If, as their proponents claim, carbon markets are wonderful tools for bringing about emissions reductions and provide economic support for clean technologies in the Global South (or developing countries), then we should ask one question: why have they been met with a mounting chorus of criticism from civil society organisations, social movements and journalists around the world?
Plans are being made through processes like the G8+5 Climate Dialogue for countries like China currently without commitments under the Kyoto Protocol to adopt carbon trading as part of their climate policy. And there needs to be an assessment of whether such schemes really work in reducing atmospheric carbon or if they are simply a means for polluting industries to profitably avoid the issue of making emissions cuts.
The free-market logic behind the scheme looks simple on paper. Countries taking part in ‘cap and trade’ schemes like the European Union Emissions Trading Scheme (EU-ETS) have a limit set on the amount of carbon they can emit in a given time period (the ‘cap’). This allotted amount of carbon is carved up and allocated between different industrial locations in the country. If, for example, a cement factory goes over its allocated portion of carbon emissions, it has to purchase ‘spare’ emissions from another market participant for example, a power station that has emitted less than its allocation and can therefore profitably sell them on (the ‘trade’).
The problem lies in the fact that carbon trading is designed with the express purpose of providing an opportunity for rich countries to delay making costly, structural changes towards low-carbon technologies. This isn’t a malfunction of the market or an unexpected by-product: this is what the market was designed to do.
In may 2006, the economist John Kay wrote in the Financial Times:
when a market is created through political action rather than emerging spontaneously from the needs of buyers and sellers, business will seek to influence market design for commercial advantage.
In terms of climate change and carbon trading, the ‘commercial advantage’ (at least in the short term) lies in avoiding the costly structural changes, and industry has influenced every stage of the design and implementation of the carbon market to this end.
Businesses and industries in the Global North (or developed countries) have avoided making these infrastructural changes by ensuring that the price of carbon permits is kept absurdly low. It is much cheaper for industry to purchase cheap carbon credits than to implement the technologies that would actually bring about real emissions reductions at source.
The low price of carbon permits was ensured in the first round of the EU-ETS by governments handing many more emissions permits to industry than was necessary. When news of this massive over-allocation was revealed, it caused the price of carbon permits to drop dramatically. Economists estimate that carbon permits should be priced at around 30-50 per tonne in order to create sufficient incentives for low-carbon technologies. Towards the end of the first round of the EU-ETS the price of permits was regularly dipping below one ‚¬ per tonne.
Market enthusiasts argue that the ‘cap’ will be tightened in the second round, causing the price of carbon to rise. But in order to prevent this happening, business has lobbied for a means of importing more cheap credits into the system, generated in countries like China, through the Clean Development Mechanism (CDM).
The CDM works as follows: Instead of trading with other market participants in Europe, another option for our cement factory would be to purchase ‘carbon credits’ that have been generated outside of the trading scheme say, through a project in a developing country that supposedly reduces or avoids emissions. An example would be a hydro-electric power station in China that has sold its supposed emissions reductions to companies from rich countries as part of the CDM. China has been the world leader in this market, generating some 60 per cent of all CDM credits in 2006.
The CDM has had some bad publicity in the last six months. An article in The Guardian in June 2007, said:
[the CDM]has been contaminated by gross incompetence, rule-breaking and possible fraud by companies in the developing world, according to UN paperwork, an unpublished expert report and alarming feedback from projects on the ground.
Despite the regulatory framework that surrounds CDM, there is both the incentive and the opportunity for project developers to distort key information, so as to make a project appear more effective and generate more credits or gloss over any local resistance to the project.
For example, the principle of ‘additionality’ is a pre-requisite for a project to qualify for CDM status: it has to be proved that the project would not have taken place without the funding provided through the CDM any climate benefits should be additional as a result of the funding. Otherwise, unscrupulous operators could simply claim carbon funding for projects that would have taken place anyway, meaning industries in rich countries could justify further pollution on the false premise of being responsible for emissions reductions elsewhere.
However, many CDM projects under consideration in China involve generating hydro-electricity: there are 248 currently in the pipeline. There are strong grounds to be extremely sceptical over whether these are genuinely additional, given that such projects are very common in China, and have been actively promoted by the Government.
In 2005, the International Rivers Network submitted a comment to the CDM panel in reference to the Xiaogushan Large Hydroelectric Project in northwest China’s Gansu Province, which pointed out that the application for CDM funding was submitted two years after the construction of the dam had begun, and that:
project documentation from the Asian Development Bank clearly states that Xiaogushan was the least “cost generation option for Gansu and that revenue from CDM credits was irrelevant to the decision to go ahead with the project.
It is not well documented whether there is local support for the various hydro-electric projects in China that are being promoted through the CDM, which as a pre-requisite should bring developmental benefits to local communities. Many of the corporate benefactors of CDM money in other countries are the target of sustained local resistance from communities who have to endure the often life-threatening impacts of intensive, industrial pollution.
In 2005, about 10,000 people from social movements, community groups and civil society organisations mobilised in Chhattisgarh, India, to protest the environmental public hearing held for the expansion of Jindal Steel and Power Limited (JSPL) sponge iron plants in the district. The production of sponge iron (an impure form of the metal) is notoriously dirty, and companies involved have been accused of land-grabbing, as well as causing intensive air, soil and water pollution.
JSPL runs the largest sponge-iron plant in the world, which is spread over 320 hectares on what used to be the thriving, agricultural village of Patrapali. This plant alone has four separate CDM projects, generating millions of tonnes of supposed carbon reductions that could be imported into the EU-ETS.
The inhabitants of three surrounding villages that would be engulfed are resisting a proposed 20 billion rupee (around US$412 million) expansion. In this case, the CDM is not only providing financial assistance to JSPL in making the expansion, but also providing them with ‘green’ credibility by putting them at the forefront of the emerging carbon market.
In China, the head of the country’s environmental agency, Zhou Shengxian recently attributed the rise in social unrest across the country to pollution scandals and the degradation of the environment. An article in The Guardian in July 2007, said that his comments ‘underscore the frustration of State mandarins at local government officials who ignore environmental standards in order to attract investment, jobs and bribes.’
Given such circumstances, it is highly possible that the CDM will provide financial support to the sort of environmentally irresponsible power and chemical plants that are increasingly becoming the target of community protest in China.
The largest share of CDM credits worldwide (30 per cent) has been generated by the destruction of trifluoromethane (HFC-23) a potent greenhouse gas created by the manufacture of refrigerants. A study in the February 2007 edition of Nature showed that the value of these credits at current carbon prices was 4.7 billion. Not only was this twice the value of the refrigerant gases themselves, but it was also estimated that the cost of implementing the necessary technology to capture and destroy the HFC-23 was less than 100 million.
In other words, something in the region of 4.6 billion was being generated in profit for the owners of the plants and the project brokers.
In an April 2007 article in the Sunday Times, it was reported that two Chinese companies were set to make around £500 million in 2007 alone as a result of CDM money given for the destruction of HFC-23.
This enormous sum of money generated by these Kyoto-style trading schemes has not gone to the companies and communities who are taking action on clean energy and energy-reduction projects, but rather to big, industrial polluters who are then at liberty to reinvest the profits into the expansion of their operations.
Ashish Bharat Ram, the managing director of an Indian company that reported a profit of 87 million from the destruction of HFC-23 in 2006 and 2007, told the Economic Times in April that: ‘Strong income from carbon trading strengthened us financially, and now we are expanding into areas related to our core strength of chemical and technical textiles business.’
The structure of the CDM is such that it is usually an option reserved for large companies who can provide the capital needed not only to implement the project, but also to go through the long process of accreditation and certification with all the attendant expenses of carbon consultants, third-party verifiers, ongoing project monitoring and so forth.
Larry Lohmann argues in his book, Carbon Trading: A Critical Conversation on Climate Change, Privatisation and Power, that this:
reinforces a system in which, ironically, the main entities recognised as being capable of making ’emissions reductions’ are the corporations most committed to a fossil-fuel burning future while indigenous communities, environmental movements and ordinary people acting more constructively to tackle climate change are tacitly excluded, their creativity unrecognised, and their claims suppressed.
It seems that the only people who are benefiting from the carbon market and CDM projects are the polluting corporations that are involved in both Europe and the Global South as well as the new class of handsomely-salaried carbon technocrats and brokers, which has sprung up to service the needs of the market.
There is an urgent need to recognise that the market’s fixation on short-term profit maximisation is not an appropriate instrument to induce the large-scale and costly infrastructural changes that need to take place in all countries in the transition to low-carbon economies.
This is an edited version of a piece that appeared on Chinadialogue on 19 September 2007.