Price (some of) it now or pay more later: the case for letting carbon markets get to work

A guest blog from Gordon Bennett, Managing Director, Global Head of Environmental Markets, Intercontinental Exchange (ICE).

The article represents Gordon's views as an employee at ICE.

Why outdated labels are a symptom of stalling progress - and how markets can fix it

The bottom lines

1. Stop creating artificial labels for carbon markets. Start recognising them as markets to incentivise the production of carbon savings and manage climate risk.
2. Accounting matters. Economics and markets are the best tools to solve for the allocation of scarce resources and to determine quality. Let’s use them.
3. The longer we wait to price the atmosphere, the more expensive the bill becomes.

We don’t label other markets with ‘voluntary’ and ‘compliance’

We don’t label car insurance “voluntary” or “compliance” even though you can choose not to drive - but if you do - then there is a legally mandated obligation to have it.

We don’t label home buildings insurance “voluntary” or “compliance” even though you can choose not to get a loan to buy a house - but if you do - then your lender mandates that you have it.

We don’t call home contents insurance “voluntary” even though the decision is entirely down to your perception of risk and reward.

Carbon assets are held to impossible standards

The labelling is a symptom of a wider problem, where carbon markets are treated differently in many ways.

A carbon asset is held to a different risk profile. In carbon, one imperfection seems to render the whole market worthless, rather than repricing individual assets as worth less.

Why in counting emissions - on the liability side - do we have the concept of Scope 3 which is notoriously difficult to calculate and can fall foul of double counting or more, yet on the asset side one must equal one with precision?

In venture capital, many investments lose their value over time. We regulate who can invest and what is disclosed, but rarely are there rules for what is worth investing in.

The durability of a company is not guaranteed, but the market is allowed to determine its value.

A carbon asset is held to a different risk profile. In carbon, one imperfection seems to render the whole market worthless, rather than repricing individual assets as worth less.

Why risk management, not just regulation, should drive action

Whether it’s a carbon credit or a carbon allowance, these are tools for managing risk. Some are required by law. Others are driven by reputation, regulation, or investor pressure.

They serve the same purpose: putting a price on emissions. And when you price something, you can risk manage it.

The big question is whether there will be a catalyst for change - from governments stepping in to require emissions be paid for - to one where the market goes to work on its own.

The case for carbon pricing: it’s the economics stupid

Is the atmosphere a scarce resource? And is the root cause of climate risk the fact that it’s mostly free to use? If your answer is yes, you’re an advocate for carbon pricing.

When something valuable is unpriced, it gets overused. Economics 101 tells us that markets are the most efficient way to allocate scarce resources, and the atmosphere is no exception.

Carbon pricing simply applies this principle to emissions: by putting a price on carbon, that is, internalising the cost related to negative externalities and benefits of positive ones, you create incentives to reduce emissions, innovate cleaner technologies, and produce more carbon savings

Paying for some of our emissions - through carbon allowances, carbon credits or even by recognising a provision in our accounts, is about incurring the financial costs and liabilities that those emissions represent. Debit profit and loss - accounting matters.

It’s not ideology—it’s just economics.

When something valuable is unpriced, it gets overused. Economics 101 tells us that markets are the most efficient way to allocate scarce resources, and the atmosphere is no exception.

Why price matters to everyone

Price plays a role in every decision we make - whether it's choosing a coffee, booking a flight, or buying a home. We instinctively understand value through price. Carbon should be no different.

Markets reflect what we value, and what we're willing to pay to avoid risk. If we trust markets to guide our pensions, mortgages, and grocery bills, why not trust them to help manage climate risk?

Markets work - if you let them

To reach our decarbonisation goals, we need every tool we’ve got - standards, government policy, and markets.

Markets are brilliant at finding value. And, where “quality only exists in the mind that contemplates it” then the market is the best tool we have at our disposal to solve for it.

The beauty of the market is; if you think something’s cheap, buy it; expensive, sell it. Putting our money to work is the true test of our views on value. That’s how we manage risk, allocate resources, and drive innovation.

Carbon markets should be no different. But instead of letting prices do the talking, we’ve been stuck in endless debates about frameworks, standards, and semantics.

Markets will work if we treat them seriously. That starts with credibility through the language we use and providing a demand signal by allowing those who want to pay for some of their emissions to do so.

About the author

Mr. Gordon S. Bennett has been Managing Director at Intercontinental Exchange, Inc. since February 2015. Mr. Bennett is responsible for the strategy, sales and product development of ICE’s global environmental portfolio, the world’s largest environmental marketplace.

He is a member of the Board of ICE Endex, ICE Futures Abu Dhabi, Spark Commodities and a member of the Strategic Advisory Board of BeZero Carbon.