How Adam Smith's theory of moral sentiments could be applied to cap-and-trade greenhouse-gas emissions.

News and commentary about environmental issues.
Sept. 25 2008 11:53 AM

Adam Smith Meets Climate Change

How the theory of moral sentiments could be applied to cap-and-trade greenhouse-gas emissions.

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So here's the proposal: Rather than debate endlessly about how to carve up the spoils from just one global GHG currency, why not separate GHG permits into different brands based on how seriously they take the question of climate justice? Imagine an annual GHG cap that is subdivided into two categories. First, each country would receive a share of "regular" permits based on historic emissions rates or whatever base-line allocation method emerges from international negotiations. Second, each country would receive "justice" permits based on some formula that takes into account factors like population size and previous contributions to climate change.

The easiest approach to allocating justice permits would follow the preferred approach of developing countries—i.e., "the bigger your population, the more permits you get." Call this the "distributive justice" approach. A more ambitious formula would add a further tilt in favor of developing countries on account of unequal past contributions to the present GHG buildup. Call this the "distributive plus corrective justice" approach. No doubt there would be diplomatic battles about how precisely to fix the allocation formula, but at least those battles would no longer be focused, all-or-nothing, on a single climate currency.

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Creating a separate market for justice permits also would offer the prospect of generating more money per permit for developing countries. Both regular and justice permits would entitle the holder to emit a ton of CO2 and both types would be fully tradable, but the justice permits would carry with them the right to advertise that goods and services were produced using the more equitably allocated emissions rights. The moral sentiments of consumers would then determine whether justice-branded products could be sold at a premium. For instance, we envision gas pumps of the future that give consumers a choice between "regular" and "justice added" brands. A premium price for justice brands would translate into compensation for emissions inequality.

The concept might seem a bit too abstract for consumers at first. But products from sustainably managed forests and fisheries probably also seemed abstract at one time, yet now they fill the shelves at mainstream stores like Home Depot and Wal-Mart. These firms know that the consumers most likely to be attracted to "justice" branding are also the ones willing to invest the time and energy to understand the brand's meaning. A customer might not look at a justice-branded sneaker and say to himself, "Hey, great, this was produced with carbon credits obtained via a progressive cap-and-trade system that imposes a penalty on richer nations that have been polluting for a longer time!" But he might get the bigger message—that the logo represents a larger system for reducing greenhouse-gas emissions while giving less-developed nations a chance to catch up in global markets.

At a time of high energy prices and a reeling economy, this proposal may sound a tad Pollyanna-ish, but consider the fact that the voluntary carbon offset market more than tripled in value last year to $331 million, according to one recent report. Our proposal would allow GHG altruism to continue in the coming carbon-constrained economy, and it would do so with fewer transaction costs and greater reliability than the current ill-defined and poorly monitored offset market.

This is a once-in-a-species opportunity. The global architecture necessary to produce a trading scheme is already being built. Whatever allocation of GHG emissions rights is eventually chosen will require a system for reporting, monitoring, and trading that could easily accommodate additional permit variations along the lines of our proposal. Consumers have moral sentiments about climate change. They just need a hand expressing them.

Ian Ayres and Doug Kysar are professors at Yale Law School.

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