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Contents:
1. What is cap and trade?
2. What are carbon offsets?
3. So what's wrong with cap and trade?
4. Will markets concerned with growth be able to deliver reductions of carbon?
5. What examples have there been of Cap and Trade schemes?
6. Why does European Union Emissions Trading Scheme (EU ETS) consistently grant over-allocation of pollution permits?
7. But didn't the second phase of the EU ETS (2008-2012) resolve this over-allocation?
8. But isn't Phase II nevertheless leading to emissions reductions?
9. So who profited from carbon trading?
10. What about phase III of the EU ETS?
11. So what is the problem with carbon offsetting?
12. Carbon offsets have serious negative social and local environmental impacts
13. Might reforestation programmes such as REDD work?
14. What impact will new trading schemes have on offsetting and forest carbon markets?
15. What are sectoral credits?
16. But isn't carbon trading better than nothing?
17. So what are the alternatives to carbon trading?
Carbon trading is allowing industrialised countries and companies to avoid their emissions reduction targets. It takes two main forms: “cap and trade” and “carbon offsetting.”
1. What is cap and trade?
Under cap and trade schemes, governments or intergovernmental bodies set an overall legal limit of carbon emissions in a certain time period (“a cap”) and then grant industries a certain number of licenses to pollute (“carbon permits”). Companies that do not meet their cap can buy permits from others that have a surplus – typically, because they have been given an overly generous allowance in the first place. They can also purchase “offsets.”
2. What are carbon offsets?
Carbon trading runs in parallel with a system of carbon offsets. Instead of cutting emissions themselves, companies, and sometimes international financial institutions, governments and individuals, finance “emissions-saving projects” outside the capped area to generate carbon credits which can also be traded within the carbon market. The UN's Clean Development Mechanism (CDM) is the largest such scheme with almost 1,800 registered projects in developing countries by September 2009, and over 2,600 further projects awaiting approval. Based on current prices, the credits generated by approved schemes will be worth around $35 billion by 2012.
Although offsets are often presented as emissions reductions, what these projects do at their hypothetical best is to stabilise emission levels while moving them from one location to another, normally from Northern to Southern countries. In practice, this “best case” scenario is rarely seen, with the result being that offsetting increases emissions whilst also exacerbating social and environmental conflicts.
3. So what's wrong with cap and trade?
There are fundamental theoretical flaws in the whole cap and trade scheme even before you look at the actual record of its implementation. This is because the scheme was never set up to directly tackle the key task of a rapid transition away from fossil fuel extraction, over-production and over-consumption. It seeks instead to quantifying existing pollution as a means to create a new tradeable commodity. Within this framework, traders invariably opt for the cheapest credits available at the time, but what is cheap in the short-term is not the same as what is environmentally effective or socially just.
Some of the key problems with the cap and trade approach are:
4. Will markets concerned with growth be able to deliver reductions of carbon?
The other problem is that markets are by essence growth-oriented, so look for new sources of accumulation. In carbon markets, this is achieved by increasing their geographical scope and the number of industrial sectors and gases they cover. Yet this contradicts the essence of tackling climate change which is about reducing use of fossil fuels and consumption.
It is therefore not a surprise that introducing carbon as a commodity has resulted in new opportunities for profit and speculation. The carbon market is already developing the way of the financial market with the use of complex financial instruments (futures trading and derivatives) to hedge risk and increase speculative profit. This runs the risk of creating a “carbon bubble.” This is not a surprise, as it was created by many of the same people at the Chicago Climate Exchange who created the derivatives markets that led to the recent financial crash.
5. What examples have there been of Cap and Trade schemes?
There have been a number of Cap and Trade markets – the EU ETS, the United States Acid Rain Program, the Los Angeles Region Clean Air Markets (RECLAIM), the Chicago Emissions Reduction Market System (ERMS) and the Regional Greenhouse Gas Initiative. The EU ETS, established in January 2005, is the largest cap and trade scheme in operation worldwide and is the best for illustrating how carbon trading has failed in practice.
6. Why does European Union Emissions Trading Scheme (EU ETS) consistently grant over-allocation of pollution permits?
Most cap and trade markets use projections of historical emissions provided by industry itself to calculate the initial caps. Industry has a clear incentive to overstate its past emissions to gain more credits.
As a result, cap and trade markets start out with too many permits. This was true of the EU ETS which consistently awarded major polluters with more free pollution permits (called EUAs, European Union Allowances) than their actual level of carbon emissions. This means it gave them no incentive to reduce emissions, and as a result the price of the permits collapsed – from a peak of €31 to end 2007 at €0.01 . In phase I (2005-2007) as a whole, according to the EU's own data, major polluters had permits worth 3.4 per cent more than their actual level of emissions.
7. But didn't the second phase of the EU ETS (2008-2012) resolve this over-allocation?
The EU claims that it has learned from its mistakes and that the second phase of its scheme is working. Whilst it is true that for the first time in 2008, polluters were awarded fewer permits than their actual level of emissions, there is still over-allocation of permits:
8. But isn't Phase II nevertheless leading to emissions reductions?
The EU claims emissions reductions of 3 per cent, or 50 million tons, in ETS sectors in 2008. The trouble is that at least 80 million tons of “carbon offsets” in the developing world were bought as part of the ETS in 2009 – more than the level of the cap. So, again, the ETS does not require emissions reductions by companies in the EU.
9. So who profited from carbon trading?
Companies receive most carbon credits for free. This is equivalent to a subsidy – and with allocations made on the basis of historical emissions, the largest subsidy goes to the dirtiest industry (especially coal-fired power plants).
Windfall profits also arise from an accounting trick around “opportunity costs.” Power companies choose to do the cheapest thing to meet their ETS target – which is usually buying Clean Development Mechanism (CDM) credits – but passing on costs as if they were doing the most expensive – actually reducing emissions.
Even power companies receiving free credits from the ETS have nevertheless passed on the cost of these credits to consumers. Research by market-analysts Point Carbon and WWF calculated that the likely “windfall” profits made by power companies in phase II could be between €23 and €71 billion, and that these profits were concentrated in the countries with the highest level of emissions.
ArcelorMittal, the world´s largest steel company, is another typical example. It routinely receives a quarter to a third more credits than it would have needed to even begin reducing emissions. The company is likely to have made over €2 billion in profits from the ETS between 2005 and 2008, with over €500 million of this achieved in 2008 alone – yet has needed to make no proactive changes to its emissions to do so.
10. What about phase III of the EU ETS?
EU ETS phase III runs from 2013 to 2020, and the debate in Brussels is focussed on the risk of “carbon leakage.” This relates to industry claims that strict regulations in one part of the world will encourage outsourcing to locations where regulations are weaker. It is already being used as a blackmail tactic by industry to reduce its targets or obligations within the EU ETS (and other proposed schemes in Australia and the US). Over half of the 258 industrial sectors in Europe being assessed for exposure to carbon leakage under the EU ETS will qualify for free emission allowances from 2013, according to an initial assessment by the European Commission.
11. So what is the problem with carbon offsetting?
Carbon offsets allow companies and countries to avoid cutting their own emissions by buying their way out of the problem with theoretical reductions elsewhere. There are both inter-government schemes – most famously the UN Clean Development Mechanism (CDM) - as well as voluntary programmes undertaken largely for purchase by individual consumers. Unfortunately both systems are deeply flawed:
12. Carbon offsets have serious negative social and local environmental impacts
The use of “development” rhetoric masks the fundamental injustice of offsetting, which hands a new revenue stream to some of the most highly polluting industries in the South, while simultaneously offering companies and governments in the North a means to delay changing their own industrial practices and energy usage.
In practice, carbon offset projects have most of the times resulted in land grabs, local environmental and social conflicts, the displacement of Indigenous Peoples from their territories, as well as the repression of local communities and movements.
13. Might reforestation programmes such as REDD work?
The inclusion of tree planting and similar “sinks” projects in the CDM and cap and trade schemes is also under consideration.
These pose additional measurement problems, as many projects are not additional, are difficult to measure, do not include the upkeep of the trees and assume instant absorption of already released carbon – when in fact it will take thousands of years for the carbon to be absorbed.
“Reforestation” also tends to count monoculture plantations as forests, when they are not as they lack biodiversity, and so contribute to soil degradation; and also require intensive synthetic fertilisers, which contribute significantly to climate change, water pollution and damage to local peoples´ health.
Schemes for Reducing Emissions from Deforestation and Degradation (REDD) repeat the error of emissions trading by commodifying forests. They presume that deforestation happens because standing forests make less money than forests that are cut down. In fact, the commodification of forests is what drives deforestation.
This commodification includes the role of corporate and development bank investment in new infrastructure, mining and oil extraction projects; industrial logging; and land clearance to make way for monoculture plantations for the pulp and paper and palm oil industries. REDD is likely to fuel property speculation and so exacerbate land conflicts, dispossessing indigenous peoples and forest communities.
14. What impact will new trading schemes have on offsetting and forest carbon markets?
The most active buyers of offset credits in 2008 were European companies, which bought 80 million credits from the CDM or Joint Implementation projects (a similar UN scheme, operated in countries which have emissions reduction commitments under the Kyoto Protocol) as either a cheaper alternative to reducing their own emissions (under ETS), or for the purpose of speculation and re-sale. But this market is likely to expand massively if the American Clean Energy and Security Act (ACES) is passed, which proposes to allow US companies to purchase from 1 to 1.5 billion international offsets every year. This would spur on a massive increase in damaging offset projects, creating enormous pressure to reduce the already-inadequate checks on their environmental integrity.
15. What are sectoral credits?
Sectoral credits would introduce new offsets as part of what are called Nationally Appropriate Mitigation Actions (NAMAs) in the climate policy jargon. This is one of a number of proposals currently being debated for inclusion in a new UN climate treaty.
The basic idea is that developing countries should commit to reducing their greenhouse gas emissions “in an indicative range below business as usual,” as the draft of the G8´s L´Aquila declaration in July 2009 puts it.
This deviation from an assumed future trajectory would be counted as a “reduction” (although it need be nothing of the sort) and traded to help industries in developed countries avoid reducing their own emissions. The private money flowing through these carbon markets could also be “double counted” as part of the financial commitment that the industrialised countries agreed to make at the UN Climate Conference in Bali.
16. But isn't carbon trading better than nothing?
No. As carbon trading helps to avoid change and even increases emissions while exacerbating local conflicts, it is not a question of alternatives to carbon trading but rather of taking measures that actually tackle climate change.
17. So what are the alternatives to carbon trading?
Carbon markets should be dismantled, starting with offsets. A clear intention to discontinue carbon markets can fatally undermine them even in advance of legislative action. Alternatives then need to be developed that are properly consulted and developed together with local communities to prevent a repeat of the dispossession and social injustice caused by offsetting schemes.
A range of different approaches will be needed but may include: