Climate finance, the new fiscal frontier
Not deterred by the international financial crisis which became widespread in 2008 or by the many recessionary patterns that grip most country economies, financial engineers are massing in København to prepare for the next wave. This one is about the commercial opportunities which renewable energy technologies, country climate funds and sectoral mitigation programmes promise to contain. The bankers and investors have gathered with them many of the skills used in the global derivatives trading markets, and even though the more exotic variations of financial instruments have now been banned or forbidden, the intent that governed their design is being adapted to climate change funding. From the point of view of the financiers and speculators, the move is a natural one, for the global carbon trading markets are already sophisticated.
The numbers being prepared for discussion in København are staggering by any measure, at least to those who struggle to find money for social programmes, city infrastructure needs and social sector essentials like health and education. For those accustomed to constructing enormous virtual edifices of dizzying interlinks, this is finance redux with a new set of fundamentals that are defined by the science of climate change and by the growing list of acceptable technologies used to provide adaptation and mitigation methods.
"There is a huge funding gap as recession-hit developed countries struggle to make concrete offers ahead of a December 7-18 summit [in København], meant to lay the framework for a new climate pact to be agreed next year to succeed the Kyoto Protocol," stated a Reuters news report. "Carbon markets have so far failed to deliver the tens of billions needed, deploying US$6.5 billion in developing countries last year under carbon offset schemes under Kyoto."
From the point of view of negotiators from the industrialised Northern countries, developing countries - most notably India, China, Brazil and Malaysia - want as much as 1% of the wealth of the Northern bloc to be allocated to tackling their climate cost, which according to several estimates lies within a band of US$100 billion and US$300 billion annually by 2020. The gap right now is huge, for only about US$10 billion is on the table. Where the market savvy of the financial engineers comes in is to mobilise much greater private sector cash. The promise and potential has lured some of the biggest and most controversial names in global industry. Enron, the American energy trading company whose complex methods (leavened with hefty doses of graft) helped pave the entry of energy futures and exchanges, is already in the ring. It has migrated some of its business to the 'ecosystem services' financial sector to manage funds and advise on the 'measurement and monetisation of land-use carbon credits' and so forth. American International Group (AIG) which was assisted out of fatal bankruptcy and financial mismanagement by a massive transfusion of US$ 150 billion dollars is there too, having used some of this transfusion to lobby for a US carbon trading system, as it plans to gain from lucrative new commercial opportunities thrown up by such a market.
The exotic products and financial instruments which will be on display on the sidelines of the København conference are many. Some of the terms we will hear being used there are hybrid and complex carbon credit structured products, derivative/synthetic carbon products, carbon-linked notes for retail investors, sub-index arbitrage strategies, productising carbon, access channels for producers and so on. The audience for such a range of curious goods comprises investment banks, corporate and oligopolistic investors, and major compliance buyers all of whom will focus on how they can profit today from an increasingly diverse range of carbon-related investment opportunities which are being designed to enter the markets from 2010.
"Today, carbon trading is increasingly dominated by some of the same Wall Street and City of London firms made notorious by their role in the financial crash," Larry Lohmann has said. Lohmann is with the redoubtable Cornerhouse group and the straight-talking Durban Coalition for Climate Justice. He is also author of 'Carbon Trading: A Critical Conversation on Climate Change, Privatisation and Power' (Dag Hammarskjold Foundation, Sweden). "Most carbon credits from the UN's CDM carbon offset projects are now being traded by speculators in the financial markets. Some of the biggest buyers of such credits are Goldman Sachs, Morgan Stanley, Barclays Capital, Deutsche Bank, Rabobank, BNP Paribas Fortis, Sumitomo, Kommunalkredit, Cantor Fitzgerald, Credit Suisse, and Merrill Lynch." Lohmann has pointed out that, just to take a single example, Goldman Sachs has invested several millions into lobbying on climate policy in the hope that the next generation of carbon markets will wind up diverting even more public money to Goldman Sachs than the energy futures market did. The big credits buyers will discuss in København public loan guarantees or high-risk equity stakes in projects, bonds where governments sell notes which they repay over 10-15 years, and getting 'up-front investor cash' now to 'protect rainforests'.
These developments are hugely worrying, for they take the business of carbon credits and emissions trading - already largely disconnected from the actual problem of climate change - into a new orbit that was previously occupied by futures trading. Country negotiators and civil society in København will need at all times to keep the terms of climate change reference in the foreground, some of which affect the majority of rural agricultural households on Earth (helpfully listed by the Financial Times):
* Clearing of natural ecosystems for permanent croplands (cultivation)
* Clearing of natural ecosystems for permanent pastures (no cultivation)
* Abandonment of croplands and pastures with subsequent recovery of carbon stocks to those of the original ecosystem
* Shifting cultivation (swidden agriculture - repeated clearing, abandonment, and re-clearing of forests in many tropical regions)
* Wood harvest (industrial wood as well as fuel wood). The estimates include the emissions of carbon from wood products (burned, stored in long term pools, decayed over time).
They will need also to screen off the dazzling display of new financial ingenuity and focus tightly on the issues in hand. It has been difficult enough keeping abreast of the conventional carbon credits system, which is dominated by the clean development mechanism (CDM) and also includes the joint implementation (JI) system. CDM has given rise to a labyrinthine project design, approval, validation and award process within which the influence of the evaluator agencies is considerable. In many developing countries, and as has been documented over and over again since 2005, the project description documents (PDD is the shorthand for this process, itself an industry) far more often than not are templates that have nothing to do with what has been attempted on site, and particularly with reference to the local communities whose commons have been used for a CDM project.
That's why it is worth returning to the definitions to understand the reasoning behind CDM and its administration. "The CDM allows emission-reduction (or emission removal) projects in developing countries to earn certified emission reduction (CER) credits, each equivalent to one tonne of CO2," is the UNFCCC explanation. "These CERs can be traded and sold, and used by industrialised countries to a meet a part of their emission reduction targets under the Kyoto Protocol. The mechanism stimulates sustainable development and emission reductions, while giving industrialised countries some flexibility in how they meet their emission reduction limitation targets. The projects must qualify through a rigorous and public registration and issuance process designed to ensure real, measurable and verifiable emission reductions that are additional to what would have occurred without the project. The mechanism is overseen by the CDM Executive Board, answerable ultimately to the countries that have ratified the Kyoto Protocol."
There are a number of key concepts embodied here: emission reduction, the earning of emission reduction credits, the trading and sale of such credits, the stimulation of sustainable development, and the use of the system by industrialised countries to meet emission reduction targets. There are some critical checks and balances: "rigorous and public registration", "real, measurable and verifiable emission reductions" and the system being "answerable" to the countries which have "ratified the Kyoto Protocol". If the CDM system has been mostly a short and disappointing history of failures, it is because the players in this system have not discharged their responsibilities to the very communities CDM was intended to help.
Of course it is the largest and fastest growing 'developing' countries which lead the CDM technologies and projects. In wind CDM projects China has 409 with a total of 22,673 MW; India has 328 with a total of 6,031 MW; Mexico has 14 with a total of 1,759 MW; Brazil has 10 with a total of 674 MW; South Korea has 13 with a total of 354 MW. In hydro CDM projects China has 833 with a total of 26,159 MW; India has 133 with a total of 5,751 MW; Brazil has 76 with a total of 2,769 MW; Peru has 20 with a total of 1,371 MW; Chile has 20 with a total of 647 MW. All told, there are and have been 5,513 CDM projects of all kinds and in all countries since the mechanism began, with 2,581 being right now at the stage called "at validation" by the UNFCCC. (The source for this data is the well known 'CDM Pipeline' database maintained by Jørgen Fenhann of the UNEP Risø Centre.)
The point here, after half a decade of carbon trading and emissions and climate exchanges, is whether in fact the principles of sustainable development, social justice, equity to all - and especially - respect to and protection for the poorest and most vulnerable has been helped by the CDM and its constellation of allied activities. The short answer is 'no', and because that is the short answer, the future of any successor system - many will be unveiled at the København summit - is equally bleak in the terms that genuinely concern us. The evidence of failure on a global scale is in fact all around us. In sub-Saharan Africa CDM project developers have thrown people out of their homelands to grow plantations that accrue carbon credits, and they fence these new monocultural plantations off by the tens of kilometres, and guard them with guns, and shoot to kill - as has happened in eastern Uganda. In sub-continental Asia CDM project developers have built new roads through tropical hill forest to erect ranks of wind turbines on plateaus where only a few years ago shepherds took their goat herds to graze. There too, as in the state of Maharashtra in western India, where I have directly visited, these new CDM wind factories are guarded by men with guns. In south America they move many truckloads of cement into high and 'protected' river valleys by clearing forests and then altering forever the flow of fragile watersheds, as in Ecuador, to claim the benefit of CDM dams thrown callously across life-giving rivers.
There is a host of evaluating agencies and consultants who are in the business today. The top 20 worldwide are: AgCert, AGET, Agrinergy, Beijing Tianqing Power International CDM Consulting, CAMCO, CantorCO2e, Carbon Resource Management, CasperVanderTak, CWEME, Easy Carbon, Ecoinvest, Econergy, EcoSecurities, MGM, Mitsubishi UFJ Securities, PricewaterhouseCoopers, Senergy Global, Tsinghua University, WB-CF, Zenith Energy Services. Do they count "real, measurable and verifiable emission reductions"? In most cases the answer is 'no'.
Here is how. Many CDM projects today are promoted as assisting a province or state "in stimulating and accelerating the commercialisation of grid-connected renewable energy technologies" - this assertion comes directly from a PDD. They are also described as demonstrating "the viability" of their chosen method (wind, hydro, biomass, energy efficiency, etc) "which improve energy security, air quality, and local livelihoods, besides assisting the development of a domestic sustainable renewable energy industry". This is boilerplate use of terminology that the global carbon trading system looks for. The home province or state or district is invariably described as being 'deficit' in power (which is usually true) and the land occupied is often described as 'barren' which is almost always untrue. The CDM project developers will often circumvent the local self-government (a village council) from which it is obliged to obtain a 'no-objection' certificate for its activities, or simply purchase one. The CDM developers will claim consultation when there has been none or where consultation has been staged. Not one of the big 20 evaluating agencies has cared to strengthen the approvals and evaluations system till date in the face of such impunity. When the CDM is riddled with such malpractice, how much better will any successor system fare?
In all the 'developing' countries at the forefront of the CDM project lists, metals industries are turning to the mechanism enthusiastically. Huge steel plants have been earning tens of millions of euros in additional income using the CDM route. Felix Padel, an anthropologist-activist, and Samarendra Das, a filmmaker-activist, have collaborated on a book, 'Out of this Earth: East India Adivasis and the Aluminium Cartel' due to be published soon. They have explained the true impact of a metals business (in this case aluminium in India) which earns euros from CDM. "The externality cost of carbon emissions alone is calculated at US$ 85 per tonne by a recent UK government report, giving around US$ 1,275 as the carbon cost per tonne of aluminium (which emits 6 to 20 tonnes of carbon dioxide). If other emissions and effluents, including sulphur dioxide, fluoride, HFCs (hydrofluorocarbons), spent-pot lining, and the toxic red mud, were properly built into the cost, aluminium's externality cost per tonne would be far above conventional estimates of US$ 2,000 per tonne. And, when the real price of forest loss and human displacement is appreciated, the true costs of production of aluminium could be seen for what they are: far more than either the official cost of production that the metal is produced for, or the London-fixed price it is traded for."
The complicity in the system has been documented in both South and North, and it is this collaboration that beats all other collaborations in the climate technologies and climate finance fields. In July 2009 Dietmar Mirkes of Action Solidarité Tiers Monde, Luxembourg, wrote a simply-worded and hard-hitting report about his country and CDM. "For a country like Luxembourg, which is internationally renowned for its active development policy, it might seem likely it would be just as agile in international climate policy. And so it has aroused our curiosity to understand what 'our' real world-wide activities are and to what degree they are ultimately combating climate change." He provided a valuable insight into the extent of duplicity that drives the global emissions trading system, and how buyer countries maintain a pall of ignorance about it around their own citizens.
Rarely will you find reference to the idea of climate debt and its repayment, which the Malaysia-based Third World Network has organised a campaign around. The joint statement is blunt and forceful and has been endorsed by over 250 groups so far. It says: "Developed countries must repay the full measure of their adaptation debt to the developing countries and communities, who did little to cause climate change and are its first victims. They must provide financing and technology to ensure full compensation for losses suffered, and the means to avoid or minimize future impacts where possible. They should commit to fully repay their adaptation debt to developing countries, commencing immediately."
Again the collaborations which are working to prevent recognition of such ideas exists only because of complicity throughout the global carbon and emissions trading chain, and because of the new financing taking shape. This has happened and continues to happen because of what Samir Amin has called the "capture of ecological measurement by vulgar economics". It takes shape in the thousands of young researchers in the USA and in the European Union, and their market-oriented collaborators in India and China, who have been mobilised to give substance to a hollow new science. Amin, director of the Third World Forum in Dakar, Senegal, has pointed out that the ecological costs are, in this way of thinking, "assimilated to external economies". When that happens the only methods of measurement that come into play - as we shall see in the coming days in København - are competing market-related methods of measuring cost/benefit in terms of exchange value, and perverted notions of ecosystem pricing which have excised entirely the human and community elements.