Emissions Trading: The economics of ‘bagging and tagging the atmosphere’
The climate change crisis has added a new sought-after commodity to the trading market: Carbon. Global attempts toward engineering this complex economic architecture have resulted in a battle between age-old business Darwinism, and some of the planet’s leading minds.
By now the world is generally well-versed in matters relating to climate change, whether the cause is man-made (anthropomorphic) or natural. It has become widely known that these truths are a lot more inconvenient to the developing world, with Africa set to be hit the hardest though its’ comparative contribution to the warming saga has been the lowest.
Ensuing debates have even pitted off warming against cooling, while many suggest that the present phase of climate change is part of the earth’s natural cycle.
According to Chris Field, director of the Carnegie Institution’s Department of Global Ecology and co-chair of the Intergovernmental Panel on Climate Change (IPCC) Working Group 2; “There is a real risk that human-caused climate change will accelerate the release of carbon dioxide from forest and tundra ecosystems, which have been storing a lot of carbon for thousands of years."
The IPCC commonly collects information from the likes of scientists and policy advisers such as Field, in order to take the appropriate action toward the implementation of much-needed adaptation and mitigation scenarios. "We don't want to cross a critical threshold where this massive release of carbon starts to run on autopilot," he said.
As a result of the complex and inconsistent nature of the information, certain crucial statistics were omitted from the fourth assessment report. "The data now shows that greenhouse gas emissions are accelerating much faster than we thought," said Field. "Over the last decade developing countries such as China and India have increased their electric power generation by burning more coal. Economies in the developing world are becoming more, not less carbon-intensive."
Whereas the past two decades saw attention fixed on validating scientific proof, recent efforts are now directed toward curbing greenhouse gas emissions (GHG’s) at all costs. The first real global collaboration toward generating GHG mitigation solutions can be traced back to the United Nations Conference on Environment and Development (UNCED) then the ’92 Rio Earth Summit. As a result, the United Nations Framework Convention on Climate Change (UNFCCC) international environmental treaty was set up to stabilise atmospheric GHG concentrations at a level that would inhibit hazardous anthropogenic interference with the climate system.
The famous Kyoto protocol is one of its primary offshoots, designed to set mandates on emission limits. Thus far the majority of world nations have committed to limiting their harmful emissions under this protocol, except the folk on the fence in the US, who are signatories, but have neither ratified nor withdrawn from the treaty.
The UNFCC defines emissions trading, as allowing “countries that have emission units to spare - emissions permitted them but not "used" - to sell this excess capacity to countries that are over their targets.” As a result, a new commodity was created in the form of emission reductions or “removals”. Allowed emissions are divided into “assigned amount units” (AAUs).
Being the principle GHG, Carbon made its entrance into the trade arena, or ‘carbon market’ much like any other commodity. Several regional and national emissions trading schemes are in operation at present. Among them are the European Union Emission Trading Scheme (EU ETS), United Kingdom Emissions Trading Scheme and the New South Wales Greenhouse Gas Reduction Scheme. In the USA, carbon’s version of Wall Street is presently the Chicago Carbon Exchange (CCX), the country’s’ main cap-and-trade system.
The CCX’s chairman and CEO is also its founder, economist and financial innovator none other than the "father of carbon trading", Dr. Richard L. Sandor, tipped ‘Hero of the Planet’ by Time Magazine in 2002 for founding the Exchange. The CCX is North America's only cap-and-trade system for all six greenhouse gases, with extensive global affiliates and projects. These include the European Climate Exchange (ECX), Insurance Futures Exchange (IFEX), Montréal Climate Exchange (MCeX) and Tianjin Climate Exchange (TCX).
Cap & Trade
In essence, the cap-and-trade scheme looks at ways of tackling emissions targets through a system of credited incentives. At its base is the ‘grandfathering provision’, which supplies reductions incentives to emit pollutants. Very simply put, the atmosphere is packaged, priced and sold to the highest bidder.
Former World Bank Chief Economist Nicholas Stern’s report on the Economics of Climate Change (The Stern Review) has played a pivotal role in supplying a foundation of workable answers to the crucial need for emissions reductions in the business sector. In conjunction with the London School of Economics and Political Science (LSE), Stern tackles various issues that have arisen since global engagement in GHG reduction via the ‘Key elements of a Global Deal on Climate Change’.
According to this report; “Achieving growth and fighting poverty must be key objectives for all countries but particularly for the developing countries.”
With regards to international emissions cap and trading, the report proposes that allocating a price to GHG emissions should be a central pillar of mitigation policy. Coal served its purpose in the Asian sectors and until it becomes completely redundant, according to Stern; “It is crucial to make polluters pay for the damages they cause in order to change behaviour on the massive, widespread, and cross-cutting scale necessary to tackle climate change.’ It further suggests that the power of a global cap-and-trade scheme should be harnessed,” to generate significant financial flows to developing countries: around $20-75billion per year in 2020, and $50-100billion per year by 2030.”
An alternate version of the Cap-and-trade system is known as Cap-and-share, a design focused on carbon trading from a public point of view. Cap-and-share is the brainchild of Richard Douthwaite, economist government climate systems advisor and co founder of the Irish Foundation for the Economics of Sustainability (Feasta).
According to Douthwaite; “Cap-and-share is a way of upping the price of fossil fuels and recycling the money to citizens. It is rationing at the top level rather than at the level of individuals.” Jeremy Wakeford, research director of the South African New Economics Network has conducted extensive research into the system’s viability on behalf of Feasta, reporting on the impact a global cap-and-share scheme would have on, for example, South Africa. Wakeford observes that SA; “mirrors the wider world in that it has two linked economies, a rich, energy-intensive one and a poor, low-energy-use one.”
He explains that as a result, the study of the effects that cap-and-share would have if introduced in SA as part of a global climate settlement, provide a good indication of how the scheme would affect the world as a whole. Wakeford’s findings show that “as much as 70% of the population would be better off, because they would receive more from selling their emissions permits than their cost of living would go up. The income of the bottom 20% could double.”
In addition, the Carbon Tax Centre (CTC) has its opinions on why the carbon tax system too would foster economic equity. The CTC is a non-profit, non-governmental organisation founded by economist Charles Komanoff and attorney Dan Rosenblum in order to encourage “candid discussion of carbon taxing in the national arena” and to provide intellectual and practical support, whilst encouraging a sense of community.
One such argument is brought fourth by Climate expert James Hansen, head of the NASA Goddard Institute for Space Studies in New York, acknowledged as one of Time Magazine's 100 Most Influential People in 2006. In his recent paper; ’Carbon Tax and 100 Percent Dividend’, Hansen defines cap-and-trade by saying; “The alternative to carbon tax and 100% dividend is Tax & Trade, foisted on the public under the pseudonym ‘Cap & Trade’. A ‘cap’ increases the price of energy, as a tax does. It is wrong and disingenuous to try to hide the fact that Cap is a tax.”
Carbon tax systems generate significantly less corruption than cap-and-trade systems. Hansen explains that making direct monthly deposits of money into individual citizen’s bank account, would be a pretty convincing way of proving the fairness and transparency of the system. “The honest approach, the effective approach, for solving the global warming problem would be a tax with 100% dividend. The public is not stupid. They will understand that the hooks and eyes of a less comprehensive more dissembling approach will be put there for some reason other than saving the future for their children.”
What this means for Africa
In accordance with UNFCC’s Kyoto protocol, the market also makes inclusion of trading units transferred under various schemes, each unit equal to one tonne of CO2. These are subdivided into three categories pertinent to emerging economies; a removal unit (RMU), emission reduction unit (ERU) and a certified emission reduction (CER).
The RMU is issued on the basis of land use, land-use change and forestry (LULUCF) activities such as reforestation. The ERU is most commonly generated by a (JI) joint implementation project and CER’s can be sourced through clean development mechanism project (CDM) endevours.
Stern places this into context; “Reduced deforestation and forest degradation (REDD) and afforestation/reforestation (A/R) should both be included in any trading. Including forests in a single market for all types of carbon (or, equivalently, credits that are freely traded between linked markets) would probably also be the best means of achieving equity across developing countries.’
With developing Africa being prime target for offset strategies, terms such as ‘Carbon colonialism’ have surfaced among concerned Civil Society groups as a result of circumstances under which baseline and credit CDM schemes have resulted in the maltreatment of indigenous peoples and their environment. Cases of trade fraud and accounting discrepancies have also come to the fore.
In 2001 Norwegian NGO Norwatch published a report entitled; CO2lonialism - Norwegian Tree Plantations, Carbon Credits and Land Conflicts in Uganda’, revealing that Uganda’s experience of CDM was not all roses. Acting Deputy Commissioner for Forestry, Ignatius Oluka-Akileng at the time was quoted to implore the writer; “We just have to admit that we know nothing about the trade in CO2 credits, neither how it will function nor how much the foreign investors will profit from it. Can you please help us with information about this?”
Whilst the Kyoto Protocol and CDM Executive Board’s solutions think tanks are not able to cover regulatory ground fast enough, The Energy Research Centre (ERC) at the University of Cape Town in South Africa has narrowed the playing field from developing country perspective in various areas, stressing this need for regulation in the interests of the both the growth sector and the polluters. It is not yet certain how far the continent’s governments have progressed since Oluka-Akileng in 2001 toward keeping abreast of ever-changing policy-issues. So far the sacrifices of have not been pleasant, and reports from Africa and South America continue to flood in.
Stern cites a possible cause;” Validation, independent scrutiny and verification of measuring reductions against project by project CDM undertakings imposes substantial transaction costs. Investigations such as a report on ‘Overcoming Barriers to Clean Development Mechanism Projects’ have revealed the validation process at the time to be as long as 300 days from validation to registration chasing transaction costs up to US$ 500,000 (€325,000) per project.
On the one hand, for a phenomenon as new as the ‘economics of climate change’ to have teething problems is to be expected, obstacles are still being encountered as the global trade markets are penetrated by a system that pivots the opposite to instant gratification on stock returns. On the other, the continent’s highly sought-after biodiversity places it in a strong position of negotiation, and also ultimately creates the possibility for it to be steered toward development through low carbon technologies at the outset, as opposed to its more industrialised Asian counterparts. The continent’s lack of heavy industry has thus shifted market focus onto its natural resources in favour of offset schemes, making carbon tax and cap-and-share crucial to averting future catch 22’s.
In December this year at the historical United Nations Climate Change Conference in Copenhagen, governments will be expected to finalise a treaty to limit GHG’s that will pick up where the current Kyoto Protocol leaves of after its 2012 expiration date. The parties involved face many challenges toward reaching consensus. Until such time that a fixed system is adopted, Africa is required to bear vigilance in order to avert unnecessary pitfalls to both its young emerging markets – and its vulnerable communities.
In view of the global fossil fuel dependence v.s. climate change, ongoing debates surrounding natural cycles vs. anthropogenic emissions do little to serve the paradox that Africa, the continent with the greatest resource wealth, has its poorest people. The worlds top Development Banks are admitting a need to get their act together on behalf of the less fortunate, fast. As a result, focus has shifted to assisting developing countries in adaptation to climate change.
According to the World Bank's environment director, Warren Evans, the institution began focusing on adaptation around five years ago and is still assessing how best to include adaptation in development projects. "Our knowledge of adaptation, in comparison to mitigation, is weak," Evans said. Adaptation in a first world and third world country has different meanings. At this point it relates to issues such as protecting regions from climate change-related fatalities, water conservation measures, the use of flood-resistant crops and economic losses.
By including nature as a global commodity, these economic losses are now made synonymous with finance, and as a result issues of this nature will automatically need to be classified as ‘adaptation assistance’. Whether warming, cooling, entirely bogus or natural, if trade actions ultimately assist in poverty alleviation through methods other than interventionist aid, then the scheme is worth every carbon credit it can securely muster.