Introduction
On reflection, several readers have communicated to me over the past few weeks, in different ways, the grave difficulty they were having in trying to fathom the interconnections between the global carbon market, the LCDS, and the resolution of the global climate problem. They find that there continues to be a real disconnect in comprehending the concrete nature of the linkages I have been pin-pointing between trading in both carbon emissions allowances/permits and carbon offset projects (including forest carbon ones) and the expectation that global atmospheric pollution will be reduced. “Is this all pure fantasy?” they despairingly ask.
To be fair, there is a distinct element of make-believe and ostrich-like hiding of heads in the sand in the preponderant international reliance which is being placed on the global carbon market as one of two principal solutions to the global climate problem; the other being technological innovation. For readers to get through this muddle I recommend that they first try to wrap their minds around two basic and incontrovertible facts.
The first of these undeniable facts is that there is indeed a vibrant functioning global carbon market. This is neither an invention nor fantasy. As I have previously observed this market is the world’s fastest growing commodity market and is projected by several credible observers to become the world’s largest market ever! The second reality is that, like all other major commodity markets, the carbon market does not trade in carbon per se. Instead, it trades in property rights to activities that generate carbon dioxide (CO2) emissions and carbon storage/capture under both mandatory compliance regimes and voluntary ones. It is from the starting point of these two basic realities that the carbon market enters the discussion as a proposed solution to the global climate problem.
REDD fraud at large
The case for the carbon market fulfilling the purpose of resolving the global climate problem is clearly not helped in view of the flaws in this market that I have been discussing over the past three weeks. In similar vein to my observations, readers should note that the Guardian newspaper (UK) recently investigated the Reduced Emissions from Deforestation and Forest Degradation scheme (REDD) along with the forest carbon segment of the global carbon market, which is essential to the success of the LCDS. It concluded that the arrangement: “Is a recipe for corruption and will be hijacked by organized crime without safeguards” (October 5, 2009). Of particular note, the same Guardian’s investigative report went on to state: “Experts on all sides of the debate, from international police to politicians to conservationists have warned this week that the REDD scheme may be impossible to monitor and may already be leading to fraud.”
While these are very strong comments from a highly reputable daily newspaper, they are tellingly supported by very forceful comments from the Interpol environmental crime specialist (Peter Younger). Commenting on REDD, he stated: “Alarm bells are ringing. It is simply too big to monitor. The potential for criminality is vast and has not been taken into account by the people who set it up… organized crime syndicates are eyeing the nascent forest carbon market. I will repeat… REDD schemes are open to wide abuse.” By any standard these are stunning observations.
I had documented in this column last week evidence revealing the rapid infusion of criminality into the carbon market. As also indicated this should be linked to the troubling manifestations of practices on the climate exchanges quite similar to those that have occurred in financial markets which recently led to what is now widely acknowledged as the worst financial crisis and economic recession since the Great Depression.
The view expressed here is echoed by Chris Long who has pointed out in the article: Breathing A New Life into the Scam of Carbon Trading that we find today: “Instead of credit derivatives, or oil fortunes, or mortgage-backed credit default swaps (CDS) the new game in town, the next bubble is in carbon credit… a ground breaking new commodities bubble disguised as an ‘environmental plan’” (February, 2010).
‘Nature does not do bailouts’
Pointing out the basic similarities between key practices and weaknesses in today’s carbon market and the recent financial services market serve to highlight the immense dangers involved if the carbon market were to replicate the devastating negative results that have occurred in the latter market. These include massive wealth reduction, investors’ panic and a massive loss of confidence and trust; to the extent that several governments were forced to provide financial bailouts from taxpayers’ funds.
However, as Kevin Smith of the Carbon Watch Fund has recently pointed out, the situation is potentially more serious for carbon markets, simply because while governments could offer financial bailouts to assuage the damage produced in the financial services market, “nature does not do bailouts.”
The truth of the matter is that there will always be scope for manipulation of the carbon market by unscrupulous investors. Basically this derives from the consideration that while carbon released today can be fairly accurately measured, when it is to be saved or sequestrated some time into the future, through perhaps a forest carbon project it becomes contingent on too many uncontrollable variables. These include 1) that there is no systemic project failure; 2) that there is additionality,(in other words the carbon captured by the project would not have occurred without it); 3) that there is no leakage (this would occur if saving carbon directly through the project indirectly results in releasing carbon into the atmosphere somewhere else; and 4) that the carbon sequestrated is validated through independent monitoring, reporting and audited verification (MRV). On top of all this it must be recognized that when carbon is scheduled to be saved some time in the future, it should be discounted back to its present value.
Conclusion
In conclusion there is the view (held mostly by sceptics) that forest carbon projects are more often than not over-complicated, too cumbersome, and covering too many countries and jurisdictions at the same time, thereby ending up being far too opaque and, therefore, generally dodgy. From all sides there is the complaint that the purpose of the carbon market seems more driven by the desire to make money at all costs rather than contributing to solving the global climate problem.
Next week I shall briefly report on a recent survey of forest carbon projects in the global carbon market as well as the recent Oslo, Norway, Climate and Forest Conference (May 2010). This will bring to an end for the time being my discussion of the potential role of the carbon market as a solution to the problems of global warming and climate change.
