Within the framework of the carbon market, and in order to make it feasible, the authorities have defined the following:
Why a market only between polluters?
Mainly to circumvent the problem with naive application of Pareto’s law: we solve 80% of the problem with 20% of the actors. This simplification nevertheless has an impact on the determination of the price. Indeed, Coase’s theorem specifies that there must be an effect between 2 actors for the externality to be internalisable through a market. However, there is no externality between two polluting firms. Nevertheless, these two companies may be interested in reducing their carbon emissions to be more competitive and efficient. In this case, the price driver, for the carbon ton, is not the value of the externality, but the cumulative investments and efforts to reduce the carbon footprint in a sector. Thus, if the entire automotive industry does not decide to make any investments, the price is likely to remain low. Otherwise, if one of the players invests in a clean vehicle, in order to benefit from the non-emission of greenhouse gases, it can impose a higher price per ton of carbon, create a competitive advantage, and thus encourage other players to invest.
Thus, this carbon market is not really an application of Coase’s theorem, but rather the implementation of a financial constraint to stimulate innovation.
Strict implementation of the Coasse theorem is impossible for the following reasons:
So why include the climate externality in the balance of externalities and how can it be monitored over time?
Today, the only existing and credible value is that provided by the carbon market. This value has all the shortcomings of the world, but allows us to know the value of a ton of carbon in the current economic system (a system that is still very poorly adapted to this new constraint). It is to be hoped that this value of the carbon ton will increase over time, as investments are made to reduce the carbon footprint. In addition, other elements will influence its value: social pressure for a fairer value of the ton of carbon, discovery and improvement of climate models, …
By integrating the ton of carbon in the balance of externalities now, we anticipate that progress will be made. Taking into account current knowledge, we integrate the social cost of our emissions. Finally, we reserve the right to correct the impacts.
This method reveals two advantages.
The first is an application of the precautionary principle, not only to measures but also to future impacts.
The second is to prepare an experimental base, in order to invalidate or confirm the hypotheses and models of evolution that we may be led to make. The balance of externalities thus becomes one of the first long-term models to be applied to the economy. The balance of externalities can become one of the economic metrics for improving models and better understanding the notion of progress.