14 March 2013

The carbon markets are dead, long live the carbon markets

Political inertia and empty rhetoric are diluting and undermining the efforts of market based mechanisms to tackle climate change.
by Assaad W. Razzouk and Gareth Phillips 

Today, annual global emissions exceed 34bn tons, and in order to avoid catastrophic planet-wide consequences, must decrease more than 50% by 2050. This extremely challenging objective cannot be met without heavy reliance on market-based mechanisms, and engagement with developing countries to move them onto low carbon trajectories.

Governments are using a range of instruments to manage greenhouse gas (GHG) emissions including regulations, taxes, subsidies, performance standards, international treaties, and emission trading schemes (ETS).  Taxation and ETS place a price on carbon, and create broad and efficient incentives to manage and reduce a large proportion of GHG emissions.

However, market-based efforts are being failed by the forever-emerging global climate change debate, where decisions are routinely postponed and where world leaders have presided over the construction of a shaky political architecture.

Structured under the UN and sometimes the World Bank, the global response is sinking into empty slogans, announcements of undefined new mechanisms and increasing legions of bureaucrats housed in multiple offices.

These include the United Nations Framework Convention on Climate Change, Green Climate Fund, Global Environment Facility, and Adaptation Fund – but with nobody in charge and therefore nobody accountable.

Until recently, the only success stories were the EU-ETS and the Clean Development Mechanism (CDM). But the current collective failure of the EU to save its ETS will dampen interest in market-based mechanisms globally.

The stakes are incredibly high – failure will end any hope of stabilising mean temperature increases below 2⁰C, beyond which scientists predict harmful effects on ecosystems. Continued hesitation will also reduce pressure on the International Civil Aviation Organisation (at its triennial meeting this September) to reign in aviation; unabated, its emissions alone are projected to exceed 2bn tons by 2050.

The fate of the EU ETS is critical. It’s the world’s largest emissions trading scheme yet it is over-supplied with allowances and credits and facing existential challenges as politicians wrestle with the concept of interfering in the market.

This is akin to a central bank hesitating to intervene in the currency or interest-rate markets. Failure to intervene will consign the EU ETS specifically, and ETS in general, to the scrap heap.

Similarly, the CDM, a global market-based mechanism, is dying because of the prevalence of empty rhetoric ahead of action. The fate of the CDM matters because it provides a safety valve for ETS when demand exceeds supply, and is a proven means of delivering hundreds of billions of dollars into clean energy investments.

Through the EU-ETS and the CDM, the markets were beginning to show how effective a public-private partnership can be in the fight against global warming. The lessons learnt over the past 10 years are that markets and pricing are an essential component of the global response to climate change.

The multiple instruments mentioned above combined with project-based activities can deliver cost effective GHG emission reductions and sustainable development benefits. Pulling these instruments and mechanisms together into an effective global effort to reduce GHG emissions is the most urgent challenge facing today’s policy-makers.

Where are we today?  

As mentioned above, global emissions are more than 34bn tons per annum.  Of these:

1. Approx 45% represent CO2 emissions from fossil fuel combustion arising from stationary sources (power plants), large mobile sources (planes and ships), and process-based CO2 emission (e.g. cement).

2. Approx 45% consist of CO2 and CH4 emissions from other activities including forestry, agriculture, road transport, the built environment and domestic sector, mining, and waste management.

3. The balance represents non-CO2 GHG emissions from industrial sources, N2O from fossil fuel combustion etc.

Governments have already developed a range of policies and measures to manage emissions in each of these areas:

1. Domestic and linked emission trading schemes.

2. Performance standards, subsidies and taxes e.g. tailpipe regulations, energy efficiency labelling, building standards etc.

3. International treaties to phase out ozone depleting gases and related GHGs.

But not all countries and sectors have the capacity to develop and implement these programs. The Kyoto Protocol created the CDM, whereby governments and the private sector invest directly in developing countries’ emission-reducing projects, producing certified emission reductions for sale, while also avoiding the lock-in of carbon intensive technologies.

Together, these instruments combine to provide a suite of tools to break the link between growth in economic output and growth in GHG emissions – the only way to avoid catastrophic climate change. But today, perhaps only 20% of GHG emissions are under the influence of such measures.

Where should we be in 2050?  

Policy-makers should aim for a 2050 environment where:

– Emissions have shrunk substantially – 50% reduction or more compared to 2000;

– All emissions are under management; and,

– Markets and pricing continue to play a critical role.

In other words, policies, measures and international treaties must expand to capture the relevant sources in all economic sectors capable of participating in such schemes. Those sectors which are not capable – least developed countries, disorganised sectors, etc – would utilise project-based mechanisms like the CDM.

But here’s the rub – even if all developed countries stopped emitting tomorrow, we would not achieve the target because of the rapidly growing emissions from developing economies. It’s imperative that developed countries and the private sector engage with developing countries to ensure a transition to a low carbon pathway avoiding carbon intensive technology lock-in.

There are several ways to do this – Norway pledged USD1bn to Indonesia’s forestry sector; the Global Environment Facility invested USD3bn in various projects over 30 years; the CDM mobilised over USD215bn in 10 years.

Considering the scale and urgency of the problem, we need to use all of these approaches to the maximum.  It would be completely irresponsible to reject the role of emissions trading and the power of private sector investment by allowing the EU ETS and the CDM to fail.

This article first appeared on The Ecologist