The EU carbon market scam

March 5, 2011

When the Kyoto Protocol was being negotiated in 1997, the European Union opposed the United States’ proposal to introduce carbon trading and “offsetting” as a form of compliance with mandated greenhouse gas emissions reductions.

Instead, the EU favoured coordinated policies and measures.

But by 2001, when the US unilaterally abandoned climate negotiations, the EU had already reversed its position and enthusiastically supported delivering the fate of climate policy to a speculative market.

In 2005, industrial lobbies and big fossil fuel corporations, such as BP and Shell, finally got what they wanted: a market for CO2 emissions rights that would allow industries to continue polluting and even reap a profit.

The first phase of the EU Emissions Trading System (EU ETS), from 2005 to 2007, was, by any standard of evaluation, a complete disaster. CO2 emissions from covered sources went up, not down. The 2007 cap was 8.3% higher than the 2005 verified emissions level.

The second phase, from 2008 to 2012, was only marginally less bad. The cap was only 2% lower than the 2005 emissions.

Only in 2009 did emissions fall — due to the economic crisis that reduced production and, consequently, fuel use, an October 2010 Friends of the Earth Europe report said.

The future of the EU climate policy remains gloomy, given the problems with “hot air”. The EU ETS gave more permits to polluters than they needed, which can be used at any time in the future.

The excess permits banked so far by industries grant them the right to avoid cutting emissions until 2016.

Member countries can also buy permits for carbon emissions from Eastern European countries or Russia, which have a huge excess because of the meltdown of industrial production in the early 1990s.

And, if this is not enough, polluters can buy carbon credits from the Clean Development Mechanism (CDM) and, essentially, continue polluting forever.

Another way to look at the problem of over-allocation is that the incentive to cut emissions, given by the price of a permit, is always very low. The permit price never exceeded €30 ($41), when economic estimates point to €100 as the level that would make low-carbon technologies competitive.

The price is usually about €10, having dropped to almost zero twice.

Unlike a tax, the incentive is dependent on the functioning of a volatile speculative market that is manipulated by its participants.

The environmental performance of the EU ETS is so bad that one wonders if emissions would be lower if the EU had followed the US example and did nothing.

But there are winners from this disaster. Along with traders, investment bankers and financial services providers that profit from a financial market created by government regulation, polluting industries have earned windfall profits.

Industries can sell permits they get for free at a profit. Usually, buyers are energy companies, which can pass the cost of buying the permits to their customers.

Large polluters have already cashed in huge financial gains from selling permits. Steel giant Arcelor Mittal earned €108 million in the 2007-09 period, a May 21 Corporate Europe Observatory report said.

Lafarge, the cement giant, made €142 million in 2009.

Together, the top 10 carbon profiteers stand to earn €3.2 billion in 2012, a sum far greater than the investment in renewable energy and low-carbon technologies, said a March 2010 report.

Energy companies, meanwhile, are able to earn significant windfall profits through accounting tricks. Utilities pass on to costumers the costs of the ETS by estimating what carbon permits will cost in the future.

This leaves room for overestimates. The consultancy firm Point Carbon estimated in a March 2008 report that energy companies stand to gain between €23 billion and €71 billion over 2008-12 in windfall profits.

But the list of people who profit from carbon trading wouldn’t be complete without mentioning fraudsters.

Rogue traders have managed to buy permits from countries that don’t charge value-added tax (VAT). The traders then sell the permits in countries that charge the tax, pocketing the VAT and disappearing with the money.

Known as “carousel fraud”, it has cost European taxpayers an estimated €5 billion, a December 28 Europol report said.

The Hungarian government “recycled” used credits from CDM offsetting, swapping them with carbon permits and then selling them for a profit. This led to the temporary closure of several exchanges when the used credits were again bought by firms unaware that these credits couldn’t be used again.

Phishing and hacking scams have led to millions in losses for companies participating in the ETS, with fraudsters stealing their permits and selling them on the spot market.

As with any complex financial market, the ETS is a haven for those who can work around the system.

The successive failures of the ETS have led European authorities to redefine success.

The first phase was a success because companies learned how to deal in carbon trading. The second phase is a success because fraud is high and evidently fraudsters don’t waste their time with insignificant markets.

All sorts of ridiculous arguments are put forward to disguise the fact that carbon trading doesn’t — and won’t — lead to emissions reductions. In fact, that was never its purpose and that’s why large polluters love it.

[Ricardo Coelho maintains .]



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