Carbon Markets

Global environmental markets became a topic only after the approval of the Kyoto Protocol in 1997, which provided a foundation for the development of the first global carbon market. Carbon markets have been promoted by industry advocates such as the International Emissions Trading Association (IETA), some conservation nongovernmental organizations (NGOs), and some governments as a way to generate enough money to enable industries and countries to reduce their carbon dioxide (CO2) emissions. However, concerns about the efficacy and fairness of carbon markets have been raised, and Interpol, the world’s leading policing agency, has warned that organized crime easily takes advantage of carbonmarket schemes.

History

In the early 1990s, when the Kyoto Protocol was being debated at the United Nations Framework Convention on Climate Change (UNFCCC) negotiations, no country wanted markets as part of a climate agreement except the United States, says Payal Parekh, a Swiss-based climate scientist and energy expert. The Kyoto Protocol, which was adopted in 1997 and entered into force in 2005, sets binding targets for 37 industrialized countries and the European community for reducing greenhouse gas (GHG) emissions, which amount to an average of 5 percent against 1990 levels over the five-year period between 2008 and 2012. The United States subsequently refused to ratify the protocol, but the market component remained.

That legacy has resulted in carbon-offset markets that allow developed countries to continue to emit carbon while they invest in “emissionssaving projects” in less-developed countries. The biggest of these offset markets is the UN’s Clean Development Mechanism (CDM), with almost 3,200 registered projects so far in Africa, the Asia–Pacific region, eastern Europe, and Latin America and the Caribbean. In order to truly reduce emissions, the money invested by developed countries must be applied to emissionreduction projects that would not have otherwise been possible. However, the CDM has been widely criticized, as several studies estimate that 20 to 90 percent of CDM projects do not result in lower emissions overall.

European Emissions Trading System

The world’s biggest carbon market is the EU Emissions Trading System (EU ETS), which accounted for 95 percent of the $144 billion in carbon transactions in 2010. The aim has been to “cap” GHG emissions, but several available sources show that the EU ETS has failed to reduce carbon dioxide emissions. According to Steve Suppan, senior policy analyst at the U.S.-based Institute for Agriculture and Trade Policy (IATP), “Carbon markets are open to fraud, misrepresentation, and deceptive promotion.”

In studying the EU ETS, organizations such as Carbon Trade Watch discovered there were extra costs associated with setting up carbon markets that had not been disclosed or anticipated. Hazel Henderson, author and president of Ethical Markets Media in the United States and Brazil, observed:

There was a failure to disclose that setting up carbon caps and trading mechanisms actually entailed the creation of costly, complicated new bureaucracies. Monitoring, verifying the offsets, RECs (renewable energy certificates) while lowering the levels (caps) on CO2 emissions was opposed by the polluters. The CO2 permits were to be auctioned, but this quickly turned into massive giveaways to polluters, which then sold them at a profit, as global levels continued to rise. Thus, “cap and trade” turned out to be less efficient then direct taxing and regulation.

At the same time, the rethinking of climate policy produced two groundbreaking reports from the Intergovernmental Panel on Climate Change (IPCC) and UNFCCC with the World Meteorological Organization. They advised broader approaches to global emissions beyond CO2 to focus on soot, methane, volatile organic compounds (VOCs), and ozone—pointing out that this approach could decelerate global warming more rapidly.

Additionally, the EU ETS has experienced high levels of fraud. Earlier in 2011, according to reports by InterPress, carbon credits worth $38 million disappeared in the EU’s carbon market after computer hackers transferred funds from the Czech Republic to Poland, Estonia, and Liechtenstein—the fourth time funds had been stolen or mislaid. Suppan notes: “a lawyer formerly involved in carbon trading told me that if markets are still trading carbon 10 or 15 years from now, then the global environment will be in very big trouble.”

Several carbon-trading firms laid off significant staff in 2011, because of lackluster volumes in the European Union Allowance (EUA) and UN offset markets and weakening prices amid uncertainty about EU’s 2020 climate target and a future global climate regime. Moreover, institutional investors, such as pension funds, were much less interested in carbon markets than they were in 2010.

A recent collapse in EU prices is a signal that the trading scheme could be oversupplied through the entire third phase (2013–20). This has convinced many funds that the carbon market isn’t worth the outlay.