The Future Of Carbon Markets: Taking Politics Seriously – OpEd

By Peter Newell

Carbon markets are under attack on all sides, despite ongoing faith in their ability to deliver meaningful reductions in greenhouse gases (GHGs).

As the Durban climate summit approaches and as the first commitment period of the Kyoto Protocol comes to an end in 2012, carbon markets have been adversely affected by low prices that are failing to drive necessary investment in low carbon technology and a series of scandals about their integrity.

Some are questioning whether it is right to call time on carbon markets – and not just NGOs.

Referring to the European Union’s Emissions Trading Scheme, which is a considerable source of demand for Clean Development Mechanism (CDM) credits, Henry Derwent, former head of the International Emissions Trading Association recently said “the market consists of individual participants, many of whom have other places to go if they find emissions trading has become too complicated and changeable a place to make money or secure investment income.”

At the international level the center piece of carbon markets is the CDM, an offset mechanism created under the Kyoto Protocol which allows richer countries to pay poorer countries to reduce emissions on their behalf where, in theory at least, it is cheaper to do so.

Projects have to show that they are additional (i.e. they wouldn’t have happened anyway) and different methodologies provide ways of ascertaining this. Doubts have been raised about the additionality of many CDM projects though, with many studies suggesting that for up to 40 percent of the projects additionality is unlikely or questionable.

Recent revelations from WikiLeaks cables in which government officials claim that no CDM projects from countries such as India (the world’s second largest host of CDM projects) can be considered genuinely additional give further cause for concern.

But the deal at Kyoto was that poorer countries were entitled to receive sustainable development benefits (technology, jobs, health benefits) from hosting these projects: lower-cost emissions reductions in return for development benefits.

The evidence is overwhelming that this has not occurred on anything like the scale anticipated.

Unless projects are also accredited by private standards (such as Gold Standard which now has 20 percent of the market share), you don’t get extra money for delivering sustainable development benefits.

Benefits claimed in Project Design Documents (PDDs) are not checked at the end of a project. The responsibility for assessing whether nationally defined sustainable development criteria have been met thus lies with national authorities whose backlog of work and the lack of time to scrutinize proposed projects fully means that they are not in a position to adequately screen projects for development benefits.

Carbon market advocates point to many CDM projects that have delivered GHG reductions and sustainable development benefits in spite of these problems. They highlight wind or solar energy projects, biomass and cooking stove projects that bring multiple cost, health and environmental benefits to poorer communities.

Critics contend that such projects can and should be financed by other means, such as direct aid, and not created as an offset opportunity which means industries in the North absolve themselves of some of the pressure to reduce their own emissions.

On the whole projects that bring substantial and lasting benefits are too few, and strong incentives still remain in place to go for “low-hanging fruit” opportunities that are low cost but earn lots of carbon credits – like eliminating industrial gases such as hydrofluorocarbon from refrigeration systems.

Still, many think it is too early to throw the baby out with the bathwater. According to the World Bank, CDM finance continues to represent the largest source of mitigation finance available to developing countries which could raise 18 billion dollars in direct carbon revenues over the period 2001-2012.

Reforms of the CDM have been proposed to address some of the problems confronted so far. But they are not teething problems that can be easily weeded out with further institutional learning and innovation – scaling up projects, reducing barriers to smaller ones, improving feedback to project developers.

They touch on the deeper politics of carbon markets and the role they play in responses to climate change which have to be addressed.

The challenge ultimately is to move from a carbon economy which is one small part of a global economy, largely run on fossil fuels, to a system of “climate capitalism” where growth and development are achieved on a low carbon basis.

This means working with powerful business and financial actors that will make money in a low carbon economy, in other words coalitions of the willing and the winning.

Given the urgency of tackling climate change to avoid three to four degrees warming, an argument for offsets is that they buy time for richer countries while they transition to a low carbon economy.

The problem, of course, is that most of them are not. Those that are also find that actions they do undertake are overwhelmed by fossil fuel-based growth elsewhere in the economy.

Are offsets, therefore, meant to be a temporary measure to bring down emissions while the necessary structural reforms take place in the economies that generate most emissions, or do they form part of a permanent solution?

Structural reforms will not happen quickly or easily, but how long should reliance on offsets be allowed as an alternative to tackling the sources of GHG emissions?

Strong rewards are needed for those businesses that are willing to invest in a low carbon future where, for the time being, the CDM remains just the icing on the cake, nice to have but not significant enough to change investment strategy.

Tackling climate change also means getting tough with businesses that continue to invest their money in fossil fuels in spite of evidence of the effect this is having.

Peter Newell is Professor of International Relations at the University of Sussex and co-author of the just released paper ‘Governing Clean Development: what have we learnt?’, with Jon Phillips, from the University of East Anglia’s School of International Development. Copyright Tierramérica.