Be my carbon baby
Is carbon emission trading the Holy Grail that will lead us out of our climate predicament? Or is it rather a diversion that is leading us into a dead end of fanciful accounting and even downright fraud?
Carbon markets have their enthusiasts and their detractors. One of the supporters is Joan MacNaughton, who was for six years Director-General of Energy and Energy Security in the UK government, and for two years Chair of the Governing Board of the International Energy Agency, and who is still an active and influential figure on the world energy scene. In an interview with EER that we are publishing today, MacNaughton recounts how she went to the White House in 2004 to explain to US government officials what the EU Emission Trading Scheme (ETS) was all about – and that the EU would actually go ahead with it. "They could not believe that we would really do this", she recalls.
MacNaughton still considers the EU ETS a "tremendous achievement", despite the crisis that Europe's carbon market has been immersed in for some time, with carbon prices at near-zero levels. She is also a keen supporter of the Clean Development Mechanism (CDM) – the global carbon market set up under the Kyoto Protocol, which allows developing countries to sell emission reductions to developed countries and companies – although the CDM market too is in a deep freeze.
Both ETS and CDM are stalling because of a lack of demand for emission credits, which is caused by too modest reduction targets in combination with the economic crisis. For this reason, many observers are already predicting the imminent collapse of these markets. The Economist magazine recently called the CDM a "complete disaster in the making".
And that was even before "Doha". The recent UN Climate Conference in the capital of Qatar certainly did not deliver anything in the way of more ambitious reduction targets. In fact, it only barely managed to ensure the survival of Kyoto beyond 2012, minus a bunch of countries, like Japan and Russia, which decided to drop out.
It was also before the latest, spectacular carbon fraud investigation, this time in Germany. On Wednesday 500 (!) police officers swooped on the offices of Deutsche Bank in Frankfurt, Berlin and Düsseldorf as part of an investigation into a tax evasion scheme connected with the trading of carbon permits. This surely won't do the prospects of carbon markets any good. Both ETS and CDM have been plagued by fraud cases for many years. These may perhaps be called incidents, but they are incidents that have a lot do with one important structural weakness of carbon markets, namely the fact that they need intensive monitoring and oversight.
Paradoxically, however, despite all these troubles, the idea of carbon markets appears to be alive and well. Indeed, it is catching on across the world! California will start with its own carbon market in 2013, in just a few weeks, Australia will start one in 2015, and important countries like China, India and South Korea are conducting serious pilot projects. The International Energy Agency said in June in a report that enthusiasm for carbon trading is now so widespread that "carbon pricing could become the norm rather than the exception" in the world.
In this context, then, it seems to make sense for policymakers not to throw away the ETS and CDM babies, but to clean up the bath water instead. This is exactly what Joan MacNaughton would like to see happen. She was Vice-Chair of a high-level panel set up by the UN to evaluate the CDM, which concluded earlier this year that the CDM is worth saving – and that it can be saved, if it is thoroughly reformed.
Indeed, according to MacNaughton, with the growth of regional carbon markets across the world, the CDM could be the ideal instrument to link countries and markets together into a global carbon trading system. Such an approach, she adds, is – when all is said and done – the best (i.e. most efficient) way to address the climate problem.
I try to avoid the crossroads metaphor, but I guess you could justifiably conclude that carbon markets are really at the crossroads right now.