A New Currency: Climate Change and Carbon Credits

By Victor, David F.; House, Joshua C. | Harvard International Review, Summer 2004 | Go to article overview

A New Currency: Climate Change and Carbon Credits


Victor, David F., House, Joshua C., Harvard International Review


A new currency is emerging in world markets. Unlike the dollars, euros and yen that trade for tangible goods and human services, this new money exchanges for pollution--particularly emissions of carbon dioxide, which are caused by burning fossil fuels and are the leading cause of global climate change. Carbon credits, as they are called, are poised to transform the world energy system and thus the world economy.

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But it is not easy. As the Europeans have shown with their successful launch of the euro, new monetary systems require sophisticated and strong institutions. Creating a new currency for global trade is doubly difficult. Not only are global institutions much weaker than national courts and treasuries, but international cooperation is vulnerable to defection. Rarely do all major nations move in lockstep, but the creation of a new global currency implies the need for coordination on a scale that is unprecedented in the history of international environmental law.

How this currency evolves and its implications for the world economy depend on decisions that are being made today and in the next few years. Those who want this system to work--and if it does, the benefits to the atmosphere and to the world economy could be enormous--must look to the right lessons from history. Yet the wrong histories have served to inspire most of the international diplomacy in this area. Governments have sought grand global treaties, such as the Kyoto Protocol, yet in history the most demanding and effective treaties and strongest currencies have emerged "bottom up" from the initial efforts of a committed few.

Previous Efforts against Global Warming

In its simplest form, the physical cause of climate change is not disputed. The atmosphere naturally contains greenhouse gases such as water vapor, carbon dioxide and methane. Absent these gases, the planet would cool to a subzero frozen ball, much as the desert cools rapidly on a cloudless night. When humans pump extra quantities of these heat-trapping gases into the atmosphere, we alter the energy balance of the planet and cause a change in climate. It is clear that the concentrations of these greenhouse gases have greatly risen since the industrial revolution, that average global temperature is higher, and that temperatures will climb still further if we do not alter our path.

A gradual warming is likely to cause rising sea levels; more extreme weather events are also possible. Much less likely, but highly worrying, are abrupt changes such as a rapid shift in the North Atlantic ocean circulation--an event that could, ironically, put much of the far North into a deep freeze.

Devising effective solutions to the problem is difficult because climate change is both global and long-term. Greenhouse gases are stock pollutants with long lifetimes. What matters is their concentration in the atmosphere, not the exact geographical location where they are emitted. This characteristic of greenhouse gases enables the targeting of the least costly places for controlling emissions wherever they may be on the planet, but also the danger that laxity in one location can undo even the best efforts elsewhere. And unlike local pollution problems that have been the mainstay of environmental regulation, the benefits of controlling greenhouse gases accrue over many generations because greenhouse gases are long-lived in the atmosphere--carbon dioxide remains in the atmosphere for about a century.

During the late 1980s climate change rose to prominence in the United States and other advanced industrialized countries. At the 1992 "Earth Summit" in Brazil, the United States signed the United Nations Framework Convention on Climate Change, which created a framework for international cooperation on climate change. For the United States and industrialized countries, compliance has meant submitting reports on emissions of greenhouse gases and contributing to a fund that compensates developing countries for the "agreed incremental cost" of their efforts to comply with the Convention's goals.

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