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  • Weekend Video: Carbon Offsets Go Wrong
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  • FRIDAY WORLD, May 20:
  • Europe’s New Energy Transition Accelerating
  • New Energy Still The Best Buy

    Tuesday, January 12, 2010


    Carbon Trading; How it works and why it fails
    Tamra Gilbertson and Oscar Reyes, November 2009 (Dag Hammarskjold Foundation)

    The emissions trading system that supports the cap&trade provision of the Obama administration’s energy and climate legislation stirs intense passions and violently contradictory impressions of its value and effectiveness.

    Advocates (including political leaders, scientists, environmentalists and veterans of the climate change fight) believe it has already, in Europe, put the powers of the marketplace to work to achieve emissions controls and will allow the U.S. to participate in a worldwide effort to dial back the rising global temperature and its likely attendant catastrophe.

    The authors of Carbon Trading; How it works and why it fails, Tamra Gilbertson and Oscar Reyes of the Dag Hammarskjold Foundation, believe cap&trade redefines the challenges of climate change so that “neoliberal economics” can provide a market-oriented solution.

    Gilbertson and Reyes (G&R) argue that the EU Emissions Trading Scheme, the world’s largest carbon market, is a failure and the UN Clean Development Mechanism (CDM) supports “environmentally ineffective and socially unjust” emissions reduction projects. They argue that there are more effective, just and fair methods of fighting climate change, including more precisely targeted subsidies and better regulation. They are right. But those more just and fair methods are not presently accessible.

    Advocates of the EU ETS and a global emissions trading marketplace contend that the short-term failures of the system already at work are the result of developing from scratch what is projected to become one of the world’s largest commodities markets. They point out that, over the long-term, EU emissions have fallen a small amount and, if the marketplace is allowed to work, emissions will continue falling.

    Advocates of the CDM argue that the majority of its projects have cut emissions and the system can become even more effective as the skill to manage investments grows.

    Fails? (click to enlarge)

    The Gilbertson and Reyes (G&R) book has 5 chapters:
    Chapter (1) introduces carbon trading, explains how it works and who the market players and regulators are;
    Chapter (2) explores the history and architects of emissions trading;
    Chapter (3) examines the EU ETS, presents the case that it has rewarded polluting companies and failed to cut greenhouse gas emissions and argues that the overallocation of emissions permits that allowed these failures are fundamental to cap™
    Chapter (4) presents the CDM, examines 4 CDM project case studies (in Thailand, India, Indonesia and Brazil) and argues that offset projects, even those that fund New Energy, will not defeat climate change; and
    Chapter (5) presents alternative solutions and how to make them work.

    There is no better way to review a book than to let it speak for itself. Here is the closing paragraph of Carbon Trading; How it works and why it fails:

    “There are no short cuts around the difficult work of political organising and alliance building. There are no back roads or technofixes around the historical and international policies that have created climate change. No aspect of the debate on climate change can be disentangled from discussions about colonialism, racism, gender, women’s rights, exploitation, land grabs, agriculture and the democratic control of technology. Carbon trading will never address these critical issues because the struggle against climate change has to be part of the larger fight for a more just, democratic and equal world.”

    It is a profoundly admirable and noble vision of a world that truly works not just for the wealthy but for one and all. If this was a book review, NewEnergyNews would describe the book as a jargonistic diatribe that offers unachievable ideology in place of an imperfect but accessible start towards the beginning of a solution. But this is not a book review.

    click to enlarge

    Both the EU ETS and the UN CDM were outgrowths of the 1997 Kyoto Protocol although the concept came out of academic theories at the University of Chicago in the 1970s and was first applied on a significant scale to enforce the Clean Air Act and control power plant sulfur dioxide (SO2) emissions beginning in 1989.

    World efforts to respond to global climate change have so far been almost completely inadequate. The ambitions of Kyoto have been largely fruitless.

    EU emissions did, however, fall 1% in 2007, well in advance of the reduced energy consumption associated with the 2008-09 economic downturn. Despite G&R’s assertions to the contrary, this emissions reduction is likely attributable to the ETS or at least to the heightened awareness about emissions Kyoto and the ETS spawned.

    EU emissions were down in 2007, before the economy slowed them. (click to enlarge)

    Gilbertson and Reyes insist cap&trade is not a solution to climate change but an effort to make the problem fit the capitalist model for a solution in the absence of concerted action by the community of nations.

    In a cap&trade system, governments assign hard limits on how many GhGs businesses and industries can generate. Allowances, which are emissions permissions, are given or auctioned. Businesses and industries that do business below their limits (caps) can sell the extra allowances to businesses and industries that need to spew beyond their limits. In this way, the allowance trading market creates a price for the allowances traded and gives businesses and industries an economic incentive to reduce their spew.

    The EU ETS, the world’s largest carbon market, was worth US$ 63 billion in 2008 and continued to expand in 2009 despite the economic downturn.

    Concerned that the tightening of caps could drive allowance prices so high it would impede the conduct of business and drive the cost of energy to consumers out of control, the EU welcomed the concept of offsets into the system.

    In an offset system, undeveloped and developing world New Energy, Energy Efficiency and emissions cutting projects (from wind and solar installations to forest protections) are funded by emitters in the industrial world. Businesses and industries in the developed industrial world earn allowances for every unit of emissions the projects they pay for save, or offset.

    The UN Clean Development Mechanism (CDM) is the biggest offset system. It has so far registered almost 1,800 projects (September 2009) and 2,600+ projects await approval. Offset credits may be worth as much as US$ 55 billion by 2012.

    Problems have plagued both the ETS and the CDM from the beginning. That is not really surprising since they are international market systems created from nothing in just a few years. Each problem has been met with solutions.

    The ETS overallocated allowances in the initial 2005-06 period and was not prepared for the more recent 2008-09 economic downturn. Both periods saw unworkably volatile fluctuations in the price of emissions. Both periods have spawned innovation in the market system.

    The first phase was volatile and the second phase taught lessons; what will the outcome of the third phase be? (click to enlarge)

    G&R repeat the hackneyed and wrong-headed accusation against the CDM that it does not cut emissions but only transfers them from the developed world to the developing world through offsets. This neglects the fact that while the businesses and industries that purchase offsets do go on emitting at their allowed levels, the offsets are not designed to reduce emissions but to give the businesses and industries a mechanism to profit while participating. This keeps them in the system. The hard caps on emissions ratchet down over time. That is how the system reduces spew.

    By far the most admirable thing about the authors’ case that cap&trade is broken is that they do not stop with criticism. If the only rational response to cap&trade’s failures is change, G&R recognize that a much more fundamental mode of change must occur before alternative plans to fight climate change will work.

    This more fundamental change begins in a “broader context of struggle” and requires (quoted for fear of misrepresentation):

    (1) “Actions by g roups, especially Indigenous Peoples and forest-dwelling communities, to protect community forests and other local commons are a powerful force against climatically destabilising land clearance, commercial logging, industrial fish farming, tree plantations and industrial agriculture.”
    (2) “Networks against trade liberalisation, privatization and commodification help slow growth in unnecessary transport and protect local subsistence regimes against threats from fossil fuel-intensive sectors.”
    (3) “Popular movements against fossil fuel extractions, including movements against oil wars, gas and oil pipelines, fossil fuel extraction, power plant pollution, liquefied natural gas (LNG) expansion, coal mining and mountain top removal, tar sands extraction and airport and highway expansion, all help curb extraction of fossil fuels.”
    (4) “Popular movements in both North and South against fossil fuel pollution from electricity generating and other industrial installations contribute to building solidarity and stopping dangerous pollution that causes climate change.”
    (5) “Initiatives to set up small, community led renewable energy sources for local benefit, whether off-grid or on-grid, build resistance by providing more sustainable direct energy. Often they provide a cheap alternative to fossil fuel oriented centralised generating systems particularly in many areas of the South.”

    G&R believe these fundamental actions are the basis of local resilience, community solidarity and organized action and so are crucial both to the fight against and the adaptation to climate change.

    Bottom lines: G&R argue that carbon trading fails not because the rules have been designed inadequately or have been badly applied but because of a complex interaction of state and corporate power. Those with the loudest voices want offsets to escape the responsibility to change industrial practices and domestic power production.

    Offsets offer an income stream to any rural people who own land. (click to enlarge)

    Emissions trading decisions are made to keep players competitive rather than to protect the environment. Offsets do not include concerns about sustainability or community needs.

    These factors cannot be tempered, G&R argue, by better rules and regulation because they are the result of the intent by corporate powers to preempt and delay that is fundamental to the economic and political systems that created climate change.

    The powers use emissions trading to redefine the problem. It requires that climate change be defined in measured units of GhGs that can be reduced through caps. This, G&R argue, is an imagined precision real climate change does not offer.

    Having put the problem in measureable units, cap&trade sweeps change across the economy (power generation , manufacturing and agriculture) and deflects questions about the underlying economic model of sustaining GDP growth with cheap fossil fuels.

    The authors are right that in some cases, for reasons understood and for reasons not folded into the basic cap&trade concept, emissions have risen. G&R argue the oversimplification of climate change so as to make it fit the commodification of GhGs is responsible for failing to control emissions.

    In fact, the very failures of the CDM the authors point at are examples of attempting to ensnare the complexity of the many GhGs into offsets. The familiar complaint against offsets, that they displace emissions in one location with action at a convenient distance in the undeveloped or developing world, over-simplistically suggests the problem of emissions is local. But the CDM assumes climate change is a complex, multi-causal global phenomenon.

    Climate change is global so offsetting emissions anywhere benefits everywhere. (click to enlarge)

    The authors object to widening the sectors to which offsets can apply and criticize the idea as merely widening the system to expand the volume of emissions in the markets. Once again, they fail to recognize that the nature of the climate change fight requires an ever-expanding effort against a widening set of emissions generation processes in a fully complex model.

    Yes, this benefits the financial sector, but only because it directly addresses the wide-ranging nature of climate change and the financial sector has designed its market to encompass that wide range of causal factors.

    Addressing this multi-causal nature with a multi-pronged attack, emissions trading will continue to reveal ways it can stumble and be gamed. Yet it is likely to do just what it is designed to do and just what G&R accuse it of being designed to do, laboriously and incrementally reduce GhGs and slowly, deliberately reverse the worsening greenhouse effect.

    Another familiar theme of cap&trade criticism that the book echoes is the complaint that emissions market derivatives are being used as investment vehicles. The EU ETS does, indeed, need to address this. It might do so in the way the designers of the U.S. system have, by prohibiting the use of emissions allowances in any form of derivative or alternative investment vehicle.

    The economic bubbles of the last few years have produced a wave of anxiety about the validity of financial markets themselves. Because such anxiety leads to caution, it is well-placed. Yet, as they have throughout known human history, businesses will do business and the best that can happen is that they are required to do so transparently according to a set of commonly respected regulations. If the market system is designed with adequate flexibility, regulations will be appropriately altered when the creative force of human greed innovates ways to circumvent them.

    click to enlarge

    Proposed alternative solutions.

    G&R point out that environmental protection has only recently been done through commodity markets. This is true. Cap&Trade was an innovation of free market enthusiasts at the University of Chicago and it was first embraced as a system of environmental protection under the Republican administration of the first President Bush, as a strategy reduce the coal plant sulfur dioxide (SO2) emissions that cause acid rain. It is now being embraced by Democrats who, during the 1990s, discovered the successful political strategy of defending markets.

    Though the anti-market forces don't want to acknowledge it, cap&trade was essential in controlling acid SO2 and acid rain. (click to enlarge)

    There is no single alternative approach to fighting global climate change, G&R argue. It is practices in many sectors, from manufacturing to industrial agriculture, and they all must be studied and managed. Regulated, in fact.

    Yet they refuse to accept that a well-regulated marketplace that trades in a commodity common to all of those sectors might be the means through which a multi-factorial action might be mounted. Because global climate change, they say, is not simply a question of money.

    Yet it is and they say so, over and over. The corporate powers that operate through the neoliberal economic and political system G&R condemn do so to defend their ability to make money.

    In any case, the authors call for the study of a wide range of local technologies adapted specifically to local practices to solve global climate change. This cannot be described in a single grand scheme like cap&trade but requires respect for the specific and indigenous. It is the kind of respect an international trading scheme cannot possibly offer.

    This defies the actual freedom well-regulated commodity trading would give to growers and independent power producers the world over. They would be left to grow and produce and they would be given only a marketplace in which to maximize their returns. It is not a perfect system and it has failed and been manipulated. But it has long served the increasingly global trade in goods and continues to bring ever more disparate elements of the developing world into its circle year by year.

    The CDM offset process is exactly the kind of wide-ranging mechanism the book's authors say is needed. Ever more effective regulation is what is necessary. (click to enlarge)

    Extremist jihadists resent the way the global marketplace has brought modernity to ever more disconnected places but the people in those places who can, through commodity markets, earn their way to modern health and educational standards do not resent it. Curiously, G&R put themselves on the side of extremist opponents of modernity.

    The authors say there is a range of ideas with more promise than the emissions markets designed to sustain unsustainable Western industrial and agricultural practices that emissions markets enable. G&R offer a “non-exhaustive” list of suggestions which is the most useless and pointless part of the book:

    (1) shift subsidies away from fossil fuels to help keep them in the ground and away from military expenditure;

    This is such a great idea it is currently being fostered by the same Obama administration that backs cap&trade. G&R suggest the idea as if the fossil fuel industries and the military would simply say “Oh, you want our subsidies and our funding? O.K., here.”

    The authors especially like the idea of shifting the money to those most in need and those most affected by the development of fossil fuels. Such a shift is actually part of the agenda of the neoliberal political economy. It will be one of the hardest-won fights of modern times and all the radical righteousness that G&R bring to their manifesto will not win it.

    The good news is that the high cost of lives and fuel is already driving the military away from fossil fuels as fast as it can find ways to make the transition.

    An effort is underway but the entrenched powers will not roll over. (click to enlarge)

    (2) reassess energy demand and efficiency;

    This is being done through the New Energy and Energy Efficiency industries around the world and every member of the fight agrees the best way to serve their effort is by putting a price on emissions, which – along with capping emissions – is a crucial primary goal of cap&trade.

    Cap&Trade is not universally applauded as the most perfect way to price emissions, just one of the most accessible ways.

    click to enlarge

    (3) advance the public debate on climate change and ecological debt;

    There is simply no disagreement between any members of the fight on this. In their own way, it must be admitted, G&R contribute to the cause by bringing the radical left to the discussion.

    (4) expand useful forms of conventional regulation;

    Here again, G&R put this “solution” forward as if the forces that benefit from uncontrolled emissions will just say, “O.K., what kind of changes do you want us to make in the way we do things?”

    Regulation does not come easily and in recent decades those in power have become masters of the lobby and masters of the political spin.

    Anybody who has watched the heroic grassroots effort to stop the growth of coal understands that imposing new regulations is a tremendous and on-going struggle and putting a price on emissions will only contribute to that struggle.

    A final point about regulation: A regulated system run by corrupt humans has only independent watchdogs as a last line of defense; a marketplace regulated by corrupt humans has the many players in the system who stand to lose from cheating as an army of watchdogs.

    Regulation is essential. (click to enlarge)

    (5) institute carefully-directed programmes of public investment;

    The bad news: By now, there cannot be many who do not understand that a precarious and overextended economy no longer has resources to do things everyone would like to see done.

    The good news: Cap&Trade raises revenues that can be put to work in public investment programs.

    Other methods of pricing emissions, especially the “carbon tax,” raise revenues. The only thing that makes a “carbon tax” a bad idea is that it will have even greater problems getting through the political system uncompromised than cap&trade has had.

    G&R point to the global enthusiasm for subsidizing AGROfuels as a folly of the neoliberal political economy. Perhaps; but when it became widely recognized that AGROfuels do not cut lifecycle GhGs, investors began to pull away, realizing there would be no benefit when emissions were capped.

    (6) undertake legal action against climate offenders

    Legal action is crucial and those who work in the system are heroes. Here’s the problem: The powers-that-be have lawyers, too.

    Without a market driving change, those powers-that-be can keep litigation tied up in legalistic complication a long time. This good earth simply does not have a long time.

    Cap&Trade should not preclude legal action against polluters. It should simply give the polluters a good reason not to fight change but to figure out how to profit from it.

    Action in the courts, action in the streets and action in the marketplace are all necessary. (click to enlarge)

    (7) secure land tenure for Indigenous Peoples’ and forest-dependent communities and institute payments to Indigenous Peoples for their territorial rights; and (8) promote sustainable local farming and people’s food sovereignty; and (9) build alliances between communities and movements based on local needs and desires; and (10) organise and support local action;

    These are all superb suggestions. They appear to have little potential to affect global GhGs except if they were to fulfill the radical left’s long-held dream of fomenting an uprising among the disenfranchised poor of the world. It is noble work and when it happens NewEnergyNews will be there to root it on.

    The UN process is making an effort to connect and serve Indigenous Peoples. (click to enlarge)

    Here’s the thing: Global climate change is coming and the new world order and the emergence of the alliance of the disenfranchised and poor is not anywhere visible on the horizon.

    Shifting funding to the disenfranchised is crucial. Right now, UN efforts are being directed at creating a fund to help Indigenous Peoples weather the worst impacts of climate change. The effort is inadequate.

    The sooner the world puts a price on emissions, the sooner that fund will grow richer and the slower the impacts of climate change will worsen. Cap&Trade is a very imperfect way to price emissions but it is probably the most immediately accessible way to do so.

    (11) explore taxation as a supplementary measure

    Yes. Explore it like crazy. Just put the corporate players to work on cap&trade while doing so.

    Having proposed taking a look at the “carbon” tax, however, G&R immediately express worry that it will require the invention of the commodity it would tax. They also worry about how all that dirty money would be handled.

    click to enlarge

    - From the conclusion of Carbon Trading; How it works and why it fails: “The headlines tell the story…‘Billions wasted on UN climate programme’… ‘Truth about Kyoto: huge profits, little carbon saved’…‘UN eff ort to curtail emissions in turmoil’…‘The Carbon Folly: Policymakers’ Favourite Global Warming Fix Isn’t Working’…‘European Union’s efforts to tackle climate change a failure’… ‘The great carbon credit con: Why are we paying the Third World to poison its environment?’…Behind these headlines lies a tale of the growing failure of the main tool that governments, financial institutions and corporations have adopted to address climate change. This is carbon trading – a multibillion dollar scheme whose basic premise is that polluters can pay someone else to clean up their mess so that they don’t have to…”
    - From the conclusion of Carbon Trading; How it works and why it fails: “For the world’s majority, global warming remains a problem for which they already have the solution: forgoing excessive use of fossil fuels. The recent Western fashion for distancing responsibility for climate change, both spatially and temporally, by attributing it to future car-hungry Chinese or Indians, is a diversion possible only under the assumption – shared by elites in North and South alike – that a society that mandates over-consumption is the universal human destiny.”
    - From the conclusion of Carbon Trading; How it works and why it fails: “To treat carbon trading as if it were an alternative on a par with the political and social actions mentioned above signals a loss of political and historical perspective. In this light, the question, ‘What is your alternative
    to carbon trading?’, needs to be turned on its head. Carbon trading itself is a novel elite ‘alternative’ for addressing climate change and undermines other, more fruitful mainstream strategies of movements and networks such as those mentioned above. Not only are these strategies more ‘technically’ realistic than carbon trading, they are more politically realistic – provided environmentalists and other activists fulfill their responsibility to help build alliances that can make them so…”


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