Carbon markets at the end of 2016 – what can we expect in the future?

Jan 02, 2017 No Comments by

As readers of my blog will be aware, I attended the UN Climate Summit (COP22) in Marrakech last November. Despite being something of a non-event (many of the delegates went home early) and the unsettling news of the election of Donald Trump during the conference, it was a fascinating glimpse into the realpolitik of climate diplomacy. As someone studying the ethical issues surrounding carbon trading schemes, it was particularly noticeable that ‘ethics’ of any description are simply not on the agenda of these talks. At one point, during a presentation about the EU ETS, I raised concerns about the way that the new aviation offset scheme allows what the philosopher Henry Shue calls ‘luxury’ emissions to be traded against ‘subsistence’ emissions (see here for one NGO view). Most of the panel looked like they didn’t know what I was talking about, and only an MEP answered my question because he, unlike any of the other carbon experts, had actually worked in a developing country as a doctor, treating children who lived, as he said, in cardboard huts.

So as an ethicist, I felt distinctly alone in the room of the climate policy elites. There was little sign of the climate justice movement or its message at any of the side events I attended. And yet the world is moving into a critical phase of climate inaction with attributable climate damage already visible. The planet is warmer than it has been for millions of years, the Arctic is melting, methane emissions are rocketing and there is still no global cap on emissions. When I try to explain this lack of global governance to my teenage daughters they are astounded – ‘do you mean no county is obliged to reduce its emissions?’ they ask pointedly. The answer is basically no.

The Paris Agreement is a successful political ‘fudge’ but it will not bring emissions down either fast enough, or at all. It offers a signal to countries and markets rather than instituting a comprehensive global carbon budget to be shared out equitably. While it’s true that the Agreement references a commitment to holding global warming to no more than 2 degrees, the feasibility of this target is looking increasingly unlikely as emissions continue to rise:

‘Emphasizing with serious concern the urgent need to address the significant gap between the aggregate effect of Parties’ mitigation pledges in terms of global annual emissions of greenhouse gases by 2020 and aggregate emission pathways consistent with holding the increase in the global average temperature to well below 2 °C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5 °C; …’
– UNFCCC Paris Agreement, 2015 – preamble

After years of disagreement between developed and developing countries, the facts on the ground in terms of the distribution of global emissions have changed, making the Kyoto Protocol’s fastidiously negotiated mitigation targets for Annex I countries largely irrelevant. New path dependencies and lock-ins have been established. For instance, China is now the world’s largest greenhouse gas polluter, and many developing countries are now big emitters even if their per capita emissions are still very low. Failure to amend the decision-making rules governing UNFCCC bodies has left the global community at the mercy of the vetoes of major emitters and the insidious influence of the fossil fuel industry, especially in the US (see this piece by Climate Home). The legitimate concerns of developing countries about how to provide affordable power generation to their growing populations have not been adequately addressed through financing mechanisms. The Green Climate Fund has missed its target of $2.5bn investment in 2016 with a growing threat looming over the US contribution since the election victory of Donald Trump. And speaking of that election, there is no doubt that Trump’s victory is a catastrophe for climate policy, never mind climate justice.

Good climate policy is fundamentally about forcing a reckoning between the ecological stability of the earth’s atmosphere and the economics of globalisation and development, however uncomfortable the conclusions might be for human societies. I’m not sure Trump cares about either of these things, and anyway, his dismissal of multilateral approaches means that the US cannot now be relied upon to provide political legitimacy and leadership in global climate policy.

So this depressing year has finished with a stark reminder from UNEP that global emissions must peak by 2020 and start to decline rapidly afterwards if we are to have any hope of reaching a 2 degree warming limitation target (which, incidentally, might just as well bring horrendous consequences). Even this ‘optimistic’ scenario includes – by mathematical necessity – negative emissions technologies such as BECCS (bio-energy, carbon capture and storage) which have not yet been proven feasible on a large scale. Without some mechanism to suck carbon dioxide out of the atmosphere, it appears there is zero likelihood of a stabilisation of the earth’s climate over the next couple of generations.

What we have got in the Paris Agreement is a bottom-up approach, where ‘pledge and review’ actions in the form of Intended Nationally Determined Contributions will be reviewed every five years. Ambition is supposed to be ramped up over time, but there is no enforcement mechanism and no sanctions for non-compliance. In fact, the legal status of the Paris Agreement itself is not even clear.

What the agreement does say is that carbon trading schemes – loosely referred to as ‘voluntary cooperation’ and ‘internationally transferred mitigation outcomes’ should be facilitated by rules to be established under the Agreement, with a view to ‘overall’ mitigation. What this actually means is that market-based approaches get the thumbs up, that they should be facilitated and allowed to link together as long as the ‘overall’ outcome is calculated as contributing to emissions reductions. The actual architecture and design of schemes and the nitty-gritty of how they operate, with all the potential they have for moral and financial corruption, is a matter for the individual countries or regions.

Should we worry? Should we care? Most certainly. These new carbon markets already cover 16% of global greenhouse gas emissions and this figure will rise over the coming year as new schemes come on board. Critically, what we will start to see is ‘linkages’ between schemes so that carbon credits can move around the world at the touch of a trader’s mouse (does 2008 financial crisis ring any bells here???)
From the figure below it can be seen that investor and traders look to the potential value of the whole market and the value of emissions credits rather than any serious climate policy effort. They represent, in the view of critics such as Larry Lohmann and Clive Spash, the next frontier for speculative capitalism. Fundamentally, carbon trading involves the financialisation of nature through the creation of new tradeable commodities that have little or no basis in any sensible, coherent valuation or real mitigation efforts. Offsets through the Clean Development Mechanism are included in international trading schemes as certifiable emissions reduction units but these often represent a fanciful deviation from reality rather than a genuine effort to bring emissions down where they need to come down (in the rich, high consuming countries of the global North usually).

Source: World Bank Group 2016 State and Trends of Carbon Pricing p.84

Source: World Bank Group 2016 State and Trends of Carbon Pricing p.84

Trouble is, this the world we’ve got, these are the instruments that are getting through the logjams and minefields of international climate diplomacy. Shouldn’t we try to make them work for the climate instead of fighting them? Well, this raises many questions about political strategy that organisations will answer differently, depending on their priorities. In the EU context, great work by Carbon Market Watch, the European Environmental Bureau and Climate Action Network with the European Parliament has resulted in some good reforms to the EU scheme, though it still lacks sufficient ‘bite’ through a meaningful carbon price. With transparent and democratic governance, emissions trading schemes can be kept under control. But they will only succeed in giving the right price signal to emitters alongside a price floor that usually implies a carbon tax – which is anathema to many EU member states and the US.

But the big picture is that trading will not address the serious decisions that we need to undertake as societies to decarbonise our energy consumption and production. Trading might succeed – in theory – if one accepts all of the traditional assumptions of welfare economics and if we don’t care about where and how abatement actually takes place. But what needs to happen is outside of the scope of any Paretian solution where innovation courtesy of entrepreneurial capitalism saves the day. Elon Musk’s battery storage systems will not save the world, because the world is complicated and investment incentives are not coordinated on anything like the scale that they need to be for a technical innovation to succeed on its own. And the same is true for trading: we need a whole-society, whole-industry mobilisation of effort (the kind of effort that reduces emissions rather than increasing them) and probably rationing of scarce non-renewable energy resources. I’m honestly not sure if that is politically or sociologically feasible at this point in time.

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About the author

Sadhbh O Neill is an environmentalist and researcher in climate ethics and economics at UCD. Her blog can be found here.

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