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Jumping down the rabbit hole: Carbon trading is not a solution

So much for the temporary reprieve in the wake of the failed U.S. climate bill.

While new evidence confirming significant carbon trading fraud in the European cap and trade system continues to make the headlines, cap and trade systems appear to be inching their way back up policy proposal chains.

This past December a state wide cap and trade system was approved in California, many believe it has the potential to set a precedent for regions in North America. 

There are a number of regional cap and trade systems underway, including the Western Climate Initiative that includes Canadian provincial participation, with carbon markets on track to come into full force around 2012. 

Amidst ongoing speculation of an impending federal election, a recent news release proclaimed a Liberal Government would implement a national carbon cap and trade system. They are not alone, the NDP has indicated support in the past for cap and trade model, so do the Greens. The Conservatives appear more concerned with delaying any meaningful action and harmonizing with the U.S., flip flopping on whether cap and trade will have a role to play (see this Environment Canada webpage for information on the draft plans for a cap and trade system that have now been shelved).

So what is cap and trade?

In short, the idea is to set a limit (cap) on pollution and provide industries corresponding emission permits (essentially, it is permission to pollute for a specific period of time) that are given away or sold (often referred to as an auction).  It uses a trading mechanism (carbon market) to allow industries to exchange these permits between themselves. In many cases offset credits generated by projects outside of the capped areas are also included. These ‘flexible market mechanisms’ facilitate the pursuit of the cheapest available pollution reducing mechanisms.

Council of Canadians: cap and trade is a false solution to climate change

In our statement on climate justice we state that there are false solutions to the climate crisis – “green” actions that, in reality, disguise a “business as usual” approach – that distract from the more systematic changes needed, that do little to reduce emissions and help build greater equity. We include both carbon offsets and carbon trading as false solutions.

So what’s the problem with cap and trade?

Business-as-usual reigns

Cap and trade gives the impression of doing something to address the climate crisis without requiring governments to begin the process of structural changes to the energy sector or production and consumption patterns.

The cap and trade system is an attempt to create a new market, the carbon market, to repair what existing markets have helped break.  It uses neo-liberal economic logic and is complimentary to the dominant global economic governance model that informs production, trade and consumption patterns. 

The logic (perhaps a tad snide here) goes that if we can price carbon correctly and harness the power of the profit motive towards environmental considerations by commodifying the earth’s carbon cycling capacity, we can have our cake and eat it too. 

Among other problems, promoting the cheapest short-term solution (the whole thrust of the system is to make emission cuts as cheap as possible for corporations) does not necessarily mean making the right choice in terms of what is best for the environment in the long term, or what is socially just, and can ignore priorities such as community control over local ecosystems.

It also requires the development of a complex financial system that is open to market gaming.  Friends of the Earth U.S. has excellent analysis warning of the serious pitfalls of allowing Wall Street to control the carbon market. Matt Tiabi also wrote a compelling piece for the Rolling Stones on this topic which exposes the role of the infamous Goldman Sachs in the Chicago Climate Exchange and potential for a U.S. carbon market to be the next bubble to burst.

Offsets: loophole scheme = corporate dream

The use of carbon offsets in a cap-and trade system can undermine the system’s integrity, given that it is not possible to ensure that every credit represents a real, measurable, and long-term reduction in emissions

US Government Accountability Office

One of the biggest problems with cap and trade systems is the inclusion of offsets.

Carbon offsets allow companies and sometimes international financial institutions, governments and individuals, to pay for ‘emission saving projects’ in order to ‘offset’ their own carbon polluting actions.

There are offsets in the smaller voluntary carbon market where consumers, companies and governments purchase credits to offset their own emissions from transportation, electricity use and other sources – this includes examples such as the carbon offset purchase option when you fly with many major airlines.

Then there is the larger compliance market where companies, governments, or other entities buy offsets to comply with caps on their emissions established by a cap and trade system.  In this case, pollution is allowed to continue in the capped area because of the equivalent emission savings happening elsewhere. The purchase of offsets typically results in a Global North to South shift where carbon offsets are cheapest. The largest offset scheme is the UN-administered Clean Development Mechanism (CDM).

Doesn’t sound so bad?

Since carbon offsets are created against a hypothetical business-as-usual scenario baseline, it is extremely difficult to ensure that the offset credits actually equate to carbon cuts. David Victor, the head of Stanford University’s Energy and Sustainable Development Program, has found that “between a third and two-thirds of CDM offsets do not represent actual emission cuts.” It is also extremely difficult to demonstrate that emission cuts are additional to what may have happened without offset credit financing.  Worse still, there is clear evidence that certain projects applying for the CDM are causing serious social and environmental harm and human rights violations in the Global South, such as land grabs. For examples of misguided and harmful offset projects, check out the fourth chapter of “Carbon Trading How it works and why it fails (an informative source on the problems with cap and trade).”

While more critical analysis is needed, the Western Climate Initiative proposes the inclusion of both domestic and international offsets. 

The Californian system will allow for a very significant amount of the emission reduction compliance to come from offset projects which is a main reason why there is legal battle unfolding regarding the rules.

The Liberal Party’s recent press release refers to a system that includes ‘other credits’ (ie. offsets) and suggests credits will be permitted for trade in international markets (ie. The Clean Development Mechanism). 

If harmonization with the U.S. remains a high priority for Canadian politicians, the recent failed U.S. cap and trade bill (which many believe will make a come-back, in time) is indicative of what may be in store under a North American cap and trade system. The proposed U.S. bill would have seen 2 billion tons of carbon dioxide offsets allowed per year. According to Daphne Wysham of the U.S. based Institute for Policy Studies, this would have had the potential to delay verifiable reductions in GHG emissions below 2005 levels until 2026, below 1990 (the standard baseline year used internationally) until at least 2030.

Show me the proof!

The European Union Emissions Trading Scheme (EU ETS) is the world’s largest trading scheme and the longest running cap and trade carbon market. While it is often held up as an example of how cap and trade works, there are many reasons to question whether it is succeeding in generating emission reductions.

Corporate lobbying has seen the over- allocation of permits, carrying-over of permits from previous years, free giveaways of permits, and rules which have allowed some of the worst polluter’s windfall profits. Carbon prices have fluctuated wildly which has helped to undermine needed emission reductions.

According to the European Union’s law enforcement arm Europol, fraud in the EU’s cap and trade system has cost $7.4 billion in lost tax revenue!

Carbon offsets have seriously compromised the EU scheme’s effectiveness. Carbon offsets alongside Joint Implementation credits are still allowed to account for 50% of European emission reductions. 

As exposed in a damning report on the EU ETS by the UK group Sandbag, a recent budget for offsets under the EU scheme was extremely overestimated given the impacts of the economic crisis on capped industries. This has created a situation in which offsets not only substitute for domestic emission reductions; they perversely create space for European emissions to rise (page 19 of this report). Under significant pressure from a number of NGOs, there has been a recent change  which will limit some of the most dubious offset projects.

We have our work cut out for us

Clearly there is reason for concern over the ongoing promotion of cap and trade as an effective policy to address the climate crisis. We definitely have our work cut out for us in 2011 to expose and challenge this system.

Simultaneously we must broaden the discussion and debate over viable solutions (there is no one solution, there are many) that begin to address some of the structural changes needed to the energy sector, production, consumption and trade patterns.

These include examples such as:

Policies that end new fossil fuel exploration and projects, end fossil fuel subsidies and regulate greenhouse gas emissions without loopholes like offsets.  Carbon fees and regulatory limits on resource use are two potential avenues. Repaying our climate debt to the Global South also needs to be part of the solution including innovative policies such as the Robin Hood (or Financial Transaction) Tax.

We need to stop focusing on being an export-oriented energy super power and focus instead on generating energy to meet community, and Canadian needs – while ensuring energy is used efficiently and sparingly – in the least environmentally and socially destructive methods possible. This includes challenging trade rules that stand in the way of making policy choices that improve energy security and reduce carbon emissions. It includes policy examples such as feed-in tariffs regimes to help expand smaller scale renewable energy projects. Here, our priority is the expansion of public and community ownership and use of local procurement requirements that help increase green job expansion. We need to invest in the right areas like energy conservation and efficiency, public and community ownership of renewable energy, public transit and sustainable agriculture.

We need to further educate ourselves and institute alternative forms of managing natural resources such as using the public trust doctrine or managing resources as commons, and recognizing the rights of nature. We need engage in a serious dialogue about how to pursue an economic model that puts the interests of people and the environment ahead of the interests of profit and economic growth. 


Critical resources on cap and trade systems:

The Story of Cap and Trade

Carbon Trading: How it works and why it fails

The EU Emission Trading System: failing to deliver

Cap or Trap: How the EU ETS system risks locking-in carbon emissions

REDD: The realities in black and white

Hoodwinked in the Hothouse: False solutions to the climate crisis V.2