The Political Economy of Carbon Securities and Environmental Policy

The current suboptimal carbon abatement policy likely creates costs in the range of 3 to 6 trillion US dollars. Taking the perspective that policy levels are not only influenced by social welfare considerations but also by vested interests, this paper proposes a new carbon abatement policy instrument, that entitles its owner to a fixed proportion of ex ante unknown total emissions. This creates stakeholders on the side of the issue that has traditionally been underrepresented. The paper shows that carbon securities have a number of advantages over existing policy tools. First, the lobbying process leads to a carbon price level that is closer to the social optimum than with a tax or permit system. This is a direct consequence of the presence of stakeholders with an interest in low carbon emissions. Second, climate and political uncertainty have a smaller effect on the expected variance in the carbon price. While there is ex ante uncertainty about the amount of carbon emissions allowed per security, the variance of the carbon price is smaller. Third, there is higher investment in carbon abatement technology with carbon securities. There is a stronger incentive to develop and adopt abatement technology since carbon securities encourage both a higher and a more stable carbon price. Fourth, a system based on carbon securities also has implications for commitment to environmental policy.