Global Carbon Markets

As promised, this week I will be looking at the alternative ways we can pursue industrial activity, so that global CO₂ emissions can be reduced. In the last post I mentioned the European Union Carbon Trading Scheme, which branches from the UN’s Clean Development Mechanism (CDM), set at the Kyoto Protocol. I will use this as my starting point in evaluating the effectiveness of legislative approaches to tackling emissions.

Michael Wara (2007) provides this summary of the CDM, explaining that it “works by paying developing countries to adopt lower-polluting technologies than they otherwise would. The difference in carbon emissions between the cleaner method and what they would have used can be converted into CDM credits and sold to industrialised nations who use it to offset their own emissions.” Thus there are a certain number of carbon credits in the market (like any other currency) which can be traded, limiting the amount of pollution that can take place worldwide. At least, that is the theory. Wara’s article in Nature asks the question ‘Is the Global Carbon Market Working?’ Below I have summarised his key findings:

• There are mild successes, such as reducing GHG emissions (but only by a tiny fraction of the annual level).
• Initially the market was expected to create strong incentives to invest in infrastructure for low-carbon energy in developing countries, but it has also allowed developed countries to ‘justify’ their high levels of emissions by buying up carbon credits
• Research shows that only 33% of existing projects in the global carbon market are concerned with reducing CO₂, 62% are concerned with other waste gases – considering the potency of CO₂compared to other GHGs and the much greater quantities in which it is emitted, this ratio must at least be inverted.
• Certain distortions exist – such as that of HFC-23 (a potent GHG which is a product of refrigerant processes). It is very cheap to cut HFC-23 emissions, and thus earn credits – which can be sold at a standard price. It is estimated that a one-off pay out of €100million from the developing world would cover the cost of installing the simple technology needed to capture and destroy HFC-23 at industrial source, saving an estimated €4.6billion in CDM credits that could be spent on other climate-protecting uses. Similar fixes could also be applied to other emissions, such as nitrous oxide.
• The solution that Wara offers is this: make the global carbon market a market for CO₂rather than for all 6 Kyoto Protocol gases (CO₂, methane nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulphur hexafluoride)

What is highlighted in this article is the overall vagueness of the scheme. It has, through over-ambition, tried to encompass too much and reach too far, and in doing so lost its effectiveness. Wara’s solution is a sensible one, refining the market to focus on just CO₂ would allow more specific limits, targets and legislation to be put in place. It also addresses a key undermining aspect of the scheme, something that Brechet at al. (2012) describe as “the issue of low-hanging fruits”: As long as other gases are covered by a trading scheme, whichever is easiest and cheapest to remove will garner most attention (as the HFC-23 example illustrates). Doing so earns the same reimbursement in carbon credits as reducing carbon emissions would; a clear distortion of the market and an inherent problem with the scheme.

Haszeldine (2009) insists that simply pricing carbon in a market is not enough to enforce decarbonisation, and Brechet et al. (2012) illustrate just why that is the case, revealing yet more problems with the incumbent manifestation of the concept:

• Countries endogenously set their carbon targets at the Kyoto negotiations, rather than them being given to them externally. This meant they were able to assess what a comfortable and realistic level would be for themselves, before agreeing to it.
• Too many carbon credits in the market, which means that countries can engage with the system, profit from it, but not meaningfully reduce global carbon emissions.
• But, the CDM is a good mechanism for countries that are unable to raise the funds for their clean investments, by selling carbon credits.

So what would a more effective global market look like and how can planetary boundaries help? Firstly, it must be more specific by, i) only encompassing one GHG (in this case carbon) so that differentials in ease and cost of removing others does not distort the market, and ii) set specific targets for countries, based on planetary boundaries and the proportion of global carbon emissions that country’s industry is responsible for. In addition to this, the number of credits in the market must be reduced, so that it leads to a meaningful reduction in emissions, and does not simply allow developing countries to profit, and developed countries to merely offset their continuingly high level of emissions.

Of course such a scheme must also be accompanied by widespread and viable technology, as well as facilitating legislative reform … so I’m sure you can guess what the topic of the next post!