World ponders alternatives to troubled carbon market

BANGKOK (AlertNet) – Carbon trading, in which the right to emit the greenhouse gas is bought and sold, is considered an important tool in the fight against climate change. But a growing group of researchers and environmental activists say taxing carbon offers a fairer, more transparent and less corruptible way of limiting emissions.  

Charles Sampford, director of the Institute for Ethics, Governance and Law at Australia's Griffith University, favours a levy on consumers of high carbon products similar to the value-added tax (VAT) imposed on retail sales in many countries.

A carbon-added tax (CAT) could be applied to imports, placing the financial burden on the end users of products. In contrast to carbon trading, it would spread the burden wider, as well as preventing companies from lobbying for free carbon credits and market speculators profiting from price fluctuations, Sampford says.  

"The merchant bankers and traders make money out of volatility - the more volatility there is, the more money they make - whereas when it comes to the people who make real investments in factories and industries, the volatility is extremely damaging," he explains.

Oxford professor and former World Bank economist Paul Collier also advocates for a carbon tax in his latest book, The Plundered Planet, saying governments should impose the levy at a uniform rate and offset it by reducing taxation on another economic activity.

Critics of "cap and trade" - a system requiring polluters to obtain an ever-decreasing number of permits for every tonne of carbon dioxide they release into the atmosphere, which are then traded on a regulated market - say it rewards nations and firms that are historically most responsible for the rising greenhouse gas levels scientists say are warming up the planet.

But proponents argue carbon markets channel funds to low-carbon development projects in poorer nations which can issue tradable offsets, while allowing polluters to meet their targets for curbing emissions without the cost of complying with domestic regulation.  

GOVERNANCE RISKS

Carbon trading has been promoted by the developed world as one of the few practical and politically acceptable solutions to tackle climate change.

Collier calculates the potential value of carbon-trading rights as "a staggering $720 billion per year" in his book, based on a typical estimate of the value of a tonne of carbon - around $40 - and the global ceiling on emissions of around 18 billion tonnes per year.

According to Toru Kubo, head of the Asian Development Bank's carbon market programme, the real amount of money flowing into projects that reduce greenhouse gas emissions is in the order of several billion dollars - much smaller than Collier's estimate, but still sizable.

Sampford warns that carbon trading can create huge temptation for graft due to the amount of money it generates.

The ingredients - multiple polluters, remote forests, invisible gases, financial speculators and hard-to-verify carbon offsets - make carbon trading a "recipe for corruption", agrees Daphne Wysham, a fellow at the Washington-based Institute for Policy Studies and founder of the Sustainable Energy and Economy Network.

"The system is ungovernable, from start to finish," she says. "We do not have the capacity to monitor every polluter and every timber thief and every derivatives trader in every part of the globe, and yet we are opening up markets to trading in invisible gases that will involve these."

Underlining the governance risks, emissions permits were recently stolen from accounts in the Czech Republic and Austria, leading the European Union to impose a week-long freeze in spot trading on its 72 billion euro carbon market this month.

EU officials have promised action to improve security and re-open the system as each national registry proves it can resist further attacks. But the incident, the latest in a string of scandals including the re-sale of used offsets, VAT fraud and hacking, will add to factors discouraging other countries from adopting similar cap and trade schemes.

The United States delayed last year plans to launch its own system, mainly due to slow progress on domestic legislation, leading to similar delays in Australia and Japan.

SIDE BY SIDE?

Kubo concedes that concerns about the fairness of carbon trading are valid, but says equity should not be the main focus because "the climate change problem itself is so potentially destructive, especially to people in developing countries where they are more vulnerable to the impact".

"The primary focus should be on how we can prevent dangerous levels of climate change within the time and resource constraints," he adds.

To that end, carbon taxes and carbon trading can be used side by side, he argues, pointing to Sweden and Denmark, which levy taxes on carbon emissions from fuel, light industry and agriculture while participating in the European trading scheme.

Kubo says the cap and trade approach is useful for controlling industrial emissions, as companies and installations can be easily quantified. In addition, because it is volume-based, "you know there is an impact on the quantity of greenhouse gases produced".

But it may not work as well for the residential, commercial and transport sectors, which involve larger numbers of people and entities. In such cases, a carbon tax may be more efficient, he says.

Other alternatives include a global feed-in tariff, proposed by the United Nations, under which regional or national electricity utilities would be obligated to buy renewable power from eligible producers.

"This would require an investment of roughly $100 billion per year for 10 years to make renewable energy accessible and affordable for the entire world," Wysham says.

IMPROVING THE MARKET

Another capital market approach being promoted by some traders and investors is green bonds underwritten by governments to help secure debt financing for low-carbon projects.

Yet while the world ponders the options for slicing and pricing the greenhouse gas pie more fairly, improvements can be made to carbon trading, Kubo says. One problem that needs to be solved, for example, is how to verify whether emissions reductions generated in countries without emissions caps are truly additional.

Wysham says carbon offset schemes have helped finance large dams that were already under construction rather than new initiatives that would not have existed without the system.  

Kubo believes it will take time before developing countries with population and consumption levels below those of emerging economies like China, India or Brazil see substantial benefits from carbon trading.  

"We're looking at a market mechanism that naturally or automatically seeks low-hanging fruits - which are gone or disappearing," he explains.

"So if the carbon market is to be indeed used as a tool to address climate change, it has to move to the higher-hanging fruit, and while there will continue to be deals in middle-income countries, the opportunities will expand in less-developed countries."