Over the last several years, so-called carbon markets have emerged around the world to facilitate trading in greenhouse gas credits. This Article takes a close look at an unexpected and unprecedented development in some of these markets--premium "green" currencies have emerged and, in some cases, 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 some of the compliance 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 arising alongside and even displacing inferior currencies. This Article provides the first recognition and analysis of green differentiation in carbon markets. We explore a range of explanations for this curious development. We then identify potential lessons for the design and evolution of future carbon markets and, more generally, environmental compliance markets.I. INTRODUCTION II. CARBON MARKETS 101 III. PROBLEMS IN THE CARBON MARKETS--HOT AIR AND ENVIRONMENTAL INTEGRITY IV. LESSONS FROM OTHER ENVIRONMENTAL MARKETS V. GREEN DIFFERENTIATION IN THE KYOTO MARKETS A. Green AA Us B. The CDM Gold Standard VI. EXPLANATIONS--WHY IS THIS HAPPENING? VII. LESSONS--DOES THIS MATTER? VIII. CONCLUSION
In 2008, Hungary made news in the climate change world when it announced the sale of six million greenhouse gas (GHG) reduction credits to Spain, the largest sale in the world at that time. (1) The fact that Hungary was selling emissions credits (known as Assigned Amount Units or AAUs) to Spain was not surprising, nor was its earlier sale of two million credits to Belgium. (2) As members of the European Union (EU), Spain and Belgium have committed under the Kyoto Protocol to the United Nations Framework Convention on Climate Change (Kyoto Protocol, Kyoto, or Protocol) to reducing their GHG emissions eight percent below 1990 levels by 2012, (3) and this reduction can be met by a combination of both actual emissions reductions and the purchase of emission reduction credits.
What was surprising was the sales strategy of Hungary. It proclaimed that its reduction credits were especially valuable because the funds raised by the sale would be invested in energy efficiency projects in residential and public sector buildings rather than simply going into the national treasury to be used on roads, pensions, or some other general need. (4) Nor was Hungary's strategy unique. Over the past three years, Ukraine, the Czech Republic, Latvia, Poland, and other eastern and central European countries have announced similar transactions. (5)
These all have been described as so-called "Green Investment Scheme" (GIS) deals. (6) GIS is a self-imposed commitment by potential seller countries that the income generated from sale of their credits will go to environmental projects. (7) There has been a comparable development in the Clean Development Mechanism...