Carbon trading: a brief introduction.

• Author: Reyes, Oscar

Carbon trading is allowing industrialized countries and companies to avoid their emissions reduction targets. It takes two main forms: "cap and trade" and "carbon offsetting." Under cap and trade schemes, governments or intergovernmental bodies set an overall legal limit of carbon emissions in a certain time period ("a cap") and then grant industries a certain number of licenses to pollute ("carbon permits"). Companies that do not meet their cap can buy permits from others that have a surplus--typically, because they have been given an overly generous allowance in the first place. They can also purchase "offsets."

Carbon trading runs in parallel with a system of carbon offsets. Instead of cutting emissions themselves, companies, and sometimes international financial institutions, governments and individuals, finance "emissions-saving projects" outside the capped area to generate carbon credits which can also be traded within the carbon market. The UN's Clean Development Mechanism (CDM) is the largest such scheme with almost 1,800 registered projects in developing countries by September 2009, and over 2,600 further projects awaiting approval. Based on current prices, the credits generated by approved schemes will cost around $35 billion by 2012.

Although offsets are often presented as emissions reductions, what these projects do at their hypothetical best is to stabilize emission levels while moving them from one location to another, normally from Northern to Southern countries. In practice, this "best case" scenario is rarely seen, with the result being that offsetting increases emissions while also exacerbating social and environmental conflicts.

So what's wrong with cap and trade?

There are fundamental theoretical flaws in the whole cap and trade scheme even before you look at the actual record of its implementation. This is because the scheme was never set up to directly tackle the key task of a rapid transition away from fossil fuel extraction, over-production and over-consumption, but sought instead to quantify existing pollution as a means to create a new tradable commodity. Within this framework, traders invariably opt for the cheapest credits available at the time, but what is cheap in the short-term is not the same as what is environmentally effective or socially just.

Some of the key problems with the cap and trade approach are:

The "trade" component does not reduce any emissions. It simply allows companies to choose between cutting their own emissions and buying cheaper "carbon credits," which are supposed to represent reductions elsewhere.

The "cap" has too many holes and sometimes caps nothing. The cap is only as tight as the least stringent part of the whole system. This is because credits are sold by those with a surplus, and the cheapest way to produce a surplus is to be given too many credits in the first place ("hot air" credits as a result of caps being set too high). The aim of trading is to find the cheapest solution for polluting industry, and it is consistently cheaper to buy "hot air" credits than to actually reduce emissions.

Cap setting is a political process that is highly susceptible to corporate lobbying, which means that there is invariable over-allocation of pollution permits. In fact, lobbying is encouraged through extensive industry "stakeholder" involvement.

While cap and trade in theory limits the availability of pollution permits, "offset" projects are a license to print new ones. When the two systems are brought together, they tend to undermine each other--since one applies a cap and the other lifts it. An offset is essentially a permit to pollute beyond the cap. Most current and proposed "cap and trade" schemes allow offset credits to be traded within them--including the EU Emissions Trading Scheme (EU ETS) and the US cap and trade scheme proposed in the 2009 American Clean Energy and Security Act (ACES).

The other problem is that markets are by essence growth-oriented, and thus look for new sources of accumulation. In...