Jackson Ewing, Sumin Wang, Manfei He
Emissions trading systems (ETSs) are expanding as tools for addressing climate change. In an ETS, regulators set mandatory limits for greenhouse gas emissions and then issue permits that can be traded among companies covered by the systems. These companies then have a choice: stay below the cap and gain credits that they can then sell to other entities, or exceed the cap and purchase credits to make up the excess. They choose the path they find most logical, whether it be lowering their emissions through internal changes to their operations and facilities, purchasing credits on the market, or a combination of the two. As emissions caps are lowered, overall emissions decline while individual companies retain flexibility. Taken together, the enlightened self-interests of individual companies lead to emissions reductions at lower costs and faster speeds than would regulations that force specific emissions cuts.
The Environmental Defense Fund’s CarbonSim shows players what it’s like to participate in an ETS, and has been road tested by more than 2,500 ETS stakeholders from 25 countries. Last week, Josh Margolis, the Managing Director for Environmental Markets at EDF, visited Duke with this simulation tool and his experience working with stakeholders around the world.
Over 70 Duke students and professors with widely diverse backgrounds (Trinity School, Nicholas School, Pratt School, Fuqua Business School, Sanford School, and the Law School) joined Josh in an intellectually simulated game night, trading carbon emission allowances on CarbonSim. 18 trading teams (representing 18 power companies) competed to meet the emission reduction target with the lowest compliance cost over a 3-year simulation. Besides competing with peers, every team faced the challenge of competing with artificially intelligent robots that is also trying to maximize outcomes from the market. A set of compliance strategies were tested, including abatement technology investments, allowance auctions, exchange market trading, and over-the-counter trading (OTC). Learning by doing, participants were able to get a more holistic view of the carbon cap-and-trade system through the “first-hand” trading experience. The encouraging news is that the carbon trading simulation ended with every team meeting the compliance requirement. And all 18 companies “achieved” around 5 billion metric tons of CO2reduction in 3 years.
Besides carbon trading, around 25 students joined a Power Lunch with Josh hosted by the Duke Energy Initiative. Josh asked students of different heights to demonstrate a chart of CO2growth in the past century, and left the audience with three main takeaways:
1) The ultimate goal of carbon market is not to make money, but to reduce actual emission. Higher carbon prices are not a measure of success for carbon markets, but the decreasing cap is.
2) The clock is ticking. There is not time to wait for another 30 years and it depends on current generation to figure out solutions to reduce carbon emission.
3) Every threat is an opportunity. For companies whose business models are affected by the carbon market, “you are either in the kitchen or on the menu”.
These lessons are important for the next generation of environmental leaders currently being trained at Duke, and the exercises last week offered a window into what’s possible.
This event was co-organized by Duke Nicholas Institute, Duke Energy Initiative, and Nicholas School Energy Club, and also received support from the Fuqua Business School.