the temperature increase to 1.5°C would require “rapid and far-reaching transitions in energy, land, urban and infrastructure (including transport and buildings), and industrial systems”, and that current nationally stated mitigation efforts do not suffice. Hence, mitigation efforts have to be stepped up significantly.

As one flexibility policy option, Article 6 under the Paris Agreement allows the use of Internationally Transferred Mitigation Outcomes (ITMO), basically the trading of emission rights. Since its invention in the late 1960s, the instrument has gained almost unanimous support from environmental economists. Even more importantly, Daly (2019) emphasizes that cap-and-trade programs allow for differentiating and prioritizing scale, distribution, and allocation decisions: “The cap serves the goal of sustainable scale; the auction serves the goal of fair distribution; and trading allows efficient allocation – three goals, three policy instruments”. Based on these promises, GHG CaT have spread not only across the globe from Europe (EU ETS), to North America (RGGI, WCI), Asia (China ETS, South Korea ETS, Tokyo ETS), and Oceania (New Zealand ETS) but also across all governance levels from local (e.g. Tokyo) to supra-national (EU) (ICAP 2019).

So, indeed, carbon markets can play a major role in a sustainable climate regime.

Is justice really necessary?

Besides environmental effectiveness and economic efficiency, justice plays a key role in sustainable climate policy for several reasons. First, justice, particularly intra- and intergenerational justice, was a founding principle of the concept of sustainable development laid out early in the late 1980s in the Brundtland Report. As a consequence, justice is a vital part of a substantial number of the 17 Sustainable Development Goals. Second, justice issues have become increasingly important in the public and political debate with immediate consequences on the political feasibility of ambitious climate policy. Third, political and religious leaders across the world have emphasized the injustices caused by climate change. In 2019, Pope Francis called not acting on climate change a “brutal act of injustice towards the poor and future generations”, former UN High Commissioner for Human Rights Mary Robinson stated in 2018 that “the fight against climate change is fundamentally about … securing justice for those suffering from its impact – vulnerable countries and communities that are least culpable for the problem”, and for Greta Thunberg (2019) “a 50% risk [of reaching the 1.5°C  is simply not acceptable to us – we who have to live with the consequences”. Fourth, empirical research has shown that people in various countries appreciate an equitable approach to climate policy. Fifth, the Paris Agreement itself urges signatories to the agreement to “reflect equity”. And, sixth, current energy transformation processes have raised serious doubts about a fair burden sharing in the respective policy mix.

So, justice has to become a key requirement for sustainable climate policy, including carbon markets.

But can carbon markets ever be made just?

So far, most of the discussion on justice in climate policy has followed three major strands: The first strand deals with question of climate justice. It has its major focal points on (a) inter-generational justice between those who have been causing the problem in the past and present and those who will suffer in the future, and (b) international justice between those who have caused the problem in the rich industrialized world of the global north and those who will suffer in poor countries of the global south. A second strand of the literature deals with questions of social justice, mostly understood as referring to the distributional effects of ambitious climate policy, most prominently carbon pricing, on households or entire communities with different income levels. The argument assumes that carbon pricing induced energy price increases have regressive effects and can thus burden poor households or communities relatively more than rich households. The third strand is on environmental justice and discusses co-pollution effects originating from climate policy. The major argument here is that policies such as cap-and-trade lead, via extensive purchases of CO2, to hot spots of locally potent pollutants such as SO2 or NOX mainly in poor communities.

Our approach, first, discusses a comprehensive set of normative justice concepts such as procedural vs. result-based justice, justice in transfer, allocation, and redistribution, desert-based vs. welfare-based justice, (non-)egalitarianism (equality of what?), and intra- ((inter-)national), as well as intergenerational justice and their applicability to carbon market design. For this year’s ANZSEE conference we then evaluate current and past carbon markets in Australia and New Zealand based on these criteria: The Australian Carbon Pollution Reduction Scheme, proposed by the Rudd Government in 2008, the Carbon Pricing Mechanism (CPM), implemented by the Gillard Government and in place from 2012 to 2014, and the current Emission Reduction Fund (ERF) accompanied by the Safeguard Mechanism (SF), implemented under the Abbott Government, as well as the New Zealand Emissions Trading Scheme (NZ ETS), in place since 2008 with several revisions.

And we can show that, indeed, just carbon markets are possible, but the design has to feature, amongst others, stringent absolute volume caps that are in line with the 1.5°C target, full auctioning, and 100% revenue recycling to adaptation and redistribution. Will such carbon markets ever be politically feasible? This is certainly a key question. So far, neither in Australia nor in New Zealand they have become reality, but the early Australian CPRS and CPM came very close to the ideal.

Sven Rudolph is Associate Professor at Kyoto University’s Hakubi Center / Graduate School for Global Environmental Studies, Japan.

Elena Aydos is Senior Lecture at the University of Newcastle Law School, Australia.

The authors expertise is in climate law and economics with a special focus on climate policy and carbon pricing. Sven and Elena have collaborated across disciplinary and national borders in both teaching and research for several years, having produced several peer-reviewed publications and joint teaching programs. Both have work experiences outside of academia, e.g. in non-governmental organizations, legal practice, and as political consulting.

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