Markets and myopia beyond finance: Emissions trading and the promise of market-based environmental governance

Gordon Clark is surely right when he declares that ‘people are often unable to conceptualize immediate circumstances against market forces that operate beyond the boundaries of current experience and at levels or scales that appear abstract rather than material to the interests of those involved’. In this commentary, I claim that the description of the interactions between behavioral predispositions and the market environment offered by Clark can be of appreciable value in revealing the functioning of market-based environmental governance programs, especially emissions trading schemes. There are tangible similarities between financial markets and carbon markets regarding the need for the regulation of risk-taking behaviors and the governance of market structures. Carbon markets are characterized by long-term time horizons due to the significance of sunk costs and a high degree of uncertainty around the political and financial stability of these markets. Moreover, a number of the same institutions involved in the global financial crisis have taken an interest and developed roles in the financial aspects of carbon trading. The behavior of these institutions and their market traders in the events that preceded the global financial crisis are therefore of immediate relevance to their behaviors in markets for tradable emissions units. The unfolding of the global financial crisis and fears over its potential severity displaced climate change from the center of the political agenda and public attention. However, if the global financial crisis has tarnished the expectation for financial markets to deliver efficient and self-correcting outcomes, it has had little effect on enthusiasm for markets in other domains. Despite the failure of the Copenhagen Summit to establish a framework for climate change mitigation post-2012, emissions trading and the development of national and regional carbon markets (and eventually a unified global carbon market) remain the dominant policy response for the abatement of greenhouse gases. In the words of European Commissioner for the Environment Stavros Dimas, ‘Climate change is the gravest challenge facing mankind and emissions