| Comment | With respect to the cap and trade program now under discussion: If
we are going to have a program like this, it would be improved by
- elimination of participation by speculators in the emissions
trading market and
- elimination of offsets.
Who supports it?I recognize that the California
Global Warming Solutions Act (AB 32) is the one that the Texas oil
companies just spent millions trying to overturn in the last
election. One hesitates to suggest that there might be anything
fundamentally wrong with a program they and climate-change deniers
oppose.
However, the presence on the political landscape of interested
parties who aim to undermine emissions limitations themselves, or
even to deny the reality of human-caused climate change, should not
keep us from as diligently assessing the effects and risks of a
proposed program as we would without self-interested or irrational
actors as part of the conversation. Within the limited time
remaining to radically reduce carbon emissions before we are
overwhelmed by climate change, we must ask whether the proposed
trading scheme is likely to deliver the significant emissions
reductions needed, and to deliver them in a just and equitable way
consistent with our international commitments.
How does it work? Emissions trading schemes
operate under the general idea that in the context of many actors
having to reduce emissions, it makes sense to try to spend the
least money possible for every unit of greenhouse gas emission
reduced. This suggests that for a set amount of money, in the end
there would be more emission reduction than if cost were not
considered. Emitters which face high costs for modifying their
systems can shift their responsibility to run cleaner operations to
emitters with a lower cost, by paying money via a carbon share
system, and the planet benefits by having more programs overall,
taking more carbon out of the air. That's the theory.
Carbon trading schemes have been in existence for twenty years now,
and have acquired a strong lobby for existing program features.
However, this does not mean that all of these features are a good
idea.
Last year Friends of the Earth, UK, published a stinging critique
of cap and trade programs, called A Dangerous
Obsession.{1} It should be required reading for anyone
considering such programs, and is the source of most of the ideas
in this article. According to the report, most traders in the
existing carbon markets are not the utilities, manufacturers and
green energy companies one would expect, but commodities traders
and other speculators, some of whom bundle the carbon shares into
derivatives, the same type of opaque financial instrument that
brought us the recent global economic meltdown.{2} The presence of
these speculators in the market for emissions reduction units adds
risk and creates pernicious effects:
The speculative secondary market removes any reality from
the price: The ability of speculators to purchase emission
reduction units{3} precludes their value from being calculated by
any objective means. Even though the entire program is based on a
political construct, rather than a real-world commodity such as
grain that has a physical supply and demand, the value of emission
reduction units has become a pure function of speculative activity,
not susceptible to adjustment to suit public policy goals.
Speculation makes the price unpredictable: Opening
the carbon trading market to speculators means that it is not a
reliable and predictable source of income on which long-term
development decisions can be based.
Speculation is a risk-laden distraction from the purpose of
the program: One would be entitled to ask why government
funds are being spent to create and police a speculative market,
the operation of which enriches financial gamblers—the same
risk-for-profit actors who have just brought the global banking
system near to collapse—and does nothing to decrease greenhouse gas
emissions. In fact, the presence of this speculative market
threatens clean development by creating artificial price
fluctuations that have nothing to do with anything other than the
vagaries of short-selling, complex and opaque financial
instruments, and the irrational fluctuations that characterize
stock markets.
Offsets: Another feature described in the Friends
of the Earth report that is dangerous to the success of emission
reductions and to equity between developed and developing nations
is offsets. Offsets allow those with high emissions to buy their
way out of having to make cuts with credits for reductions outside
the system, in another sector (say in agriculture or forests,
rather than manufacturing), or another region or country. The
California proposal allows offsets of up to 8% of a facility's
compliance obligation, although earlier proposals had set the
amount at 4%.{4}
There are some fundamental problems with this.
Offsets allow developed countries to ignore legally binding
emission reduction commitments: With offsets, developed
countries can continue to produce more than their fair share of
emissions, at a time in which reductions are required by all
nations, but particularly by those historically responsible for the
problem. This is not merely stating the fact as a matter of
equity, but it is required by the Framework Convention on Climate
Change, the international agreement signed by most nations in the
early 1990s, committing developed countries to reduce their
emissions, and to provide "new and additional" money to
less-developed nations to help them with clean development and
climate-change mitigation. This assistance to the developed world
was very clearly meant to be in addition to, not instead of,
immediate emissions reductions on the part of the developed world.
Offsets create a disincentive for technological innovation
for the buyers of credits: While companies selling
credits—that is, those which emit at a level below that of their
carbon allocation—have an incentive to innovate, companies in
highly polluting industries have no incentive as long as credits
are available to them at rates lower than the anticipated cost of
reduced emissions. Why should they innovate or even start on the
research and development that would be required? More broadly, the
existence of offsets postpones the major structural changes
necessary for developed countries to switch to a low-carbon
infrastructure, and allows their worst polluters to continue to
emit greenhouse gases when they should be actively winding them
down.
Offsets create disincentives for quicker paths to emission
reductions: Offsets approved by the UN's Clean Development
Mechanism executive board must be, among other things, additional
to greenhouse gas reduction activity that would have occurred
anyway. This rule, set for obvious reasons with respect to the
purpose of the program, unfortunately creates a perverse
disincentive to new programs of regulation and/or taxation in
regions of sellers of certificates, usually the developing world.
If more stringent regulations were set, they would limit
eligibility for some projects that might have been granted approval
otherwise, undercutting the inward flow of capital.{5}
Markets do not plan and are unconcerned with equity or
transparency: Relying on market forces to create clean
development in the developing world removes that activity from any
transparent public planning process that considers sustainability,
equity, or regional economic need.
Less-developed countries are forgotten:
Development projects have been disproportionately located where
industrial infrastructure is already well-established—that is
China, India, Mexico and Brazil (now collectively about 80% of all
projects){6}—leaving less-developed nations with little inflow of
money for mitigation and clean development.
Offsets, along with speculation, should be eliminated from the
program.
The Friends of the Earth report makes a compelling case to
eliminate cap and trade programs altogether. In the context of a
program such as that of California whose creation is already
underway, it behooves us to ensure that at least its most
pernicious unintended consequences are minimized.
_________________
{1} Clifton, Sarah-Jayne, A Dangerous Obsession: The Evidence
Against Carbon Trading and for Real Solutions to Avoid a Climate
Crunch. Friends of the Earth, UK. London: November, 2009.
http://www.foe.co.uk/resource/reports/dangerous_obsession.pdf
(retrieved 22 November, 2010)
{2} op. cit. p 14.
{3} There are variously defined units of greenhouse gas reduction,
such as the CERs (certified emission reduction [units]) authorized
by the UN's Clean Development Mechanism executive board.
{4} Fulton Publishing Ltd. California's cap-and-trade plan
relaxes offset limit, offers free allowances; Carbon Finance,
News and Analysis of Market Solutions to Climate Change. London: 29
October, 2010.
http://www.carbon-financeonline.com/index.cfm?section=lead&action=view&id=13293
(retrieved 22 November 2010).
{5} Clifton, op. cit. p 24.
{6} UNEP (United Nations Environment Programme) Risø Centre. CDM
projects by host region; Energy, Climate and Development.CD4CDM:
Capacity Development for the Clean Development Mechanism. 1
Roskilde, Denmark: November 2010.
http://cdmpipeline.org/cdm-projects-region.htm#1 (retrieved 22
November 2010).
Thank you for your consideration of these ideas.
Yours truly,
Beryl Magilavy (Ms)
Founder and past director of San Francisco's Department of the
Environment
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