The Curious Case of Greening in Carbon Markets
23 Pages Posted: 16 Mar 2011
Date Written: March 11, 2011
Over the last several years, so-called carbon markets have emerged around the world to facilitate trading in greenhouse gas credits. This Article takes a close look at an unexpected and unprecedented development in some of these markets - premium "green" currencies have emerged and, in some cases, displaced standard compliance currencies. Past experiences with other environmental compliance markets, such as the sulfur dioxide and wetlands mitigation markets, suggest the exact opposite should be occurring. Indeed, buyers in such markets should only be interested in buying compliance, not in the underlying environmental integrity of the compliance unit. In some of the compliance carbon markets, however, higher quality green credits have emerged in recent years as important currencies for a number of buyers, representing a dynamic that we refer to as "Gresham’s Law in reverse" - more stringent currencies arising alongside and even displacing inferior currencies. This Article provides the first recognition and analysis of green differentiation in carbon markets. We explore a range of explanations for this curious development. We then identify potential lessons for the design and evolution of future carbon markets and, more generally, environmental compliance markets.
Keywords: environmental law, environmental compliance markets, climate change, carbon markets, Gresham's law
JEL Classification: A14, K32, Q23
Suggested Citation: Suggested Citation