Granted, competitive markets aren’t perfect. Every now and they they need a little intervention to set them in the right direction – like government policy for instance. Competitive markets can create a lot of “externalities” (an economics term for repercussions) which can be positive or negative. For example, lets say some outside contractors are brought into your city to build a large plant facility. Third parties like hotels or restaurants appreciate the business the contractors bring them, and so the building of the facility contributes to the local economy (an external benefit). On the other hand, if the completed facility happens to burn fossil fuels, it creates toxic emissions that we all have to deal with (external costs).

Up until the introduction of carbon credit trading markets, companies producing toxic emissions could profit at the expense of the environment. They rake in “X” amount of dollars and spew out “Y” amount of emissions. The problem is, little to no amount of “X” goes towards reducing or cleaning up “Y”. Companies could make their money using “dirtier” technology, and we’re all left with the consequences.

By introducing carbon credit trading markets, governments can help compensate for these negative externalities and encourage a little healthy competition. It forces companies to purchase credits for the emissions they produce, leaving them with two main choices; they can either continue paying out large sums of money to obtain carbon credits, or… change & adapt by becoming more efficient and less harmful to the environment.

Competitive companies will reduce their emissions by investing in greener technology as well as innovation, and as a result won’t need to purchase as many credits. Dirtier companies face the increased costs of paying for their higher emissions and gradually loose out due to their decline in competitiveness. Essentially, companies who would otherwise be polluting, are forced to become more efficient (greener) in order to reduce their costs and remain competitive. In some instances, companies who create fewer emissions can even sell the credits they don’t use to further fund innovation and acquire even more green technology.

So if carbon credit trading markets are so great for the environment, how come they’re so highly contested? Ironically, it boils down to remaining competitive with other providers. Particularly companies in other economies who may not be subject to such programs nor the subsequent hit to their bottom line. Not to mention, If a company’s initially forced to pay out a substantial sum of money purchasing credits, on top of investing in cleaner technologies, they’re probably going to end up charging the consumer a little more to cover their costs too. While companies adjust to the new standards, energy prices rise, the economy slows down, and consumers begin shopping elsewhere for the cheapest deal. Unfortunately, there aren’t many politicians who want to be responsible for slowing down the economy. And who really wants pay more for their energy?

That’s why it’s so important for us to see past the relatively short-term costs, and look towards the long-run benefits of becoming greener. I’ll phrase that last sentence a little differently because its an important one… Biting the bullet now, equates to a greener future down the road for you and your children.

Asking companies to bite the bullet on their own is a lot like trying nudge a large elephant – you may be familiar with Newton’s first law of motion: “A body at rest stays at rest, and a body in motion stays in motion, unless it is acted on by an external force”. What I’m trying to say is, emission generating companies are going to keep on doing what they do unless an outside force gives them reason enough to change, and a little government imposed competition (via carbon credits trading) will do just the trick. It will encourage players within industry to invest in greener, more efficient technology in order to remain competitive.

Competitive market-forces in action… talk to the “invisible hand” Microsoft

If I ever feel like I’m paying more than I should for something or a product isn’t good enough, I’m quite often surprised at how a competitive economy corrects the situation, because someone out there wants my business. To economists, this is really just Adam Smith’s “Invisible Hand” taking effect, which is a metaphor used to to describe the self-regulating nature of markets. This invisible hand as it were, is continuously shaping the world around you and it can be fun to watch it take effect.

For years, I wanted to purchase a Microsoft wireless adapter for my xBox 360 so I could keep it in my room and be able to play online. I’d been running a long unsightly LAN cable through my house, ironically from our wireless router to the gaming console. I held off on equipping my console with Microsoft’s wireless adapter because I felt their product was far too expensive. Its price has been fixed firmly at $99 for years and doesn’t appear to be budging. I took issue with this because similar technology found in wireless cards for laptops (which serve virtually the same function) sell for considerably less. Perhaps Microsoft feels they have a monopoly in the market for xBox wireless adapters.

Frustrated by this, consumers ended up finding a way to connect their xbox to their laptop, effectively using the laptop itself as a wireless adapter. Seeing as how I keep my laptop in the same room next to my xBox, all I have to do is run a small three foot cable from my laptop to the console. If Microsoft sold their adapter at a more reasonable price in line with similar technology (laptop wireless cards at less than half the price!), I would have been inclined to buy one from them long ago. And so would a lot of other people too. But the market corrected the problem and found another way. Talk to the invisible hand Microsoft. In the process, I saved $99 because my laptop already had a built in wireless card, and if it hadn’t, anyone could buy one for less than half of what Microsoft’s adapter retails for.

I suppose you could say I’ve created another externality; using my laptop as an adapter comes at the expense of increased power usage. But the fact remains, Microsoft lost a sale, which could be detrimental to a less fortunate company. Its an important lesson for businesses out there; you could sell an absolutely wonderful product or service, but if its not priced competitively, potential customers are almost sure to go elswhere. And besides, I love blogging on my laptop between rounds of Halo.

I can think of lots of other areas where competition has brought us better goods and services… safer cars, declining cell phone rates, faster more efficient computers, and now a growing number of environmentally friendly products & services.

In any event, you could say innovation springs from the clash of competition… much the same way wit springs from the clash of opinion. Which is precisely why competitive markets and economies will continue to be key attributes among the world’s leading nations, and continue to reward the most innovative business among them.