The heated debate
Carbon trading: pro and con
How effective is carbon trading as a method of reducing emissions? Although trading CO2-emissions has always been regarded critically by many observers, the voices of the sceptics seem to be getting louder. And they include not just environmental NGOs but also influential government committees and even some oil companies.
Trevor Sikorski, director at Barclays Capital, makes a strong case for carbon trading. It is a more effective way of controlling emissions, he says, than, say, a carbon tax. ‘The biggest merit for cap-and-trade is you do limit the amount of emissions because that’s what it’s engineered to do. Whereas with a tax, you’re setting the price and leaving the market to determine how many emissions you will get for that price. If you set that price too low, you’re going to get too many emissions. That is the big problem with taxation.’
But what about the problems cited by the detractors? These include the difficulties of verification, the scope for fraud, the sheer complexity of administering carbon markets, and the issue of what is known as ‘carbon leakage’ – the incentive created for industries to move to regions where emissions are not capped.
‘All markets have issues with them,’ says Sikorski. ‘If you are trying to put in a mechanism that is going to address one of the world’s biggest problems and is going to generate huge amounts of finance and interest, looking for simplicity in the solution is probably not the thing to do.’
‘Some of the points you raise have been problems and have been learning points under the ETS. And there are things policy-makers didn’t see coming, such as VAT fraud. It’s early days in the market. It’s only been going for five years.’
Not everyone shares Sikorski’s view, however. Environmental organisations are particularly critical of carbon trading. Sarah-Jayne Clifton, climate campaigner at Friends of the Earth (FoE) International, sees no merit at all in carbon trading as a means of mitigating climate change. ‘Not only is trading failing to drive down emissions’, she says, ‘banks are growing fat developing ever more complex trading systems, and this risks another financial crash similar to that caused by sub-prime mortgages.’
Instead, she says, governments should be ‘making real cuts in emissions by investing in green power and energy efficiency, and introducing stronger regulations and carbon taxes to rein in the biggest industrial polluters’.
She sets out her case in detail in a report published a few months ago, entitled ‘A dangerous obsession’ (The report can be downloaded here). It identifies six central problems with carbon trading, namely that it:
- is ineffective at driving emissions reductions
- fails to drive technological innovation
- leads to lock-in of high-carbon infrastructure
- allows for, and relies on, offsetting
- creates a risk of sub-prime carbon
- provides a smokescreen for lack of action on climate finance by the developed world
She is particularly scathing about offsetting, the practice of meeting emissions reduction commitments by funding carbon emission reductions elsewhere, often in developing countries. ‘Offsetting projects frequently do not deliver emissions reduction at all,’ she says, ‘and are sometimes worse than doing nothing.’
Clifton cites the Clean Development Mechanism (CDM) established by the Kyoto Protocol. This allows developed countries to get carbon emissions credits (CERS) by funding projects in developing countries that reduce greenhouse gas emissions, or by buying such credits from third parties. According to figures published by Bloomberg New Energy Finance, credits generated by the CDM formed the second-largest slice of the international carbon market in 2009 after the European Emissions Trading Scheme. So-called ‘secondary CERs’ – those bought indirectly through third parties rather than directly from the projects themselves – took a 15% share of the total market by transacted volume and market value.
The CDM is currently the main mechanism linking developing countries to carbon markets. But it is highly controversial, partly because of some of the types of the projects that are covered by the scheme (such as large hydropower and destruction of industrial gases), partly because it reduces emissions-reduction ambitions within developed countries, and partly because developing countries often get relatively little benefit.
‘The environmental integrity around CDM projects is pretty bad,’ says Clifton. ‘The vast majority of offset credits do not come from projects that are setting developing countries on low-carbon pathways. They come from things like destruction of HFC gases (hydrogen-containing fluorinated hydrocarbons) and gases that come from coal mines. Only about 2% of those credits are coming from renewable energy projects.’
Moreover, she says, ‘Only about 30% of the finance transferred to developing countries ends up in the projects themselves. The rest goes to banks or carbon traders or the shareholders of the companies setting up these projects.’
Then there is the issue that offsetting allows companies in developed countries to avoid taking action to reduce emissions themselves – one effect of which is to lock-in new high-carbon infrastructure with operating lives measured in decades.
The FoE report concludes that: ‘The overall effect of the opt-out provided by carbon trading is to put off the very difficult, expensive adjustments to our economic and industrial infrastructure to the very last moment. This significantly increases the risk of failure to keep global temperature increases below the critical threshold.’
The view of Greenpeace, another environmental NGO, is more pragmatic than ideological stance taken by FoE. ‘We don’t oppose carbon trading root-and-branch in principle,’ says Charlie Kronick, senior climate adviser for Greenpeace UK. ‘But in a post-Copenhagen context, you have to ask, What’s it going to deliver in terms of emissions reductions?’
‘Between now and 2020 – in the medium-term – big reductions are essential, especially from the developed economies. But the politics of Copenhagen mean there is no ambition from developed countries to have that level of reduction – which means that even if you believed that an ultra-efficient market would deliver, the carbon price is never going to be high enough between now and 2020 to reduce emissions. It’s as simple as that. When it needs to have leverage, between now and 2020, carbon trading is not going to deliver.’
Moreover, argues Kronick, ‘whatever the upside benefits might be, there are many downside risks’. He cites forest carbon – ‘the notional emissions savings from preserving forests, particularly in rainforest countries, which will depress the ambition in developed countries even more’. So particular bits of the carbon market are ‘categorically undesirable’, he insists.
Ironically, the environmental organisations have an ally in ExxonMobil. The American oil company, which has often been criticized by environmental groups for its stance on climate change, has recently come out strongly in favour of a carbon tax over a cap-and-trade system in the US. Cap-and-trade, ExxonMobil argues in its annual ‘Outlook for Energy’ report, is costly, complex, bureaucratic and liable to market manipulation. Not that the environmental groups are impressed. They believe that ExxonMobil’s rationale is self-serving.
The UK Environmental Audit Committee and the UK Committee on Climate Change are among the growing number of governmental organisations that share at least some of Clifton’s and Kronick’s concerns. In a report published in early February, the Environmental Audit Committee calls on the UK government to ‘consider measures that would guarantee a minimum price for carbon, such as a new carbon tax’.
Launching the report, the chair of the committee, Tim Yeo, said: ‘Emissions trading should be helping us to combat climate change, but at the moment the price of carbon simply isn’t high enough to make it work. The recession has left many big firms with more carbon allowances than they need and carbon prices have collapsed.’
‘If the government wants to kick-start serious green investment, it must now step in to stop the price of carbon flat-lining. Ministers should seriously explore the possibility of a carbon tax and must press the EU to tighten up the overall caps in the ETS.’ The committee is also concerned that the use of offsets could mean that some companies will be able to meet their emission reduction commitments ‘without making any actual emissions cuts themselves’.
Despite the rising chorus of dissent, so much political capital has been invested in carbon trading that it seems most likely that its proponents will try to find ways to fix the most obvious problems rather than abandoning cap-and-trade entirely. And there is increasing pressure to ensure that as new schemes emerge, they become linked to create a truly international market. That would at least help to address the problem of carbon leakage.
However, whether all this can be achieved in the timescales needed to make the emissions reductions that the climate campaigners say are necessary remains a matter of grave doubt.