World emissions rise, carbon markets fail

Issue 

Global greenhouse gas emissions rose faster than ever last year and the market-based schemes set up to bring emissions down are in trouble.

That’s the bad news from two recent reports by the International Energy Agency (IEA) and the World Bank.

The IEA said emissions in 2010 were 5% higher than 2008, the previous highest year. It estimated that about 44% of the emissions came from coal, 36% from oil and 20% from natural gas.

It also said 80% of projected emissions from energy generation in 2020 “are already locked in  as they will come from power plants that are currently in place or under construction today”.

IEA chief economist Faith Birol said on May 30: “This significant increase in CO2 emissions and the locking in of future emissions due to infrastructure investments represent a serious setback to our hopes of limiting the global rise in temperature to no more than 2ºC.”

To stay below 2°C, the IEA said emissions had to rise by less in the next 10 years than they had in the past 12 months.

“The world has edged incredibly close to the level of emissions that should not be reached until 2020 if the 2ºC target is to be attained,” said Birol.

A 2°C temperature rise target was endorsed by most nations (except Bolivia) at the 2010 UN climate talks in Cancun, Mexico. It is also the Australian government’s official target.

Climate scientists and poorer nations have long argued that 2°C is still too high a target, which could trigger runaway global warming, change weather patterns and condemn low-lying island nations to disappearing beneath the waves.
 
UN climate chief Christiana Figueres endorsed this position on June 1. The Guardian reported that she told a major international conference on carbon trading in Barcelona: “Two degrees is not enough ― we should be thinking of 1.5°C. If we are not headed to 1.5 we are in big, big trouble.”

But the UN’s chosen method to tackle climate change ― carbon trading and carbon offset schemes ― is also in big trouble.

At the same conference, the World Bank released its State and Trends of the Carbon Market report. The report said the market for the Kyoto Protocol’s Clean Development Mechanism (CDM) carbon offsets had fallen by 46% in 2010 ― its lowest level since the scheme began in 2005.
 
A 2008 paper by Stanford University’s Michael Wara and David Victor said: “In practice, much of the current CDM market does not reflect actual reductions in emissions.”
 
Despite the evidence showing market schemes are not helping to cut emissions, Figueres told the audience of bankers and carbon traders that they were “visionaries”.
 
She said: “While the future scope may be as yet unclear, I see many signs that the market is, in fact, in the process of reinvigorating itself.”
 
The UN will meet again in Bonn, Germany, from June 6 to 17 for a new round of international climate negotiations. Few expect it to make any progress.

Comments

Markets can stop teriffic amounts of carbon from entering the atmosphere, at a lower cost than alternative policies. There will be problems with market design, implementation, regulatory oversight, and security. And we have seen these problems. But at the same time we have a lot of built up experience in environmental markets now, and they are working.

Does anyone recall the acid rain problems in the 70s to 90s? These were fixed, in the main, through environmental markets limiting the amount of sulphur dioxide emitted into the atmosphere by coal fired power stations and large industry. And these problems were fixed at vastly lower cost than predicted. Why, becuase once the incentive to act is out there, ingenuity is unleashed.

We are now in a position where we see soft demand for carbon offsets. These are project generated offsets that are additional abatement to business as usual. And this market is distinct from the primary market, which is a market in allowances to permit under a regulatory regime such as the EU ETS. So what is driving the reduced demand in the offset market? A number of things, 1) the EU is struggling a bit financially, and as a result, its total emissions are a little softer, and therefore they don't need to invest in as much offsetting from overseas (this is a good thing, it means the market is following macro-economic trends and that when the economy is weak, the price of carbon is too), 2) there is continued uncertainty about post 2012 binding international commitment (but we don't actually need it, we have moved to a system where countries unilaterally pledge and review their targets, and many are in the early stage of putting in carbon markets to meet their targets, so demand may be weak at the moment but a patchwork of interlinked markets is evolving under the new global cooperative paradigm which will see carbon markets grow in strength over time), 3) the US is flirting with direct regulation as a response, the antithesis of the Republican "small government" ideology (however the burden has shifted to the states, and California at least will have a robust carbon market, with others perhaps to follow when they see that the sky did not fall in).

OK, so I'm an optomist. I think carbon markets can and will develop to abate emissions at least cost. However, I'm also a bit of a realist, and understand that reducing emissions at least cost is the only real policy outcome that can be achieved through the creation of a cap and trade carbon market (unless you add in things like qualitative restrictions on the offsets that can be used in the market, but there is a limit to what can be achieved). Anyway, the beauty of a carbon market is that it raises a bunch of revenue, which can be spent on all those policies that need to complement and in areas supplement the carbon market. For example, a carbon market will push industry to invest in the most cost efficient proven available technology. It will NOT make industry invest heavily in R&D for new technologies. It may to some tiny extent increase the lending of banks to venture capital, but that's on the margins. So we need policies to promote investment in early stage, concept to commercialisation technology development. This is just one example, there are many policy gaps left around the edges of a carbon market that need filling in.

But the fact remains. There is no other way that will change behaviour on the scale required, than to amend the global market economy to internalise the cost of carbon into all commercial and personal decision making.

A cap-and-trade ETS is inappropriate for decarbonising the economy. The following is from Sharon Beder, "Environmental Principles and Policies" (UNSW 2006):
"The US EPA notes that water pollution trading works best when 'the necessary levels of pollutant reduction are not so large that all sources in the watershed must reduce as much as possible to adhieve the total reduction needed - in this case there may not be enough surplus reductions to sell or purchase'. The same is true of air pollution trading.
"If substantial pollution reductions are necessary, more expensive reductions have to be made, and there is little point in setting up markets that enable some firms to avoid making those expensive reductions to minimise aggregate costs to the industry. This became evident in Germany when the government was considering implementing an acid rain emissions trading programme, the aim of which was to be a 90 per cent reduction in SO2 between 1983 and 1998. By comparison, the US emissions trading programme aimed at only a 50 per cent reduction by 2010. This meant that in the USA there was much greater scope for power stations to find cheaper ways to reduce their emissions than in Germany, where every power station would have little choice but to retrofit their plants with flue-gas desulphurisation and selective catalytic reduction for nitrogen oxides - which meant that there was no scope for trading. The Germans therefore decided against using an emissions trading programme and achieved their goal using legislation.
"In other words, the more rigorous the emission reduction required the more likely it is to require state-of-the-art technology to be achieved and the less scope there is to find cheap solutions and sell excess allowances or reduction credits.
"The US acid rain cap and trade scheme is consistently cited as a success because it has achieved some reductions at minial cost - but how do those reductions compare with what can be achieved with traditional regulation? 'US sulpher emissions now exceed those from the EU Member States by 150%' (UK Environment Agency). Despite overall national reductions, levels of SO2 increased in 16 states, and 252 out of 600 power stations increased their emissions."

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