Pope Francis on Carbon Credits: Analysis of Laudato Si’ 171

Nearly one month after the release of Laudato Si’ (LS’), most commentators – myself included – are still trying to wrap their minds around the prophetic, difficult and sometimes unexpected elements of the Catholic Church’s first papal encyclical on ecology. While there are many such aspects, one that seems especially remarkable is Francis’ explicit critique of “carbon credits” as a means by which to mitigate climate change.

Although I was surprised to see Francis’ critique of carbon credits, I was also excited and sympathetic. I have argued elsewhere that a carbon tax is the most desirable climate change mitigation policy mechanism, and my contention is partly based on the very reasons that Francis articulates. As such, I here unpack Francis’ statement in LS’ and provide support for his prophetic but sound analysis.

LAUDATO SI’ 171

In order to contextualize my commentary, it is important to first provide the pope’s full quotation about carbon credits in LS’:

The strategy of buying and selling ‘carbon credits’ can lead to a new form of speculation which would not help reduce the emission of polluting gases worldwide. This system seems to provide a quick and easy solution under the guise of a certain commitment to the environment, but in no way does it allow for the radical change which present circumstances require. Rather, it may simply become a ploy which permits maintaining the excessive consumption of some countries and sectors (171).

OVERVIEW OF CARBON CREDITS

The term “carbon credit” describes any financial instrument that entitles its holder (usually corporations) the legal right to emit a specified amount of carbon dioxide or carbon dioxide equivalent (usually one ton). In theory, carbon credits are integral to carbon markets, and work like this: first, a governing body determines the total amount of allowable carbon emissions for a given period. Then, it creates a corresponding amount of carbon credits that are made available to polluters through auction or handout.

If the amount of carbon a firm hopes to emit in a given period exceeds the number of credits held, the company must then do one of three things: purchase additional credits on the free market from companies that hold a surplus; pay a steep fine; or find a way to reduce its own emissions. Should governments auction rather than give away credits, revenues can be invested in public infrastructure or rebated to consumers.

ANALYSIS OF CARBON CREDITS

Those who support carbon credits as a climate change mitigation tool argue that this system has many benefits. First, they point out that a government has the ability to both limit the total amount of carbon emissions for a period and decrease this amount over successive periods. Additionally, supporters of carbon credits argue that the invisible hand of the competitive free market will ensure that greenhouse gas emissions are reduced in the most efficient way possible: each firm will purchase permits, pay a fine or reduce emissions based on its own economic self-interest.

Although carbon credits thus appear to be a straightforward and efficient means by which to reduce greenhouse gas emissions, they have been critiqued on several fronts. First, as the Sightline Institute describes, the free allocation of credits can create windfall profits for corporations that hold credits and raise prices to compensate for the profit that it would make by selling rather than holding the freely-acquired commodity (2-4). Sightline chronicles that this is what occurred during the initial phase of the European Union’s Emissions Trading System, when an excess of credits on the market also caused emissions to rise relative to previous levels (5-6).

In addition to problems associated with credit handouts, Shi-Ling Hsu notes in his book The Case for a Carbon Tax that markets which trade in carbon are also plagued by the possibility of a “safety valve” whereby additional credits would be released onto the market if credit prices became too high. This would allow for an increase in emissions levels and, as former Department of Energy official Joseph Romm notes, thus fundamentally compromise the purpose of climate mitigation policy.

Furthermore, Hsu notes that many carbon credit schemes allow for “offsets” that enable an actor to fund other firms’ emission reductions and claim the avoided emissions as credits for itself (20-22). Practically, however, Hsu notes that offsets can be difficult to verify (88). Additionally, Bullock, Childs and Picken point out in “Dangerous Distractions” that carbon offsets can create credits for projects that would have occurred otherwise, fail to force high-emitting firms to make systemic operational changes, can actually increase the net amount of emissions, and compromise the obligations of justice owed by those most responsible for climate change (13-25).

Besides the problems associated with offsets, Philip McMichael convincingly argues in “Contemporary Contradictions of the Global Development Project” that carbon trading mistakenly “recycles the problem as solution,” i.e., attempts to utilize the sort of neoliberalism in which climate change is arguably rooted as the solution to the problem. Finally, and not least important from the perspective of theological ethics, Michael Sandel points out in his essay “Should We Buy the Right to Pollute?” that there seems to be something intrinsically immoral about a system that affirms and legislates a firm’s “right to pollute” (94).

CLIMATE POLICY ALTERNATIVES

The abovementioned analysis demonstrates that Francis’ concerns about carbon credits in Laudato Si’ are supported by sound economic analysis and real-world experience. At the same time, however, the pope does not follow his critique of carbon credits with similarly specific advocacy for a particular climate change mitigation policy. What sort of climate change mitigation policy, then, ought persons of faith and goodwill support?

The leading alternative to carbon credits is arguably a carbon tax. According to Shu, this is due to the fact that carbon taxation can be judged superior or at least equal to all other climate change policies on at least ten fronts: “economic efficiency; excessive formation of capital; non-interference with other regulatory instruments or jurisdictions;” capacity for government to “reduce ‘bads’”; “incentives for innovation- price effects; incentives for innovation- price breadth; administrability; international coordination; revenue raising; price versus quantities under uncertainty” (25-115).

Given the strong case for carbon taxation, this policy is supported by a wide variety public officials, scientists & economists, thought leaders, editorial boards, writers & pundits– most notably conservatives in these fields. Additionally, I argue in my above-quoted article that a well-legislated U.S. carbon tax would satisfy the ethical criteria for climate change legislation outlined by the Catholic Church better than any other policy. As such, I believe that a carbon tax – whether domestic or international – is the single most desirable climate change mitigation policy instrument (however, I also agree with Shu that climate change mitigation will likely require a range of secondary policies- 191).

CONCLUSION

In my opinion, one of the most piercing sections of Laudato Si’ is 1.VI, wherein Francis laments the “weak responses” of international climate negotiators (54). There, the pope grieves that while summit after summit has failed to help the world mitigate climate change, “the economic powers continue to justify the current global system where priority tends to be given to speculation and the pursuit of financial gain” (56). In light of no. 171, it seems that Francis considers carbon credits to be especially illustrative of this toxic dynamic.

Based on the foregoing, I hope it is clear that Francis’ worries about carbon credits are rooted in sound economic analysis and precedent sociopolitical experience. Additionally, I pray that the seeds here planted about carbon taxation might grow into fruitful climate change mitigation policy. Although there is a rapidly-closing window of opportunity within which to avoid runaway and effectively irreversible climate chaos, I believe Francis’ insights in Laudato Si’ – especially about climate change policy – can help humanity yet save ourselves from ourselves.