Is carbon trading a good thing?

In my view, in the absence of a personal carbon rationing scheme, the response to climate change has to be led by governments rather than individuals. The current response has started at the top using the much maligned emissions trading scheme (EU ETS), this is now being followed up with the soon to be introduced Carbon Reduction Commitment (CRC) for mid sized energy users. Both schemes are cap and trade or, if you like, carbon rationing schemes. The fact these exist at all shows that although personal carbon rationing has drifted out of mainstream public debate, the principles are being used elsewhere.

The schemes I mentioned above have had mixed success so far. The EU ETS got going in 2005 and mandated that 10,000 of Europe’s largest power users and generators had to measure and report their emissions. In the beginning free credits were allocated based on current consumption. The idea is that as the total number of credits is reduced, their value would increase and it would become cheaper to invest in plant that reduced emissions and any excess could be sold on.

The problem was that because credits were allocated rather than auctioned, the level of allocation became the subject of huge political manipulation. Each country wanted its own industries to have plenty of credits and each sector lobbied hard so their operating costs did not increase too much. Rather unsurprisingly, the result of the lobbying was that the too many permits were allocated and soon everyone realised that no one would be caught short and so the carbon price collapsed. The Carbex graph shows this happening in 2007 and 2008.

Data comes from: (http://www.eex.com/en/Download/Market%20Data/EU%20Emission%20Allowances%20-%20EEX)

But not to worry, to be honest you can’t blame the Politians for adopting a cautious approach, imagine if the costs had rocketed to thousands of euros per tonne and power stations had to be shutdown because of carbon prices. That would have done more long term damage to the credibility of schemes like this.

In 2008 all member states submitted their new allocations and since then the carbon price has remained relatively stable, many advocates suggest that the allocations should be cut much quicker to provide a higher price of carbon.

Many see the emissions trading scheme as merely making money for traders and speculators, more of what got us into all the mess we’re in. But in its simplest form I think is actually a good idea. If I own a power station in Poland and I’m thinking of upgrading something, I work out that if I improve efficiency (in terms of carbon) by 10% I will no longer need all my credits and can sell the excess to people plants where upgrades would cost more than mine. Every possible upgrade or project that will generate a reduction in carbon can be modelled and the necessary carbon price to make it viable can be worked out. As the total number of credits is reduced the price will rise making more projects viable.

The beauty of the whole thing is that it doesn’t rely on forward thinking CEOs or public pressure only on something that can be monetised and factored into corporate decision making.

The main problem with the the EUETS and other schemes is that most of the trade doesn’t occur between European power stations but other international projects. The UNFCCC accredits projects from the developing world under the Clean Development Mechanism (CDM), which was invented as part of the Kyoto Protocol, this then allows developing country projects to offset some of the emissions reductions of the European scheme. This means that if we can persuade the developing world to build enough CDM accredited energy schemes we won’t need to change anything back in Europe. We can still meet our binding targets and as long as the developing world has only aspirational targets it won’t matter that they sold off all the ’cleanness’ to the Europeans.

To conclude, carbon trading is a useful tool but carbon markets should be restricted so when the EU commits to reducing carbon emissions by 30% the carbon emitted by the EU will actually drop by 30%. Offsetting just provides a another chance for people to play the system and shy away from what actually needs to happen.

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2 thoughts on “Is carbon trading a good thing?

  1. I’m wandering how possible international carbon trading would be in a world where China is as belligerent as Mark Lynas suggests in this very interesting article (which you might have seen). Has anyone read enough to know how strong his argument is? I’d be interested to see an NGO response.

    Assuming he is right, and China is going to be the major obstacle to any kind of international effort to tackle climate change, then what are our possible responses? Off the top of my head:

    Civil Society: presumably Chinese civil society is not very powerful (although I’d be interested to learn more about it – there is some AIDS activism in China isn’t there?)

    Distort the market: would it be possible to engineer a situation where China’s major customers (manufacturers etc) required greener production methods? Either because western consumers wouldn’t buy brown products, or because western governments applied heavy taxes on them, so consumers wouldn’t buy them? And would this make a difference, or is manufacturing for western markets not really the main source of pollution?

    I’m sure there’s more…

  2. I read the Mark Lynas article too. It certainly was very interesting. His description of China just saying no to everything certainly gives the impression that they have no interest in a treaty on Carbon. If you accept that China have taken this stance at Cop15 it leads to the question, why?

    As far as I can see there are two possible reasons. Firstly, they don’t want a deal full stop because they see it as threatening their sovereignty. Or secondly, because the deal wasn’t very attractive to them. Something like Copenhagen requires all sides to make compromises, even if China was taking only a self interested point of view, signing up to a deal where Europe and the US agreed to reduce carbon, and so restrict growth, could well be a massive win for China particularly if their own commitments were limited.

    I’d like to believe that the deal offered was not attractive enough for China and the decision was rational rather than a fundamental distrust of international institutions and this shows an unwillingness to to engage with this kind of initiative in the future.

    Interestingly enough, until recently Chinese wind power was one of the largest recipients of CDM credits, traded on the EUETS. Until thte UNFCCC decided that the projects didn’t meet ‘additionality’ criteria. This kind of experience may colour the way china views these institutions. ( http://www.google.com/hostednews/afp/article/ALeqM5jO2Ydb4kYya923lht15jtkv816rA)

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