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A broker's job is to help bring buyers and sellers of a good or service together. You've probably heard of stock brokers, mortgage brokers, insurance brokers, even power brokers -- but emissions brokers? Consider Dirk Forrister, an American emissions broker in London, and the focus of this NPR Morning Edition report. European firms looking to buy or sell pollution rights go through brokers like Forrister. Forrister has made a career out of convincing politicians that tradable pollution rights reduce negative externalities, such as global warming.
Global warming occurs as average temperatures in the atmosphere and oceans rise over time. Man-made green house gases (GHGs) -- particularly the carbon dioxide generated by burning coal, fuel, and other fossil fuels -- intensify warming. There is some debate over the extent to which humans cause climate change, but most nations endorse precautionary measures aimed at reducing carbon dioxide and other GHGs.
Most nations have signed the Kyoto Protocol, a global agreement aimed at reducing the human contribution to global warming. In part, Kyoto relies on an emissions trading program. Each of the 141 Kyoto participant nations targets lower emissions. Governments meet targets by imposing a cap on national emissions. The government creates a number of pollution permits that are equal to the cap. For example, if a country's emissions target is 200 million tons of carbon dioxide, the government would issue 200 million permits, each of which allows the holder to emit 1 ton of carbon dioxide. While firms may buy or sell permits based on how much carbon dioxide they need to emit, total pollution cannot exceed the cap.
Under this "cap-and-trade" approach to pollution reduction, companies face incentives to adopt cleaner technology in order to avoid paying for extra pollution rights.
The Morning Edition report tracks Forrister as he matches buyers and sellers in the European market for carbon dioxide permits, or carbon credits. As you read, think about the negative externalities created in heavy industries such as oil, steel, power, and cement. Consider how Kyoto's cap-and-trade approach forces pollution-intensive firms to internalize negative externalities. In the problem set that follows, you will use supply and demand to model the negative externality and examine different pollution reduction strategies.
1. The market for carbon credits is open to all willing buyers and sellers, not just polluters. What would happen to the price of carbon emissions if environmental groups used contributions to buy and retire carbon credits?
2. Some Kyoto analysts suspect that certain Annex I countries, including Russia, Ukraine, and Bulgaria, received an excessive number of carbon credits in order to secure their participation in the Protocol. Extra credits essentially serve as a bribe; if Russia receives more credits than its industries need, the government can sell the excess permits.
Why might Russia, Ukraine, and Bulgaria conspire to withhold a portion of their excess carbon credits?
3. The Kyoto Protocol offers an interesting way for countries to exceed their carbon emissions caps. An Annex I country can earn extra credits by reducing carbon emissions or preserve carbon sinks (namely forests that absorb carbon dioxide) in developing, non-Annex I countries.