In early September, the NSW carbon trading scheme collapsed. Conspicuously absent from mainstream media coverage of this event, however, was any attempt to analyse the inherent problems of relying on market mechanisms to solve the global problem of climate change.
The NSW Greenhouse Gas Abatement Scheme (GGAS) was the first its kind, having been initiated in 2003 — two years before the creation of the European Union's Emissions Trading Scheme (ETS).
According to a World Bank report, State and Trends of the Carbon Market 2007, in 2006 the GGAS resulted in the avoidance of 20 million tonnes of carbon dioxide emissions, which were converted into NSW Greenhouse Gas Abatement Certificates (NGACs) and sold for US$225 million.
However, the September 11 Sydney Morning Herald reported that the prices of these certificates had dropped by 50% over the last few months, from $12 to $6, due to a glut of NGACs on the market combined with a slump in demand.
The collapse of the GGAS is expected to result in job losses for about 1000 people employed by private carbon trading firms, as well as the halting of a range of other schemes such as the creation of new tree plantations that are purported to act as "carbon sinks".
The NSW government has blamed the federal government for not sending clear enough signals on the future of the carbon market in Australia. In July, PM John Howard did announce plans for a national emissions trading scheme, but this would only be established in 2012.
The Nature Conservation Council of NSW argued that the state government had brought on the carbon price collapse by handing out carbon credits too freely.
Reducing emissions?
According to a report by the University of NSW-based Centre for Energy and Environmental Markets published in August, the GGAS suffered from a range of problems, many of which seem to be endemic to carbon trading schemes.
For example, 52% of all NGACs released onto the market in 2005 were produced by "pre-existing low-emission plants" — meaning millions of dollars were funnelled to companies that had done nothing to earn this money.
The market for the production of NGACs was also highly concentrated. Between 2003 and 2005, 59% of all NGACs were created by just three companies — Integral Energy, Energy Developments and AGL. Furthermore, a large percentage of NGACs were created by waste coalmine gas and landfill gas projects (i.e., flaring of methane, etc) that did not decrease the emission intensity of electricity generation in NSW.
Perhaps the most Orwellian aspect of the GGAS was the fact that the brown-coal fired Hazelwood electricity plant in Victoria — the most CO2 polluting power station in Australia — created almost 500,000 NGACs in the period 2003-05!
International Power, which operates Hazelwood, is only eligible to create NGACs because the federal government awarded it $50 million last year as a part of its Low Emission Technology Development Fund, to increase the energy efficiency of the plant.
The report noted that "the effectiveness (reduction of emissions); efficiency (at least cost) and equity (where costs and benefits are distributed as evenly as possible) for the scheme are all low" and that the "GGAS could delay meaningful action ... because it may create the perception that emissions are already being reduced".
The report also noted that there "appears to be a clear conflict of interest in IPART [Independent Pricing and Regulatory Tribunal] being the scheme administrator as well as the compliance regulator with responsibility for assessing the Scheme with respect to its stated objectives".
While the scheme's much-vaunted household efficiency measures have increased employment and have had some direct tangible effects on household energy usage, even these measures they are not what they are cracked up to be.
According to the report, these demand-side measures were purported to have created up to 7.2 million NGACs in 2003-05, thus being a huge money-spinner for the entrepreneurs who jumped into this market. But while less energy usage should be reducing NSW residents' energy bills, the catch is that electricity companies have been passing on any costs of buying NGACs back to the consumer, thus negating the benefit for ordinary householders.
A government-run and -funded scheme that cuts out the profit motive, similar to those rolled out in Cuba and Venezuela where thousands of young people have been mobilised to go from house to house installing energy efficient light globes, would achieve better outcomes for employment and the environment.
Market failure
The experience of the ETS and the Kyoto Protocol's Clean Development Mechanism show that the NSW carbon trading scheme's problems were not some exception. In May 2006, the ETS (which binds 25 European countries into an emissions trading scheme) went through a "market crash" similar to that of the GGAS, with the price of carbon permits (called "EU allocations" or EUAs) dropping from 20 to 10 euros within a few days.
The supply-demand balance was also out of kilter in this case, with member countries' governments setting low emission reduction targets as well as over-allocating EUAs. A recent study by Point Carbon has estimated that the ETS handed out 170 million too many EUAs.
The over-allocation of permits, mainly to big electricity producers or users, gave these big polluters a free asset, which they nevertheless marked down as a "cost" in order to justify raising their prices. In other scenarios, the extra EUAs that these companies were given were then re-sold, again increasing the profit margins of the biggest polluters.
A July 2006 report by Open Europe outlined some of the absurdities created by the ETS. For example, in 2005 the Queen Elizabeth Medical Centre in Birmingham was required to purchase 7500 tonnes CO2 equivalent of EUAs at a cost of £93,000 in order to achieve its target, while BP Oil sold 1.4 million tonnes equivalent of EUAs reaping a gain of £17.9 million!
The profiteering on carbon trading has not yielded equivalent gains in emissions reductions. The Point Carbon report notes that the main effect of the ETS "has been to substantially increase electricity prices".
The UN's Clean Development Mechanism was established out of the Kyoto Protocol and feeds into other emissions trading systems. The CDM established emission reduction projects in poor countries producing permits that can be re-sold to governments or corporations.
While the CDM has turned into a source of easy money for some, the gains for the environment have so far been negligible. They could even be exacerbating global warming and other environmental problems.
According to the June 2 British Guardian, "53% of the existing CERs [carbon emission reduction permits] come from just six monster projects, in India, China and South Korea, all of which ... manufacture refrigerant which produces as a side effect a gas called HFC-23 [a greenhouse gas thousands of times more powerful than C02].
"Refrigerant companies find it relatively cheap to instal an incinerator to burn the HFC-23 and, once that is converted into certified reductions of emission, each tonne saved can be sold as 11,700 carbon credits. These companies are now earning millions of euros from these credits — more than from selling their refrigerant products.
"The environmental problem is two-fold, first that HFC factories tend to pour out other pollutants which don't happen to be greenhouse gases but which are unpleasant or dangerous for local communities; and second, that the potential profits from burning HFC-23 are so great that companies are being encouraged to expand production of refrigerants so they can produce more HFC-23 to incinerate, thus increasing the net amount of pollution."
Other problems with the CDM include a weak regulatory system that is easily manipulated by corporations seeking to secure money for projects that are of questionable environmental value or that would have happened anyway.
The capacity for easy profiteering has sparked a flood of funds into CDM projects. The Guardian reported that £4 billion worth of projects are currently waiting to be approved.
Real climate action needed
The evidence emerging from various carbon trading schemes highlights the inherent problems of trying to fix a "market failure" with yet more market mechanisms.
Carbon trading schemes are far too easy to manipulate by the very corporations that have played the biggest part in creating the problem of CO2 pollution in the first place. Their complex structure and accounting methods make them increasingly difficult to understand, opening the way for a privileged group of administrators, well-versed in the carbon market lingo, to simply inform the public that "all is well" on the global warming front, even while the effects of climate change become more obvious and disastrous.
While the Kyoto Protocol and to a lesser extent schemes like the NSW GGAS have succeeded in creating a completely new market for the permits to pollute, they are less adept at actually doing what they are supposed to — reduce greenhouse gas emissions. What is needed is a far more direct approach, with governments, not markets, playing the leading role.
In 2004, total NSW greenhouse gas emissions were the equivalent of 158.7 million tonnes of carbon dioxide — or 23.6 tonnes per state resident (compared to the average of about 13 tonnes per person for industrialised countries). About one-third of these emissions come from electricity generation. Ninety percent of NSW's electricity is generated from coal-fired power stations, all of them government-owned.
The NSW government does not need a carbon emissions trading scheme to tell it, via "market signals", that it needs to make substantial investments to replace its coal-fired power stations with low-emission electricity generation sources such as natural gas, solar and wind.
Instead, the NSW Labor government is considering spending $15 billion by 2013 on the construction of another coal-fired power station, despite an August 24-26 Newspoll survey showing that 82% of adult respondents in NSW did not want a new coal-fired power station built in the state, with most wanting a switch toward renewable energy sources over coal to meet the state's electricity needs.