Introduction
Make no bones about it: the basic trajectory of the LCDS is to generate carbon credits/offsets, derived from the avoided deforestation of Guyana’s forests, for commercial sale on global carbon trading markets. For this reason, an appreciation of the workings of carbon markets is essential to its close evaluation. Several governments, international organisations, environment specialists and policy makers share the view that the global evolution of carbon-trading markets is the easiest achievable policy tool for successfully combating atmospheric pollution.
As this column has emphasised, atmospheric pollution is fast approaching a tipping-point, where the capacity of Planet Earth to sustain human life as we have come to know it, is at grave risk and therefore, the very survival of the human species is at stake. And, because the LCDS is geared to the long-term development of global carbon-trading, fed in part by Guyana’s forest carbon, the issues posed by the LCDS are presently among the most important facing the international community. From this perspective, an improved understanding of the so-called ‘mysteries and mystifications’ of carbon markets is all the more imperative.
To put it bluntly, however, what I hope to demonstrate by the end of this phase of my assessment of the LCDS is that the pursuit of a global carbon-trading mechanism as a solution to the global climate problem can instead result in a worsening of that problem. Why would this happen? The answer is it risks diverting from the main task of de-carbonizing production worldwide. Intensive fossil fuel usage is presently the principal means of generating livelihoods and the mechanism for preserving the present way of life in the small minority of countries that presently controls the levers of global power and exploits global resources for their benefit, at the expense of the vast majority of the poor ones. My thesis is that diverting concentration from the de-carbonization of production everywhere will result in carbon-trading becoming part of the problem and not the solution.
Carbon market mechanics
At its core, trading in carbon credits/offsets is based on the principle that if firms, enterprises, organizations, or for that matter individuals, are either mandated by law or voluntarily agree to reduce their carbon emissions, they can do so by either 1) directly reducing their carbon emissions or 2) through purchasing ‘offsets’ for these emissions, where permitted. Rationally, it could be expected that all those affected would make a choice that requires them to bear the lower cost.
This principle was first invoked in the cap-and–trade mechanism introduced by the United States to combat the threat of acid rain through airborne emissions of sulphur dioxide from entities. When it was introduced in the 1990s, it was posited as being more efficient than policy measures based on public directives.
Subsequently, international offsetting originated from pledges rich countries (except the United States) made to the United Nations Framework Convention on Climate Change (UNFCCC) to reduce their greenhouse gas emissions under the Kyoto Protocol (1997). Countries found that as time progressed their pledges were increasingly difficult to keep, and so sought to introduce flexibility in the way they could meet their specified emissions reductions targets. Under the Kyoto Protocol, countries agreed to compensate for their emissions reductions through offsets purchased from projects deliberately designed to reduce or sequestrate greenhouse gas emissions. It is therefore, through this search for flexibility in how rich countries could fulfil their commitments/obligations to reduce carbon emissions that carbon markets emerged and have grown to their present scale. Indeed, the growth of offsetting has been so rapid that it is now expected to deliver the bulk of carbon reductions pledged by the European Union (EU) to be in place by 2020!
Three key carbon markets
Under the Kyoto Protocol the EU has elaborated three key programmes for regulating the trade in carbon dioxide emissions reductions. These are presently the most important carbon markets in the world today, and our description of carbon markets therefore, begins with them.
First, there is the European Union’s Emissions Trading Scheme (ETS) established in 2005, which is referred to in the LCDS. This has been established in two phases. Phase 1 ran from 2005 to 2007. Phase 2 is scheduled for 2008 to 2012, by which time it is expected that the existing Kyoto Protocol will be replaced. The ETS operates through the European Economic Community, which in consultation with its member states sets annual caps on overall EU carbon dioxide emissions as well as those for individual member states. Within the limits of these allowable emissions, allotments are made to covered entities. These entities are typically power plants, other utilities, oil refineries, and industrial manufacturers. These emissions allowances can be traded. For example, if any member state manages to have at the end of this process, excess emissions allowances it can trade (sell) them to those member states that do not have enough. Clearly this will come about if covered entities in a member state succeed in reducing their carbon dioxide emissions at a comparatively cheaper cost than what would be incurred if they purchased these emissions’ allowances from other parties. In opposite situations, where the purchase of emissions allowance is comparatively cheaper than to directly limit carbon emissions, covered entities would also engage in trade (buy).
The second programme established by the EU is the Clean Development Mechanism (CDM). This explicitly facilitates international offsetting, based on EU projects established in developing countries. The concept here is that projects can be set up in developing countries, which lead to reduced carbon dioxide emissions. Credits for these emissions’ reductions accrue to the entity sponsoring the project. This could then be used to offset its own emissions in order to meet specified targets, or profitably sell them on carbon markets to those entities that wish to purchase them.
The third programme is termed the Joint Implementation (JI) mechanism. This has the same basic features as the CDM. The only difference is that projects under the JI mechanism can be established in rich industrialized countries. This is in contrast to the CDM projects which are allocated to projects in developing countries only. It should be noted that all such projects are expected to supplement and not reduce direct domestic action aimed at combating atmospheric pollution, global warming, and climate change.
Next week I shall continue to introduce readers to other major features and characteristics of carbon trading, in order to deepen their understanding of this topic.
