transnational institute _ carbon trading
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Transnational InstituteA worldwide fellowship of scholar activists
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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 (#)
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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.
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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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116 6/18/2011
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23/116
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116 6/18/2011
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24/116
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116 6/18/2011
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116 6/18/2011
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26/116
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27/116
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28/116
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116 6/18/2011
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29/116
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national Institute | Carbon Trading http://www.tni.org/primer/carbo
116 6/18/2011
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30/116
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116 6/18/2011
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31/116
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116 6/18/2011
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32/116
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national Institute | Carbon Trading http://www.tni.org/primer/carbo
116 6/18/2011
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116 6/18/2011
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116 6/18/2011
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35/116
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national Institute | Carbon Trading http://www.tni.org/primer/carbo
116 6/18/2011
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36/116
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national Institute | Carbon Trading http://www.tni.org/primer/carbo
116 6/18/2011
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37/116
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116 6/18/2011
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national Institute | Carbon Trading http://www.tni.org/primer/carbo
116 6/18/2011
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39/116
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national Institute | Carbon Trading http://www.tni.org/primer/carbo
116 6/18/2011
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national Institute | Carbon Trading http://www.tni.org/primer/carbo
116 6/18/2011
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national Institute | Carbon Trading http://www.tni.org/primer/carbo
116 6/18/2011
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national Institute | Carbon Trading http://www.tni.org/primer/carbo
116 6/18/2011
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116 6/18/2011
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116 6/18/2011
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116 6/18/2011
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116 6/18/2011
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116 6/18/2011
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116 6/18/2011
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116 6/18/2011
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116 6/18/2011
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116 6/18/2011
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116 6/18/2011
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116 6/18/2011
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116 6/18/2011
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116 6/18/2011
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116 6/18/2011
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116 6/18/2011
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116 6/18/2011
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116 6/18/2011
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116 6/18/2011
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116 6/18/2011
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116 6/18/2011
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116 6/18/2011
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116 6/18/2011
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116 6/18/2011
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116 6/18/2011
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116 6/18/2011
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national Institute | Carbon Trading http://www.tni.org/primer/carbo
116 6/18/2011
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116 6/18/2011
-
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116 6/18/2011
-
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national Institute | Carbon Trading http://www.tni.org/primer/carbo
116 6/18/2011
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national Institute | Carbon Trading http://www.tni.org/primer/carbo
116 6/18/2011
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116 6/18/2011
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