The Carbon Credit Trading and its Darker Side The global economic slow down brought about by the financial turmoil in 2008 not only has resulted in the plunge of Wall Street equities, but also the price of carbon allowances and carbon credits in the greenhouse gas ( GHG ) emissions market.

In 2005, the EU Emissions Trading Scheme (EU ETS) introduced a market-based program the cap-and-trade system, offering a cost effective mechanism to reduce greenhouse gas (GHG) emissions. Under the scheme, a fixed number of emissions allowances are decided (capped by policy makers) and distributed to industry GHG emitters. Polluters are granted a certain number of such allowances that can be traded. A heavy polluter that has exceeded its designation to emit GHG can choose to buy the deficit allowances from another company that has excess as the latter has succeeded in reducing its emissions.

The program essentially offers economic incentives to polluters to achieve reduction targets. However, in anticipation of an imminent recession, many companies rush to cash in their emissions allowances for pure profit which are allocated free. Two reasons are quoted: first for urgent cash liquidity, and second due to lower carbon demand arising from less emissions amidst global recession.

According to a report in the Daily Telegraph, U.K. Jan 29, 2009, companies not only sell their surplus, but also allowances that would normally be used to comply with the scheme.  Almost €3bn (£2.8bn) worth of allowances have been sold since the beginning of December 2008, driving the carbon price down by almost 30%.

Lower prices benefit high polluters (e.g., oil companies) who can then purchase cheaper carbon allowances from the carbon market to comply with their limit obligations. Money is thrown at a problem instead of genuine engagement of green technologies for emissions reduction. It definitely has erred in the wrong direction!

Problem may be solved by simple cancellation of the excess permits, but market confidence will erode. Other alternative includes the climate tax system where emitters are taxed on the excess of GHG emissions. Tax money can then be channeled to help poorer countries in capacity building and mitigation for global warming. Others suggest to link all the Organization for Economic Co-operation and Development markets in order to establish global pacts and global carbon pricing for a more effective global trading system.

While critics are unhappy that carbon trading tend to benefit the big corporate and financial players, and the polluters; the mechanism undeniably benefits mankind in a much bigger depth and spread. Taking examples of the benefits enjoyed by the lesser financially categories: farmers are paid to plant trees, housewives in remote parts of developing countries are paid to harness methane for cooking, Africans in the poor remote Saharan regions are financed to enjoy an improved quality of life in agro-forestry activities..... Who could have offered these benefits extensively without the facilitation of a market-incentive mechanism.

The clean development mechanism, the cap-and-trade, and the climate-tax systems offer incentives for all parties at all levels, developed and developing, to reduce emissions. Common consensus is that greater level of transparency should be sought to avoid violations, deviations and abuses.

It was estimated that up to 20% of the carbon credits issued did not match genuine reductions. The system thus risks creating a false sense of security. Critics have argued that the CDM process has been manipulated, particularly by the owners of large-scale hydropower plants, which remain environmentally controversial.

The recent slump in the price of credits (from a high of €30 to €10 - €15 as of Feb 07, 2009) has also raised criticisms that the cap and trade scheme has turned carbon into another volatile market commodity used by speculators to make money. Critics also say the system has handed huge windfall profits to electricity utilities and that national governments have handed out too many permits at no cost to favored industries.

Emissions among industries covered by the EU system fell between 4 - 6% during 2008 compared with increases of roughly 1% in the two previous years, according to analysts who reviewed the figures. Most of the decline was from falling industrial and electricity production linked to the economic slump. The decline in emissions is good for global warming but it also means that CDM 'green' projects undertaken by companies in the developed nations to counter their carbon emissions, are being cut back. It would be cheaper to buy carbon credits from the ETS than investing.

At the Royal Society, Professor Kevin Anderson, director of the Tyndall Centre, aired his concern "At the moment, the level of emissions is rising so fast that we are heading for a world that is 4-5^oC warmer than now by year 2100. That would be catastrophic for the environment and for humanity... Carbon trading may have been the answer once but not any more,” he says. “It will just take too long to achieve anything, and we no longer have the luxury of time.”

References and related news:

Shanghai District to Pilot Carbon Trading Plan: Xinhuanet April 17, 2009
Australia Climate Exchange
Europe Seeks Global Carbon Trading Market: Telegraph.co.uk Jan 29 2009
Chicago Climate Exchange
Towards A Low Carbon Economy: WBCSD

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