Welcome to Scotonomics Channel! In this thought-provoking episode, we delve deep into the intricate world of carbon markets and compliance mechanisms. Join William as he dissects the complexities surrounding carbon pricing, emissions trading, and their implications for addressing climate change.

[00:00:00] William begins by highlighting the pivotal role of carbon capture and storage in international climate agreements and the pursuit of the 1.5-degree Celsius target. But today, our focus is on carbon markets, specifically compliance markets, where industries are legally bound to operate within emissions limits.

Discover whether enterprises respond to price signals in the manner governments anticipate. Compliance markets operate on a cap-and-trade system, allocating allowances to high-emission sectors. When an organization exceeds its limit, it must purchase permits from those emitting less.

[00:01:00] But what exactly are these permits? They're not trading carbon itself but rather financial instruments linked to emissions, effectively financialising the climate crisis. The debate surrounding the effectiveness of these instruments in reducing emissions is a contentious one, but today, we concentrate on the pricing mechanism.

The success of carbon markets hinges on organizations reacting to price signals as neoclassical models predict. The theory suggests that firms with cost-effective emission reduction strategies will act while others will purchase credits.

[00:02:00] However, we argue that prices in carbon markets are influenced by a multitude of factors and are socially determined. Let's put ourselves in the shoes of a power plant CEO. First, a rising carbon price may not significantly affect the overall cost structure of the enterprise.

Decarbonization is a complex, time-consuming process involving changes in processes, personnel, supply chains, and technology. Profits must be maintained during this transition to ensure the enterprise's sustainability.

[00:03:00] Furthermore, the price of carbon isn't solely influenced by the invisible hand of the market. Government regulations, fines, and industry lobbying play significant roles. Carbon markets are far from free markets, and price-setting is socially constructed.

In this context, it's challenging to argue that the price accurately reflects the social costs of carbon. Instead, it appears designed to maintain the existing economic order and distribution of social surplus.

[00:04:00] Lastly, the concept of pricing carbon to reflect its true cost is a daunting task in a world of uncertainty. The ecological damage caused by pollution is immense, and no price can truly capture its full extent.

In conclusion, the price of carbon doesn't align with its social costs, and it isn't the primary driver for polluting enterprises to take action. Instead, it's a socially created mechanism that sustains the current economic system. Our journey through this episode sheds light on the complexities of carbon markets, highlighting the need for a broader perspective on addressing climate change.

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