Could Cap and Trade Cause Another Market Meltdown?
Rachel Morris, Mother Jones
The same Wall Street players that upended the economy are clamoring to open up a massive market to swap, chop, and bundle carbon derivatives. Sound familiar?
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You’ve heard of credit default swaps and subprime mortgages. Are carbon default swaps and subprime offsets next? If the Waxman-Markey climate bill is signed into law, it will generate, almost as an afterthought, a new market for carbon derivatives. That market will be vast, complicated, and dauntingly difficult to monitor. And if Washington doesn’t get the rules right, it will be vulnerable to speculation and manipulation by the very same players who brought us the financial meltdown.
Cap and trade would create what Commodity Futures Trading commissioner Bart Chilton anticipates as a $2 trillion market, “the biggest of any [commodities] derivatives product in the next five years.” That derivatives market will be based on two main instruments. First, there are the carbon allowance permits that form the nuts and bolts of any cap-and-trade scheme. Under cap and trade, the government would issue permits that allow companies to emit a certain amount of greenhouse gases. Companies that emit too much can buy allowances from companies that produce less than their limit. Then there are carbon offsets, which allow companies to emit greenhouse gases in excess of a federally mandated cap if they invest in a project that cuts emissions somewhere else—usually in developing countries. Polluters can pay Brazilian villagers to not cut down trees, for instance, or Filipino farmers to trap methane in pig manure.
In addition to trading the allowances and offsets themselves, participants in carbon markets can also deal in their derivatives—such as futures contracts to deliver a certain number of allowances at an agreed price and time. These instruments will be traded not only by polluters that need to buy credits to comply with environmental regulations, but also by financial services firms. In fact, a study (PDF) by Duke University’s Nicholas Institute for Environmental Policy Solutions anticipates that if the United States passes a cap-and-trade law, the derivatives trade will probably exceed the market for the allowances themselves. “We are on the verge of creating a new trillion-dollar market in financial assets that will be securitized, derivatized, and speculated by Wall Street like the mortgage-backed securities market,” says Robert Shapiro, a former undersecretary of commerce in the Clinton administration and a cofounder of the US Climate Task Force.
(8 June 2009)
Alberta Environment Minister: Carbon capture no ‘silver bullet’
Shawn McCarthy, Globe and Mail
Minister acknowledges what critics have said all along: Technology has limited use in bitumen mining
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The much-touted carbon capture and storage technology is not the answer to reducing greenhouse gas emissions from oil sands projects in northeastern Alberta, Environment Minister Jim Prentice says.
While Ottawa and Alberta are spending billions of dollars on CCS demonstration projects, the minister yesterday acknowledged what critics have said all along: The technology has limited application at the energy-intensive mines and in situ projects that extract the bitumen from the ground.
However, CCS could play a major role in virtually eliminating carbon dioxide emissions from upgraders that process the bitumen into synthetic crude oil, thereby reducing the carbon footprint of oil sands projects over all.
(5 June 2009)
Papua New Guinea and carbon trading: money grows on trees
The Economist
Irregular carbon credits cause upheaval in the government of Papua New Guinea
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AT THE United Nations climate change conference in Bali two years ago, the head of the delegation from Papua New Guinea, Kevin Conrad, became a celebrity of sorts. He challenged America to lead the world on climate change or “get out of the way”. America, which had been insisting that poorer countries make more promises on fighting climate change, backed down. That allowed delegates to agree on a road map for setting up an international treaty to replace the existing Kyoto protocol.
Mr Conrad directs an organisation called the Coalition for Rainforest Nations, an alliance of 33 countries that promotes “avoided deforestation”—which means taking measures to prevent trees being chopped down. Deforestation accounts for about a fifth of the world’s emissions of greenhouse gases. The coalition argues that poor countries urgently need the revenue logging can bring. If rich countries want them to preserve their forests to keep the planet cool, they should provide some compensation for the forgone logging revenue. In other words, rich countries that are obliged to make reductions in carbon emissions under a new climate treaty could pay owners of forests to stop deforesting as a way of reducing carbon emissions.
… The broader issue with any kind of carbon credit, however, is ensuring that governments of poor countries behave impeccably. Indeed, if problems like this can happen in Mr Conrad’s own back yard, it suggests that the challenges ahead for REDD are tough ones.
Avoided deforestation is a big deal for climate-change policy. It is also a prize worth fighting for, even if it is hard to achieve. Poor governance, on top of poorly defined and defended forest property rights, mean that without proper care REDD could become a recipe for disaster rather than part of a solution the world needs.
(6 June 2009)
Carbon Offsetting is “Fundamentally Flawed”
Andy Rowell, Oil Change
As the pressure for an international deal grows in Copenhagen, one of the corner-stones of any solution will be carbon offsetting, where rich, polluting countries supposedly offset their rising emissions by investing in “clean” projects in developing countries.
Off-setting will be high on the agenda at the next round of climate talks in Bonn this week, where reforms are being discussed to expand the UN’s Clean Development Mechanism (CDM) scheme, which is the main offsetting vehicle.
However, for a while now, there have been voices arguing that off-setting is not the panacea that the polluters are arguing it is.
And now a new report is arguing that off-setting will do nothing to prevent climate change and is actually increasing rather than reducing carbon emissions. The report by Friends of the Earth, called Dangerous Distraction, argues “In practice offsetting is having a disastrous impact on the prospects for averting catastrophic climate change. It is vital that the inherent and systemic flaws in the approach are recognised ahead of negotiations.”
The report collates many of the criticisms levelled at the emerging offsetting industry in recent years and comes up with five serious criticisms:
- counts action in developing countries as part of the cuts promised in developed countries, although the science is clear that action is needed in both developed and developing countries.
- cannot guarantee the same cuts as would have happened without offsetting. The US Government Accountability Office’s (GAO) 2008 review of offsets said “it is impossible to know with certainty whether any given project is additional”. Without this guarantee the net effect is that greenhouse gas emissions are increasing – because the CDM credit allows the developed country to continue
- is causing major delays to urgently needed economic transformations in developed countries.
- does not ensure positive sustainable development in, or appropriate financial transfers to, developing countries.
- is profoundly unjust, fundamentally flawed and cannot be reformed.
The report’s conclusions are that offsets are so flawed that they are delivering far lower greenhouse gas cuts than the science says is needed to avert catastrophic climate change. The report says that developed countries must reduce their own emissions by at least 40 per cent by 2020 and that they must reject all forms of offsetting.
“Western governments are cheating us all by plotting to expand carbon offsetting at the UN climate talks – which means avoiding real action through dodgy accounting instead of taking bold action to tackle the climate crisis,” argues Andy Atkins, executive director at Friends of the Earth.
He adds: “Carbon offsetting is doing nothing to combat climate change, is putting the lives and livelihoods of millions of people at risk and is entrenching inequality between rich and developing countries’ levels of emissions.”
(2 June 2009)
