ESSAY: The Curious Case of Greening in Carbon Markets

James Salzman, Duke
William Boyd, Colorado

Abstract

Over the last several years, so-called “carbon markets” have emerged around the world. These markets trade different types of greenhouse gas credits. In this essay, we take a close look at an unexpected and unprecedented development – premium “green” currencies have emerged alongside and even displaced standard compliance currencies. Past experiences with other environmental compliance markets, such as the sulfur dioxide and wetlands mitigation markets, suggest the exact opposite should be occurring. Indeed, buyers in such markets should only be interested in buying compliance, not in the underlying environmental integrity of the compliance unit. In carbon markets, however, higher quality green credits have emerged in recent years as important currencies for a number of buyers, representing a dynamic that we refer to as “Gresham’s law in reverse” – more stringent currencies emerging alongside and even displacing inferior currencies.

This essay provides the first recognition and analysis of green differentiation in environmental markets. We explore a range of explanations for this important development. We then identify potential lessons for the design and evolution of future carbon markets and, more generally, environmental compliance markets.