If You Want to Save the Planet, Let Markets Work

Cornelis Huysmans: Forest Edge with Loggers // Public domain

There is a general consensus among economists about the benefits and efficiency of markets and market mechanisms, and in the case of dysfunctional markets, most economists prefer already proven solutions. That is why economists like to apply vouchers to various economic or social problems. Whether it is Milton Friedman’s school vouchers, emission allowances, or refugee vouchers, which were designed to address the migration crisis that affected Europe in 2015.

However, the migration crisis of that time has either passed or been replaced by the crisis linked to the conflict in Ukraine. Currently, Europe is focusing on other issues, particularly environmental protection and the fight against climate change. To this end, a broad investment strategy has been developed, which is detailed in the Green Deal and other related plans.

A key component of these strategies is the energy sector, where the European Union has set ambitious targets for transitioning away from coal-fired energy sources and promoting the use of renewable sources. Nuclear power stations are also experiencing a significant decline in electricity production. The sustainability of energy sources will rely on a newly developed energy taxonomy to serve as a form of assessment for potential investors. According to this taxonomy, non-compliant sources will not be eligible for EU funding and will face unfair competition on the energy market.

This approach relies solely on one strategy and overlooks the fact that there may be multiple viable solutions for environmental protection. Moreover, different solutions may suit different Member States. For example, coal-fired power stations can be used as a supplementary source of energy without significantly damaging the environment. The emissions from these power stations can be substantially reduced by implementing appropriate filters and technologies, as is already being done.

For instance, the chart below illustrates the significant improvement in the US in terms of SO2 and nitrogen emissions. Nitrous oxide (N2O), which is produced when coal is burned, contributes to the greenhouse effect at around three times the mass equivalent of carbon dioxide (CO2), among other things. I note that the chart shows emissions per unit of electricity production, so the decline is not due to a general shift away from coal as a source of electricity, although that is happening.

Chart from the EIA

The problem remains that the EU taxonomy prevents investment in relevant coal research. Thanks to subsidised programmes, this is concentrated on renewables and removes the necessary scientific and material resources from other energy alternatives. The Member States’ hands are tied in this respect.

Trees or other accumulation mechanisms are another important factor in the adoption of fossil fuel energy. In particular, the ability to absorb emissions other than carbon dioxide. This is where the aforementioned allowances come in. If emissions from combustion are a problem for the Union, the creation of a market in reforestation allowances, which could serve as a tool for regulation but also for offsetting emissions, is still a better solution than a ban or non-market distribution of subsidies.

In practice, each state or local company would be entitled to a certain total number of reforestation allowances. Initial emissions could be based on a country’s level of forestation, and variables such as population, economic development or the suitability of the landscape for building renewable energy sources could also apply (countries with better renewable energy production capacity will logically need fewer allowances).

However, a condition for fossil fuel energy production would be the possession of a certain amount of these reforestation allowances. New allowances could be obtained by planting trees or applying other accumulation mechanisms, or by buying them on the market. Individual countries and companies would then trade with each other on this market. As a result, any emissions produced would be offset by the creation of a factor that absorbs them. Regardless of where and how this occurs. Instead of a skeletal focus on methodology leading to the desired results, there would be a focus on the results themselves, so that the tools to achieve the targeted results would be in the hands of the market.

The energy taxonomy would suddenly become redundant as there would be no need for any checklist to assess the suitability of an investment. The assessment would be made on the basis of own resources or the amount of reforestation allowances available to the entity concerned. This step would maintain the drive towards a lower emission economy while at the same time providing more options to achieve this objective. While operators would still be forced to accept low emission targets, they would at least have more options in their hands to achieve them.

Written by Filip Blaha

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