Using Matching Markets to Fight Climate Warming
With all eyes focused on the Glasgow COP26 climate conference this week, it seems only appropriate to register a blog entry on how mathematical tools might help in the fight against climate warming. Global warming is our generation’s greatest challenge and all tools must be harnessed to limit the planet’s future warming. Market-based solutions such as Voluntary Carbon Offset Credits can play an important role by incentivizing the private sector to accelerate its transition to a net-zero footprint. For those not familiar with how voluntary carbon credit offsets work please see the clever infographic last month by the Visual Capitalist (https://www.visualcapitalist.com/visual-guide-to-carbon-markets/).
As highlighted in the seminal report (January 2021) by the Taskforce on Scaling Voluntary Markets (https://www.iif.com/Portals/1/Files/TSVCM_Report.pdf), the key challenge is to scale by several orders of magnitude the size of the voluntary carbon credits marketplace in an efficient manner. Such a scaling will allow voluntary carbon credits to become one of the leading contributors to achieving the Paris Agreement goal of limiting warming to 1.5 degrees.
We have a possible solution, i.e., use Matching Markets principles/techniques. The voluntary carbon credit market today is on the order of $1 billion in annual turnover but suffers from fragmentation, lack of pricing transparency and the inability to efficiently match buyers (typically large corporations) with sellers who have a range of credits available typically characterized by features such as location, type of credit (e.g. forestry vs. renewable energy vs. carbon capture), etc. The structure of today’s carbon offset market very much resembles the housing market and student-dorm examples contained in Chapter 10 of the Networks, Crowds and Market textbook by Easley and Kleinberg. The current carbon marketplace has no governing principles or thoughtful market mechanisms for efficiently connecting buyers with sellers. Buyers (similar to today’s house buyers) search in an ad hoc manner for credits that may exist and appeal to them. Sometimes prices are posted but often they are simply a matter of discussion/negotiation between interested buyer and seller.
Imagine instead a carbon market employing the well-established principles and techniques of market matching (auctions based on bipartite graphs). In such a market, clearing prices will emerge and facilitate the sale of available credits to buyers in a way that maximizes total value to buyers and sellers. Participant confidence in the carbon markets will be enhanced as well as price discovery, transparency, etc. The allocation of available credits to those buyers most willing to pay for specific carbon credit characteristics will be enhanced. With these improvements, the carbon volumes transacted will grow significantly faster than possible with the current fragmented and inefficient marketplace for carbon offset credits. Any growth of the carbon markets will serve to accelerate humanity’s race to a zero-carbon future.