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October 15, 2007

Emissions Trading Commodifies Carbon, But Does It Really Help Solve Climate Change?
    by Bill Baue

Proponents of carbon trading see markets as the best mechanism for reducing emissions, while critics characterize carbon trading as a devil's bargain that steers profits to polluters.

SocialFunds.com -- You can’t solve problems just by throwing money at them, the old saying goes. Capitalists, who think markets are the solution to everything, reverse this equation by turning problems from money-pits into money-makers. Essentially, they seek to harness the profit motive to cure society’s woes by transforming problems into commodities. This is precisely the strategy behind the emerging carbon trading markets.

While most markets facilitate product accumulation, these markets encourage problem elimination. For example, by trading carbon emission rights that are capped and subsequently ratcheted down, the rights become more scarce and hence more valuable. Voilà, cap-and-trade markets help solve climate change by lowering carbon emissions while generating wealth!

If only it were so simple. While the Kyoto Protocol, European Union Emissions Trading Scheme (EU ETS), carbon trading initiatives in the Northeastern US and California, and the platforms of most Democratic (and one Republican) presidential candidates rely on carbon cap-and-trade, the system has problems identified by both its supporters and its critics. The first contentious question concerns how to distribute carbon emission rights: auction or allocation.

The EU ETS, the first major carbon trading experiment that was mandated into effect in 2005, experienced a price collapse in 2006 when it became apparent that the European Commission simply handed out too many emissions rights. Either naively or corruptly, European governments allocated rights based on companies’ own estimates of baseline emissions, and then--surprise!--their actual emissions turned out to be much lower, undermining the intention of reducing emissions and allowing companies a windfall through sales of unused credits.

“[A] country’s entitlement to pollute relates to the amount of pollution it already produces,” wrote British journalist George Monbiot in his recent book Heat: How to Stop the Planet from Burning. “The dirtier you are, the bigger your entitlement . . . the polluter was paid.”

Democratic Presidential hopeful Barack Obama favors auctioning to avoid this problem.

“All polluters will have to pay based on the amount of pollution they release into the sky,” Obama said in a Columbus Day stump speech in New Hampshire unveiling his plan. “The market will set the price, but unlike the other cap-and-trade proposals that have been offered in this race, no business will be allowed to emit any greenhouses gases for free.”

“Businesses don't own the sky, the public does, and if we want them to stop polluting it, we have to put a price on all pollution,” Obama added. “It's time to make the cleaner way of doing business the more profitable way of doing business.”

These comments highlight the second problem with carbon trading: mandatory versus voluntary markets. The US, the largest carbon emitter in the world (until June, when China usurped the dubious distinction), has not signed onto the Kyoto Protocol, which commits industrialized countries to cut carbon emissions 5.2 percent below 1990 levels by 2012 (representing a 29 percent decrease from expected levels.) And homegrown federal carbon regulations are still on the Congressional drawing board. To fill this regulatory gap, voluntary carbon markets such as the Chicago Climate Exchange have sprouted up.

“Financially, voluntary markets are not very viable and trade carbon from 50 cents to $5 per ton,” said Peter Fusaro, founder of Global Change Associates, a leading consultancy in energy and environmental commodity risk management. Voluntary markets also apply to a miniscule percentage of carbon emissions—about 100 million metric tonnes of the 6 billion tonnes (and rising) in US emissions, according to Fusaro.

“My focus is on creating the compliance driven markets which have a higher financial valuation, probably in the range of $30 to $40 per tonne and maybe $50,” Fusaro told SocialFunds.com. “The global carbon footprint of 27 billion tonnes and rising creates a commodity market of at least $3 trillion. With proper market design--which means no price cap and a financial penalty for non-compliance--carbon trading forces the movement to cleaner technology and consequent emissions reductions.”

Carbon trading critics are dubious, charging that financial benefits overshadow environmental concerns.

“At present, there are no sustained, long-term benefits of carbon trading unless you are a hedge fund, energy trader, or otherwise engaged in arbitrage or speculative finance,” said Dartmouth Environmental Studies Professor Michael Dorsey, who characterized carbon trading as a “Faustian bargain” in a recent LA Times op-ed. “And the environmental benefits are regressive--the design structure of the EU ETS and the incoherence of the voluntary market aggregate and produce short- and medium-term carbon price instability.”

A recent Scientific American article, “Making Carbon Markets Work,” illustrates the variance of carbon prices on voluntary and mandatory markets in a chart.

“So with the carbon price suppressed, polluters--energy providers, utilities, oil companies, and the like--have little incentive to curb rising greenhouse gas emissions,” Dorsey told SocialFunds.com. “Thus the present system undermines the environment and the planet, as it is helping drive increases in CO2.”

Dorsey contributed to the book Carbon Trading: A Critical Conversation on Climate Change, Privatisation and Power, which reveals structural shortcomings with the Kyoto Protocol. For example, Kyoto created a dual carbon trading structure: Joint Implementation, or trading within developed countries, and the Clean Development Mechanism, whereby developed countries can offset their emissions by supporting clean energy projects in developing nations. While supporters frame the Clean Development Mechanism as benevolent developed world support for the so-called developing world, critics see it as an extension of colonialist exploitation. Another contributor to the book criticizes certified emissions reductions, a tool for Clean Development Mechanism implementation.

“Certified emission reductions being traded are mostly on paper, containing impossible jargon and sets of figures about which society knows nothing,” Soumitra Ghosh of the National Forum of Forest Peoples and Forest Workers in India told SocialFunds.com. “Carbon trading benefits investors hugely, because this trading carries no necessity on their and the forward traders' part to deliver anything tangible (such as goods or services) and measurable. In fact, the trade in carbon takes society and the world for a ride: it helps create a dangerous illusion of safety where there is none, and hoodwinks everybody about the very real menace of climate change.”

Concern over the lack of integrity of carbon markets has reached a boiling point. Die Linke, the leftist party in the German Parliament, recently called for a moratorium on any new Clean Development Mechanism project registrations and issuance of certified emission reductions over concerns of corruption and counter-productiveness. Dartmouth’s Dorsey points out that nongovernmental organizations, as well as some banks and Clean Development Mechanism officials, have joined the call for such a moratorium as a means of focusing attention on identifying positive solutions.

For better or worse, carbon trading has become an integral strategy in climate change mitigation, so supporters and critics are challenged to negotiate collaboratively toward solving shortcomings in current practice.

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