CO2 arbitrage will make heroes

To avoid capital destruction, simulate a business model under a correct shadow price of carbon

Ajay Shah


When an advanced economy enacts pollution control in a certain industry, there is a surge in demand and profitability for Indian competitors who face weak pollution control. These firms don't think deeply about the sources of their triumph. They feel they are geniuses who are being rewarded by the meritocratic market economy. In the advanced economy, the product tends to be imported, and that country does not have to deal with the emissions, which harm the local people in India. A similar story will unfold with CO2 emissions, with some twists in the tale.
Consider a manufacturing task that pollutes. This may be a factory that sends heavy metals into groundwater. Pollution control in the first world is relatively sound. A multi-decade process of tightening the rules has been underway, where factories are forced to install expensive pollution-control equipment. This drives up the total cost of production in an advanced economy locale.
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of or the Business Standard newspaper

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First Published: Feb 19 2023 | 10:51 PM IST

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