Carbon 101...From Carbon Credit to Capitalism

By now we have all heard the terms 'carbon credit' and 'carbon footprint' but, exactly what impact do these concepts have on the bigger issues affecting your personal wealth and the health of our overall economy?

We must first define the general nature of a carbon credit. In essence it is a unit of measure that represents pollution in a form that can be traded in a manner similar to a share of stock or a bond. The 'price' of the carbon credit serves to put a cost on a specific quantity of pollution. This is the critical point of the discussion, as we now have a means to not only price pollution, but also a tradeable unit that can be used to transfer rewards and penalties.

Pricing pollution is important on multiple fronts. First and foremost, collectively we now are agreeing that it is no longer acceptable to freely produce, build, and pollute without incorporating the economy wide or life-cycle cost of pollution.

It is no longer acceptable practice to operate without at least tacitly estimating the size of one's 'carbon' or environmental footprint. As consumers, we are becoming acutely aware of the impact of driving a Hummer versus a Prius. We are now engaged in the discussion of the merits and costs of Fiji water versus Arrowhead versus NYC or LA tap water. The discussion has even evolved to whether the carbon footprint associated with shipping French wine to California is ethically similar to transporting water from Fiji.

We as a people are rapidly developing social expertise in the field of carbon ethics. Which leads me to the second critical issue of the discussion: carbon and the production process. Business intuitively operates on a cost reduction platform. Any lay person schooled in the most basic tools of economics understands that business wants to reduce costs and raise profits. Therefore, incorporating a new cost (carbon) into the business framework is something we as consumers and producers can intuitively understand.

As business owners are able to understand the 'new' cost of doing business, the enterprise will do what it does best and attempt to reduce that cost and concurrently raise profits. Capitalism and the free-market in its pure form. The consumer understands the life-cycle cost (materials, production, waste disposal, air pollution) of the product and adjusts buying behavior accordingly. This signal is apparent to the business owner which now has a demand side (consumer) and supply side (cost of pollution) incentive to change the way she/he does business. You as a home buyer demand a property that is energy efficient and utilizes a higher proportion of renewable materials. The home-builder incorporates consumer demand for green housing AND the cost of using old style practices into the production decision. Over time, the supply of green housing and materials increases to meet the new demand.

Through the efficiency of the free-market we now have a shot at actually improving the environmental impact of our products and services AND making profit along the way. It may be the first time in recent history that the interests of environmentalists and capitalists have aligned to create positive change.

Is it possible that the landscape has now shifted such that we can harness the inherent intellect and spirit of the nation to create innovation and change that in the end provides a sense of pride and accomplishment? Carbon 101 Part 2 will move from the theory of 'carbon credits' to the practice of trading and the creation of environmentally friendly products.