Two not-for-profit campaign groups, both dedicated to fighting climate change, offer very different prescriptions – for and against the principle of carbon trading.
Make the market work
Sandbag campaigns to make the carbon markets live up to their potential.
Using markets to tackle climate change: does it make your skin crawl or fill you with hope?
It’s not surprising if your reaction is the former. While humanity’s tendency to clear forests and burn fossil fuels isn’t a distinctly capitalist one, the technology and trade of capitalism has certainly sped the
process up. Markets have been very efficient at taking carbon out of the ground and putting it into the atmosphere.
So quoting Einstein has become a popular pastime: “We can’t solve problems by using the same kind of thinking we used when we created them.” Those who are critics of our system have tended to instinctively reject a market in pollution. They rightly point to the large and thorny questions it raises: of privatising nature; of those who’ve contributed most to the problem gaining most from tackling it; of the perpetuation of unjust power structures. Their rejection is understandable. But it is wrong. Faced with a challenge like this – urgent, global, requiring billions of us to act together across continents and cultures to essentially remake the foundations of our economy – it makes perfect sense to harness the power of the market to help turn things around. Climate change demands that we be pragmatic and open-minded. Dismissing proposed tools – such as emissions trading – because they are imperfect won’t do, UNLESS you have a better alternative to put on the table. It is always much easier to criticise than to make something work in practice.
Sandbag Climate Campaign is with the pragmatists. We act as a watchdog to emissions trading, a ‘critical friend’. We shine a light on what is really going on, highlighting the huge flaws in how it has been implemented so far and recommending what could be done to improve things. Our online maps show how it’s working on the ground and our reports are cited by NGOs, journalists and politicians alike. We do not call for emissions trading to be scrapped. Why not? Because it is one of the most promising solutions on the table. It puts a price on pollution and fulfills the long accepted ‘polluter pays’ principle.
What’s more, it introduces clear opportunities to profit from doing the right thing. It’s a carrot as well as a stick. It tries to focus the market’s undeniable power for innovation into cleaning itself up. Voluntary carbon offsets achieve some of these goals but their piecemeal project-by-project approach is only an interim solution.
The more comprehensive tool is when emissions trading takes the form of a ‘cap and trade’ system, which sets a legally binding limit on carbon emissions and requires all those covered (often initially large scale polluters like power stations and factories) to surrender a permit for every tonne of pollution. By focusing on quantity (rather than price as a carbon tax does) it aims to give assurance that we can control pollution and prevent it from reaching a critical threshold. Allowing those within the system to trade their permits allows the market to find the lowest cost reductions, keeping the cost down for society. We already have a cap and trade system in place in Europe. The EU Emissions Trading Scheme (EU ETS) is a sophisticated and hard-won climate policy that caps two billion tonnes of emissions annually (about
half of Europe’s carbon emissions).
We should not underestimate how hard it was to get to where we are. Impatience with the EU ETS’s progress to date is justified. Sandbag’s research has shown that far too many pollution permits have been issued, potentially a billion tonnes too many between 2008 and 2012. However, dismantling this policy would not hasten climate progress; quite the opposite. Developing and agreeing alternative policy mechanisms could take many years. It would be particularly foolish to dismantle the EU ETS just as it prepares to finally bare some teeth in 2013. We have to work in the real world, with what we’ve got. Time is short. Emissions trading is not perfect. It has huge problems. It also has huge potential. IF we put pressure on governments to make it work. That’s what Sandbag is doing.
It’s understandable to feel uncomfortable with carbon markets, but let your inner pragmatist have the final say. Join Sandbag in our fight to make sure that politicians don’t give in to powerful industry lobbies and instead repair Europe’s emissions trading scheme and reduce the huge oversupply of pollution permits. The concrete policy changes we’re working for would lead to carbon savings measured in the billions of tonnes over the coming years.
Sandbag’s report ‘Cap or trap: How the EU ETS risks locking-in carbon emissions’ is available for download from www.sandbag.org.uk/reports.
Carbon Trading – Privatising the Air
In its recent report ‘Trading Carbon’, forests and climate campaigners FERN argues that carbon trading is fatally flawed and only delays the transition to a low carbon economy. Put simply, carbon trading is the process of buying or selling permissions to pollute. It’s the system enshrined in the Kyoto Protocol and in the European Union’s flagship climate policy – the Emissions Trading Scheme (EU ETS). The model used is called cap and trade, though in the Kyoto Protocol and EU ETS the cap is leaky and the trade does nothing to reduce emissions. The idea of the cap and trade scheme is that there is an overall limit on emissions (the cap) over a specific period of time, and a fixed number of permits. A polluter must hold enough permits to cover the emissions it releases.
If Polluter A does not use all its permits, it can sell them to Polluter B that has already used up all its permits so needs more. The theory is Polluter A’s investment in emission reductions is rewarded, Polluter B’s inefficiency punished, and so the market will drive down emissions. That’s the theory. In reality, at the end of the first phase of the EU ETS, total emissions by capped industries had risen by 1.9%. Defenders of the carbon-trading system will often accept that there are problems, but say these will be ironed out in due course. FERN believes that the problems are systemic and beyond remedy and therefore that carbon trading will fail to trigger the structural changes to our economies that we need in the timeframe we need to see them.
FERN also argues that the cap is the wrong size. And leaky. Offsetting allows the polluter to exceed the emissions cap by paying someone else, somewhere else, to reduce their emissions instead. Offsets do not reduce emissions, they merely replace them [see EC106 or www.ethicalconsumer.com for EC’s report on Carbon Offsetting - Ed.]. And a cap can only work if carbon emissions can actually be measured. But in the vast majority of cases, carbon emission monitoring is inadequate and untrustworthy.
Many people assume carbon trading is a fairly simple process where companies with too many/few permits trade with each other or buy offsets. That’s far from the truth. Today the carbon market uses many of the complex financial products that have come under such criticism for their role in the financial crisis. Financial speculation – rather than the need to comply with emissions targets – is now driving the carbon market. The global carbon markets are now worth $144bn. With the emergence of a new tradable asset, carbon trading has attracted all manner of speculators and investors, buying, repackaging and reselling. There is now a market in carbon ‘derivatives’ – complex instruments mirroring practices found in other financial markets like the sub-prime mortgage market. There is now a market in ‘carbon futures’ and ‘carbon securities’ – bundles of carbon assets of different risk-values, sold in units, just like the mortgage-backed securities widely seen as key cause of the financial collapse of 2008.
Carbon is being marketed as a new asset class for investors. Some of the biggest players are now banks such as Barclays, Goldman Sachs and JP Morgan. These are not carbon emitters whose emissions are limited by the cap. They are in the carbon market, not to avert climate change, but to make money. These new carbon speculators profit from price volatility and instability – the very opposite of the supposed goal of the market: to attach a predictable cost to pollution that incentivises its reduction.
In reality, the market has consistently failed to find the ‘right’ price for carbon. The initial free distribution of permits led to an over-allocation which led to huge windfall profits for some of Europe’s largest polluters.
The ten companies benefiting most will have gained an estimated €3.2 billion over 2008-2012. And in April 2006, the price of carbon plunged to just €1 per tonne of CO2. According to the market, the cost of pollution was virtually nothing – as was the reward for reducing your emissions.
The price of carbon has never been high enough to force genuine investment in low-carbon energy infrastructure. But if demand for permits were ever high enough to make prices spike, governments have agreed to find ways of bringing the price of carbon down again. So there are regulatory checks in place to ensure supply and demand will not be allowed to price polluters out of the market. Unlike commodity markets (oil, gold, wheat, etc), the carbon market does not buy and sell a tangible product. It was set up to accelerate the phasing out of the very source of the raw material that its trade is based on – the opposite function of all other markets. And while trading itself does nothing to reduce emissions it does create a new vested interest group with no desire to see the end of the carbon economy – the very source of the asset they trade.‘Trading Carbon:
How it works and why it is controversial’ can be downloaded free from www.fern.org/tradingcarbon.