Let there be a price to pay.

I got a speeding ticket the other day going 69 km/h in a 50. Never saw camera nor cop, but I received an ominous plain envelope in the mail with payment instructions and a 'points' deduction. I won't drive fast on that highway again!

On an innocuous day last autumn with an implausible forecast of snow, my daughter did not want to wear her boots. When school let out early on account of blizzard, she walked all the way home in slush wearing Chuck Taylor low-tops. She won't forsake her Docs in autumn again!

If you want people to make different choices, make the unseemly choice a little painful. Let there be a price to pay.

This is basically what's going on with decarbonization. It hasn't traditionally been painful for enterprises to emit CO2, so they do. If we want them to make different choices, we must make the unseemly choice a little painful. Thus, we have experts who talk about 'internalizing' the societal cost of CO2 emissions, by which they mean: 'put it in enterprise operating expenses.'

From the enterprise P.O.V., one might think: “Hmm. Whereas the pains caused by my emitted CO2 used to float around 'out there' in the world, internalizing them would mean they'd start to float around 'in here' on the P&L. Sounds bad. Then again, a receding tide sinks all boats, so at least I won't lose rank in the sector—unless I botch the change. In fact, maybe my competitors will botch it! In which case I could wrangle a competitive edge out of this situation. Ok, so what are the regs?”

Apparently there are two ways to go about putting previously public pains onto private P&Ls: (1) tax; or (2) cap-and-trade. The first way is super simple. Even the most disorganized government could probably pull it off. But unfortunately, it doesn't do anything to draw a line on just how hot we're willing to let this planet become, not to mention it isn't clear what the tax rate should be. Are we talking five percent? Ten percent? One-hundred percent per emitted carbon cloud?

The second way is more attractive in terms of being able to set a limit on how much collective CO2 we as a species are willing to have floating around, because at this point we more or less know exactly how much the planet can stand before abject revolt. Cap-and-trade sets that overall limit and thereby induces scarcity, meaning there's only so much ‘pollution permission’ to go around. Scarcity makes it easier to set appropriate prices because it causes market dynamics to form (i.e. buyers and sellers haggling), and markets are good at price-setting. However, designing and launching markets from scratch is hard.

So what's it gonna be? Had we started in 1896 when that first Swedish scientist predicted all this, we probably could've gotten away with a simple tax because things weren't urgent then. We had headroom. We had time. But no more. Hence the cap-and-trade zealots in your feed (hi 🙋‍♀️).

#gogrid