Thursday, September 20, 2007

Carbon Trading: the limits of free-market logic

From the Transnational Institute:

Carbon trading, its backers claim, brings emissions reductions and supports sustainable development in the global south. But, argues Kevin Smith, it may do neither, and is harming efforts to create a low-carbon economy.

If, as their proponents claim, carbon markets are wonderful tools for bringing about emissions reductions and provide economic support for clean technologies in the global south, then we should ask one question: why have they been met with a mounting chorus of criticism from civil-society organisations, social movements and journalists around the world?

Plans are being made, through processes like the G8+5 Climate Dialogue for countries like China (ie countries currently without commitments under the Kyoto Protocol) to adopt carbon trading as part of their climate policy, and there needs to be an assessment of whether such schemes really work in reducing atmospheric carbon – or if they are simply a means for polluting industries to profitably avoid the issue of making emissions cuts.

Cap and trade

The free-market logic behind the scheme looks simple on paper. Countries taking part in “cap and trade” schemes like the European Union Emissions Trading Scheme (EU-ETS) have a limit set on the amount of carbon they can emit in a given time period (the “cap”). This allotted amount of carbon is carved up and allocated between different industrial locations in the country. If, for example, a cement factory goes over its allocated portion of carbon emissions, it has to purchase spare emissions from another market participant, for example, a power station that has emitted less than its allocation, and can therefore sell profitably sell them on (the “trade”).

The problem lies in the fact that carbon trading is designed with the express purpose of providing an opportunity for rich countries to delay making costly, structural changes towards low-carbon technologies. This isn’t a malfunction of the market or an unexpected by-product: this is what the market was designed to do.

The economist John Kay wrote in the Financial Times: “when a market is created through political action rather than emerging spontaneously from the needs of buyers and sellers, business will seek to influence market design for commercial advantage.” ...MORE