Carbon Trading

(Originally posted to Facebook Notes, 30th March 2009)

An all too brief introduction to carbon trading

Come April 1st I will be heading into the City of London with a sleeping bag and plenty of munch to take part in the Climate Camp in the City, a protest and form of direct action organised by environmental campaigners taking advantage of the G20 Summit to draw attention to something called carbon trading.

So what is carbon trading and the carbon market? It's complex, very complex, which is probably why it's rarely talked about, so here's my effort at explaining what it is, how it's supposed to work, and how it actually works.

The basics

Carbon trading, or to be more precise emissions trading, is a mechanism which seeks to encourage industry and business to reduce their greenhouse gas emissions by making it more expensive for them to engage in activities which produce such gases. It is commonly referred to as carbon trading as it originally dealt only with carbon dioxide but has since expanded to include other gases. This market based approach has been taken to reconcile the need for change with the need for economic growth.

Trading schemes use something called Cap and Trade. Businesses are granted permits from a central authority to produce so many tonnes of greenhouse gases and a cap is placed on the total emissions to be allowed which is then gradually lowered over time. 'Trade' comes into this as permit holders with more permits than they require are able to sell them to those who find they don't have enough. Over time, the market raises the price of these permits, making it expensive to produce greenhouse gases, thereby forcing businesses to turn to green alternatives to reduce their costs and remain competitive.

Forces for change...

Since the Kyoto Summit in 1997, emissions trading schemes have become the main weapon in the fight against climate change. Following the Kyoto Protocol, carbon markets adopted 'flexible mechanisms' within the cap and trade system, which in turn split the world into two groups. These are Annex I countries, chiefly the global North (ie the developed world) and the non-Annex I countries, chiefly the global South (ie the developing world).

The first flexible mechanism is 'International Emissions Trading', whereby Annex I parties may trade permits with one another at a regional or national level.

The second flexible mechanism is 'Joint Implementation'. Annex I countries may invest in emissions reduction projects in other Annex I countries and receive permits for their actual carbon emissions, a kind of offsetting. (Offsetting is where you 'offset' your carbon emissions by doing something to counter the carbon use, such as planting a tree)

The final mechanism is the 'Clean Development Mechanism', whereby Annex I countries can gain ETS carbon permits, or credits, by investing in emissions reduction projects in non-Annex I countries (offsetting). It's essentially the same idea as Joint Implementation, but is instead an effort between developed and developing nations.

...or against change?

The main weakness of emissions trading is that it ignores the real problem. Global warming is caused chiefly by the burning of fossil fuels. The obvious solution? Stop burning fossil fuels. However, under the trading scheme fossil fuels are still being used. As somebody at a recent Climate Camp meeting said, they are going about it the wrong way, by trying to find the money to pay for the solution, before implementing any actual solution.

Kyoto has been fairly criticised as setting too low a target for cutting emissions. The aim is to cut emissions in the years 2008-2012 only by 5.2% below 1990 levels, whilst excluding from the treaty aviation and shipping and more famously, the United States, who produce 25% of global emissions.

According to the European Climate Exchange, the UK is just above its target for reductions, yet there is good reason to believe these figures may be false. In December 2007, a report from Oxford University claimed that emissions had actually risen by 19% since 1990, when taking into account aviation as well as those we import (the carbon produced by buying a product made in China), minus the likewise emissions we export making products we sell overseas.

Last summer, the government's own environment department, Defra, admitted that one of its own studies showed UK emissions were higher than what the government were declaring them to be (18% growth between 1992 and 2004). Finally, last month, the World Development Movement claimed that although "the UK’s climate change targets carbon emissions need to fall by 4 per cent every year... they fell by just 1.5 per cent in 2007" and accused the government of using 'creative accounting' to hide the real figures.

Clean Development Restraints

The Clean Development Mechanism has quite rightly been the victim of stinging criticism.

- First of all, carbon credits can only be obtained by investing in projects outside of those already planned and which wouldn't otherwise have been implemented. But how can one know what is going to happen in the future? Who is to say that the wind farm in Botswana funded by BP wouldn't have been built if it wasn't for the CDM?

- In addition to the above point, according to Oscar Reyes of the Transnational Institute: "a recent survey by the NGO International Rivers found that 76 per cent of CDM projects were already completed by the time they were approved as eligible to sell credits." Aren't they supposed to be 'additional' projects to those already under way?

- Measures to protect natural forests within the CDM were excluded by Kyoto, yet deforestation accounts for around a fifth of all carbon emissions.

- In a combination of both of the above, Russia, Canada and Australia have been arguing "we have these extensive forests, if we cut them this would release carbon dioxide, a major greenhouse gas. If we don't cut these trees we should get credit for that against our 5.2%. At every conference Russia finds a new forest in Siberia. What they argue is that modernization leads to cutting trees, and by forbearing they should be credited as much as if they actually did something."

- Carbon reduction projects on the other side of the planet often have invisible victims. What's wrong with building a hydro-electric dam on the Bhilangana in India? How about the acres of land destroyed as a result, land which is tended in an ingenious and low-carbon manner and whose inhabitants won't benefit from the hydro-electricity. Or the Tata produced wind farm in Maharashtra, India? Land owners are displaced and met with repression when they complain, all so that permits can be sold to the North to allow them to continue producing greenhouse gases.

- The North is still producing greenhouse gases.

In the first phase of the trading scheme, the cap was set far too high by businesses over-estimating their actual emissions and subsequently failed to act as a cap at all. In the second phase (2008-2012), the price of carbon has actually fallen, providing no incentive for polluters to turn away from it.

Carbon trading doesn't wean us off our addiction to fossil fuels. We suffer from something called 'lock-in', where certain technologies become engrained in society despite better alternatives being available. Carbon trading allows fossil fuels to still be used; rather than curing us of our addiction it merely prolongs it.

Carbon trading privatises the atmosphere, which was previously part of the global commons. Now, those most responsible for polluting it have been granted the control of these rights whilst individuals and marginalised communities have none whatsoever.

Sub-prime 2.0

And perhaps most pertinent of all, carbon trading is based on exactly the same economic principles and mechanisms as those markets that have led to the current economic crisis. It should be noted that one of the key architects of the carbon market, Richard Sandor, was also an influential architect of the futures market that has crashed like a house of cards.

At a lecture presented to the Warwick Economics Summit by Patrick Birley of European Climate Exchange, he produced a slide entitled "Who is the market?" The answer was 'hedgers, investors, arbitrageurs and speculators'. Exactly the same people responsible for our current mess. These money driven machines (sic) are helping control the price of carbon. Rather than the market being left to industry to tackle climate change, bankers and speculators are getting involved and gambling on the market to get a cut of the lucrative profits from a market which could be worth $2 trillion by 2020. Do you really think they have climate change at heart?

Marc Stuart of EcoSecurities, in the wake of his firm's crash in spring 2008 said: "I guess in some ways it's akin to subprime... You keep layering on crap until you say, 'We can't do this anymore.'"

Alternatives

A common complaint is the cost of renewable energy sources but this is often misrepresented. Wind energy is becoming more competitive, price-wise, with fossil fuels and can only get cheaper, whilst solar power energy is also getting cheaper all the time. If governments and business would invest more in research and development rather than continuing to use fossil fuels, green technology would be even cheaper. Even BP admitted as far back as 1996 that solar energy would be cost effective if panels were produced on a large enough scale.

Asking for alternatives presumes that carbon trading has some sort of merit that justifies it being included in the arsenal in the first place. It does nothing to effect change. Simply put we shouldn't rely on it. There are cheap green technologies already there and other technologies crying out for investment, as well as financial alternatives such as carbon taxing and technology transfer to be considered and not to mention the possibility of personal carbon allowances.

Any of these could help us move away from the act of removing fossil fuels from the ground in a manner that is also socially just, something carbon trading fails to do at all.