Contrary to widespread public perception, there is no lack of hydrocarbons on the planet. Oil and gas are in abundant supply, and could potentially serve as primary sources of energy consumption for decades to come. However, the limited capacity of the atmosphere to absorb carbon emissions without triggering climate change with irreversible and damaging consequences puts a clear constraint on the use of fossil fuels. Energy policy and climate policy are thus inextricably linked.

In order to facilitate a transition to the use of low-carbon energy resources, policymakers at the national and international levels have during the past decade started to experiment with policy initiatives designed to alter or manipulate price signals for energy sector investments. In essence, these schemes have created new markets and associated ‘rules of the game’ for the trade of carbon emissions, with the ultimate goal to raise the costs for investments in fossil fuels vis-à-vis renewable sources of energy. These carbon prices have to be created through policy mechanisms since there is no ‘natural’ value to saving a ton of CO2 at the point of emission.

Ultimately, a comprehensive global approach to assigning emissions rights and abatement responsibilities would presumably be the most efficient approach to tackling the climate change challenge. However, such a ‘global deal’ would require international cooperation on an unprecedented scale. Despite progress, however, there is still no agreement on levels of abatement required to avoid dangerous interference and it appears unlikely that a comprehensive ‘global deal’ is likely to be concluded in the near future.

However, in parallel to the ‘global’ Kyoto Protocol (top-down approach), several national and regional initiatives (bottom-up approach) have been launched during the past decade. These initiatives are also designed to facilitate the emergence of carbon markets, yet they employ different institutional structures and rules.

Project objectives

All these events indicate that future carbon trading is likely to grow substantially in the years ahead. Yet, the governance structures (or ‘rules of the game’) that are being created to facilitate such trade may not be uniform. These developments raise several questions that require detailed study:

What different governance structures for various national and regional carbon markets currently exist? What are their commonalities and what are their differences? At what scale do these schemes operate and what are their growth prospects?
What are the strengths and weaknesses of each approach? What can be learned from the operation of the various carbon market schemes? To what extent can these approaches be cross-fertilized?
In light of the absence of a global framework for carbon trading and the parallel proliferation of national and regional schemes, energy companies are currently operating in an environment characterized by fairly high policy uncertainty. How, if at all, does this policy uncertainty impact investment decisions in energy?
What are the prospects of an emerging global carbon market taking into account that an agreement in the context of the UNFCCC is hard if not impossible to reach, while at the same time, national and regional initiatives are likely to continue to proliferate?

This research project will tackle these questions with a view to developing realistic policy proposals.