Transnational Institute _ Carbon Trading

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Carbon Trading

A brief introduction

Carbon Trade Watch (/users/carbon-trade-watch)September 2009

(/primer/carbon-trading)

A guide to why carbon trading will not work in justly tackling climate change and what

alternatives might.

Contents:

1. What is cap and trade? (#capandtrade)2. What are carbon offsets? (#carbonoffsets)

3. So what's wrong with cap and trade? (#capandtradewrong)

4. Will markets concerned with growth be able to deliver reductions of carbon? (#marketgrowth)

5. What examples have there been of Cap and Trade schemes? (#capandtradeschemes)

6. Why does European Union Emissions Trading Scheme (EU ETS) consistently grant over-allocation of pollution permits?

(#euoverallocation)

7. But didn't the second phase of the EU ETS (2008-2012) resolve this over-allocation? (#etsphase2)

8. But isn't Phase II nevertheless leading to emissions reductions? (#etsphase2reductions)

9. So who profited from carbon trading? (#profits)

10. What about phase III of the EU ETS? (#etsphase3)

11. So what is the problem with carbon offsetting? (#offsetproblems)

12. Carbon offsets have serious negative social and local environmental impacts (#offsetimpacts)

13. Might reforestation programmes such as REDD work? (#redd)

14. What impact will new trading schemes have on o ffsetting and fo rest carbon markets? (#offsetexpansion)

15. What are sectoral credits? (#sectoralcredits)

16. But isn't carbon trading better than nothing? (#betterthannothing)

17. So what are the alternatives to carbon trading? (#alternatives)

Carbon trading is allowing industrialised countries and companies to avoid their emissions reduction targets. It takes two

main forms: cap and trade and carbon of fsetting.

1. What is cap and trade?

Under cap and trade schemes, governments or intergovernmental bodies set an overall legal limit of carbon emissions in a

certain time period (a cap) and then grant industries a certain number of licenses to pollute (carbon permits).

Companies that do not meet their cap can buy permits from others that have a surplus typically, because they have been

given an overly generous allowance in the first place. They can also purchase offsets.

2. What are carbon offsets?

Carbon trading runs in parallel with a system of carbon offsets. Instead of cutting emissions themselves, companies, and

sometimes international financial institutions, governments and individuals, finance emissions-saving projects outside the

capped area to generate carbon credits which can also be traded within the carbon market. The UN's C lean Development

Mechanism (CDM) is the largest such scheme with almost 1,800 registered projects in developing countries by September

2009, and over 2,600 further projects awaiting approval. Based on current prices, the credits generated by approvedschemes will be worth around $35 billion by 2012.

Although offsets are often presented as emissions reductions, what these projects do at their hypothetical best is to

stabilise emission levels while moving them from one location to another, normally from Northern to Southern countries. In

practice, this best case scenario is rarely seen, with the result being that offsetting increases emissions whilst also

exacerbating social and environmental conflicts.

3. So what's wrong with cap and trade?

There are fundamental theoretical flaws in the whole cap and trade scheme even before you look at the actual record of its

implementation. This is because the scheme was never set up to directly tackle the key task of a rapid transition away from

fossil fuel extraction, over-production and over-consumption. It seeks instead to quantifying existing pollution as a means

to create a new tradeable commodity. Within this framework, traders invariably opt for the cheapest credits available at the

time, but what is cheap in the short-term is not the same as what is environmentally effective or socially just.

Some of the key problems with the cap and trade approach are:

Print this page (http://www.tni.org/print/42041)

See also

Carbon trading from Kyoto to Copenhagen

(/archives/reyes_buko)

How Not to Write an Effective Climate Policy

(/archives/smmith_climatepolicy)

Unveiling Carbon Trading (/article/unveiling-

carbon-trading)

Profiting From Pollution: the G8 and climate

change (/archives/smith_profitingfrompollution)

The case against carbon trading (/archives

/smith_casegainst)

Also by Carbon Trade Watch

Fact Sheet: Carbon Offsets (/article/fact-sheet-

carbon-offsets)December 2009

Fact Sheet: Cap and Trade (/article/fact-sheet-

cap-and-trade)December 2009

350 Reasons that Carbon Trading won't Work

(/article/350-reasons-carbon-trading-wont-work)

November 2009

Carbon Trading (/primer/carbon-trading) September

2009

The Carbon Connection (/tnibook/carbon-

connection)April 2008

Transnational Companies (/category/issues

/global-economic-justice/transnational-companies)

Deforestation (/category/issues/environmental-

justice/deforestation)

Climate Talks (/category/issues/environmental-

justice/climate-talks)

Climate Justice (/category/issues/environmental-

justice/climate-justice)

Carbon Trading (/category/issues

/environmental-justice/carbon-trading)

Carbon Offsets (/category/issues/environmental-

justice/carbon-offsets)

Environmental Justice (/taxonomy/term/60)

EU Emissions Trading Scheme (ETS)

(/category/tags/eu-emissions-trading-scheme-ets)

Clean Development Mechanism (/taxonomy/term/242)

(#)

Tags (#)

national Institute | Carbon Trading http://www.tni.org/primer/carbo

16 6/18/2011


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The trade component does not reduce any emissions. It

simply allows companies to choose between cutting their own

emissions or buying cheaper carbon credits, which are supposed to

represent reductions elsewhere

1.

The cap has too many holes and sometimes caps nothing.

The cap is only as tight as the least stringent part of the whole

system. This is because credits are sold by those with a surplus, and

the cheapest way to produce a surplus is to be given too many

credits in the first place (hot air credits as a result o f caps being

set too high). The aim of trading is to find the cheapest solution for

polluting industry, and it is consistently cheaper to buy hot air

credits than to actually reduce emissions.

Cap setting is a political process that is highly susceptible to

corporate lobbying which means that there is invariableover-allocation of pollution permits. In fact, lobbying is encouraged

through extensive industry stakeholder involvement

2.

Offsets loosen the cap. While cap and trade in theory limits the

availability of pollution permits, offset projects are a licence to

print new ones. When the two systems are brought together, they

tend to undermine each other since one applies a cap and the

other lifts it. An offset is essentially a permit to pollute beyond the

cap. Most current and proposed cap and trade schemes allow

offset credits to be traded within them including the EU Emissions

Trading Scheme (EU ETS) and the US cap and trade scheme

(proposed in the 2009 American Clean Energy and Security Act,

ACES)

3.

4. Will markets concerned with growth be able to deliver

reductions of carbon?

The other problem is that markets are by essence growth-oriented, solook for new sources of accumulation. In carbon markets, this is

achieved by increasing their geographical scope and the number of

industrial sectors and gases they cover. Yet this contradicts the essence

of tackling climate change which is about reducing use of fossil fuels and

consumption.

It is therefore not a surprise that introducing carbon as a commodity has

resulted in new opportunities for prof it and speculation. The carbon

market is already developing the way of the financial market with the use

of complex f inancial instruments (futures trading and derivatives) to

hedge risk and increase speculative profit. This runs the risk of creating a

carbon bubble. This is not a surprise, as it was created by many of the

same people at the Chicago Climate Exchange who created the

derivatives markets that led to the recent financial crash.

5. What examples have there been of Cap and Trade schemes?

There have been a number of Cap and Trade markets the EU ETS, the

United States Acid Rain Program, the Los Angeles Region Clean Air

Markets (RECLAIM), the Chicago Emissions Reduction Market System

(ERMS) and the Regional Greenhouse Gas Initiative. The EU ETS,

established in January 2005, is the largest cap and trade scheme in

operation worldwide and is the best for illustrating how carbon trading

has failed in practice.

6. Why does European Union Emissions Trading Scheme (EU

ETS) consistently grant over-allocation of pollution permits?

Most cap and t rade markets use projections of historical emissions

provided by industry itself to calculate the initial caps. Industry has a

clear incentive to overstate its past emissions to gain more credits.

As a result, cap and trade markets start out with too many permits. This

was true of the EU ETS which consistently awarded major polluters with

more free pollution permits (called EUAs, European Union Allowances)

than their actual level of carbon emissions. This means it gave them no

incentive to reduce emissions, and as a result the price of the permitscollapsed from a peak of 31 to end 2007 at 0.01 . In phase I

(2005-2007) as a whole, according to the EU's own data, major polluters

had permits worth 3.4 per cent more than their actual level of emissions.

7. But didn't the second phase of the EU ETS (2008-2012)

resolve this over-allocation?

The EU claims that it has learned from its mistakes and that the second

phase of its scheme is working. Whilst it is true that for the first time in

2008, polluters were awarded fewer permits than their actual level of

emissions, there is still over-allocation of permits:

The vast majority of factories and economic sectors are still

over-allocated it is only the power sector that needs to purchase

credits

1.

The impact of the EU-wide recession means that the ETS as a whole2.


16 6/18/2011


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will again be

over-allocated in

2009

Corporations get

the same number

of credits even if

they temporarily

close or scale

down operations

for short-term

economic

reasons

3.

8. But isn't PhaseII nevertheless

leading to

emissions

reductions?

The EU claims

emissions reductions

of 3 per cent, or 50

million tons, in ETS

sectors in 2008. The

trouble is that at least

80 million tons of

carbon offsets in

the developing world

were bought as part

of the ETS in 2009

more than the level of

the cap. So, again,the ETS does not

require emissions

reductions by

companies in the EU.

9. So who profited

from carbon

trading?

Companies receive

most carbon credits

for free. This is

equivalent to a

subsidy and with

allocations made on

the basis of historical

emissions, the largest

subsidy goes to thedirtiest industry

(especially coal-fired

power plants).

Windfall profits also

arise from an

accounting trick

around opportunity

costs. Power

companies choose to

do the cheapest thing

to meet their ETS

target which is

usually buying Clean

Development

Mechanism (CDM)

credits but passing

on costs as if theywere doing the most

expensive actually

reducing emissions.

Even power

companies receiving

free credits from the

ETS have

nevertheless passed

on the cost of these

credits to

consumers.

Research by market-

analysts Point Carbon

and WWF calculated

that the likely


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Transnational Institute _ Carbon Trading

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