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    Carbon Markets, Taxes or Revolution
    By Omar Chedda | July 2nd 2012 05:33 PM | 2 comments | Print | E-mail | Track Comments
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    Technology analyst with a background in international trade, energy and environment project development. Also, a science fan....

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    Under the UN Framework Convention on Climate Change negotiated at the 1992 Earth Summit in Rio de Janeiro, nations committed to developing and implementing climate protection measures "appropriate for the specific conditions of each Party." In addition, industrialized ("Annex I") countries agreed to voluntarily reduce their Green House Gas(GHG) emissions to 1990 levels by 2000. The Convention entered into force in May 1994 and has been ratified by 186 countries including the United States. Very few industrialized countries, however, have met the voluntary target.  For instance, U.S. GHG emissions have climbed nearly 15 percent since 1990.

    The 1997 Kyoto Protocol significantly strengthened the Convention, by establishing legally binding emission targetsfor industrialized countries and establishing a range of mechanisms to encourage cost-effective compliance.

    In order to meet the objectives of the Protocol, Annex I countries (more developed countries which ratified the agreement) are required to prepare policies and measures for the reduction of greenhouse gases in their respective countries. In addition, they are required to increase the absorption of these gases and utilize all mechanisms available, such as joint implementation, the clean development mechanism and emissions trading, inorder to be rewarded with credits that would allow more greenhouse gas emissions at home.

    Arising from this Agreement, the European Union implemented the Emissions Trading Scheme (EU ETS) which would allow EU investors and companies to buy properly certified Emissions Reduction Credits from energy projects in developing countries, where emissions reduction could be more easily achieved at a lower cost through the implementation of fairly simple processes to either reduce Carbon Dioxide emissions or through renewable energy projects.  This, therefore, created an incentive for EU investors to invest in energy efficiency and renewable energy projects in developing countries in order to obtain the Emissions Reduction Credits that would allow them to meet compliance obligations at home.  This was the advent of carbon market trading as a market devised response to the long term threats posed by climate change, which seeks to create financial incentives for economic actors, particularly in developed countries, to reduce their carbon footprint and hence, their environmental impact.

    The largest developing country beneficiaries under this scheme in terms of renewable energy projects and new revenue streams have been China, India and Brazil which are relatively industrialized. 

    The credibility of carbon market trading has been called into question due to over-generous permit allocations; limited level of emissions reduction; instances of outright fraud; and an inadequate regulatory framework.

    Carbon trading arrangements could be jeopardized if there is no successor agreement to the Kyoto Protocol, which expires by 2013, and at this point it seems unlikely that there will be.  The Copenhagen (2009) and Cancun (2010) summits did not produce a follow-up document.  Consequently, carbon markets might falter, and the associated project investments might dry up, without the more predictable environment engendered by an international agreement. 

    The rationale behind carbon market trading is the need to address market failures for climate change by putting a price oncarbon emissions, and in so doing promote innovation in low carbon technology and remove barriers to energy efficiency.

    Climate market failures can also be addressed through carbon taxes and regulation. Advocates of a carbon tax argue that carbon market trading is prone to fraud and has achieved little or no emissions reduction to date, while the outcomes of a carbon tax are certain.  Realistically, a carbon tax agreement would be difficult if not impossible to achieve internationally, and the costs would most certainly be passed on to consumers.  Mandatory global regulations governing emissions have proven difficult to achieve.

    Carbon market trading seems to be the most likely mechanism to be implemented internationally, within the current paradigm, but would require a global cap and trade scheme which is unlikely without U.S. involvement.  The EU ETS is, to date, the largest carbon trading scheme, which has been difficult to replicate elsewhere, although variations exist.  Australia implemented a carbon tax on July 1, 2012, and indications are that industry will pass on the costs to consumers.

    In the midst of a sluggish world economy and difficult economic circumstances, issues relating to climate change are not high on the agenda for many people who are not feeling the direct impacts, as yet.  Whether for reasons of social existence or evolution, people tend to focus firstly on their short term survival needs, as well they should.  However, survival also depends on considering longer term threats and opportunities. 

    The long term forecast was for rising energy prices from traditional sources based on "peak oil" theories. However, according to a new study by a researcher at the Harvard Kennedy School (http://belfercenter.ksg.harvard.edu/files/Oil-%20The%20Next%20Revolution.pdf), “Oil production capacity is surging in the United States and several other countries at such a fast pace that global oil output capacity is likely to grow by nearly 20 percent by 2020, which could prompt a plunge or even a collapse in oil prices.” 

    Nevertheless, some analysts maintain that this would just be a temporary stay before the return of a "peak oil" trajectory because energy consumption is also increasing.  The danger is that a collapse in oil prices, as suggested by the Harvard Kennedy School study, would certainly result in a set back for research and development in alternative energy solutions.  Historically, low oil prices have resulted in reduced investment in renewable energy sources due to the reduced price competitiveness. 

    This means that we could see an increase in greenhouse gas emissions rather than a reduction in the medium-term.

    The failure of governments to make firm commitments at the United Nations Conference on Sustainable Development in Rio de Janeiro last month to address the threats to environmental degradation has been celebrated by some critics as an historic defeat for the international environmental movement, which is viewed as largely anti-business.  They argue that the concept of “sustainable development” has largely been ineffective and that increased trade coupled with improved property rights will do more for the environment than any international agreement with that specific objective.

    The economic system requires continued growth as an integral and intrinsic way of operating. Increased production also means increased consumption. The question is whether we can continue to produce and consume at an increasing rate while reducing carbon emissions, either by carbon markets or taxes.  There is no getting away from the need to examine the economic system to have a better understanding of the possibilities created by technology that require a qualitative shift in how we organize to reproduce our existence.  The movement towards such a goal will not come from above. Essentially, the future of the planet lies in the hands of the ordinary man and woman and how they organize to make the required changes.

    Comments

    Hank
    Carbon market trading seems to be the most likely mechanism to be implemented internationally, within the current paradigm, but would require a global cap and trade scheme which is unlikely without U.S. involvement. 
    It is unlikely with US involvement.  If the largest polluters are not involved, it is a failure and therefore pointless.  You can't have an emissions cap and trade when the world's largest emitter is protected as a 'developing' nation.

    Emissions in the western world have gone down, a bad economy will do that, America is at mid 1990s levels of CO2 emissions, so laying this at the feet of America seems odd.

    Cap and trade for emissions will never be implemented because it creates a new bureaucracy and is subject to crony-ism and corruption.  Politicians should just tax carbon if they are convinced it is the problem and then take the hit if it does not work - it is simple, cheaper and applies equally.  Pretending they are creating a 'new' market by spending a bunch of money redistributing corporate money inefficiently is dishonest.

    Omar Chedda

    "If the largest polluters are not involved, it is a failure and therefore pointless. You can't have an emissions cap and trade when the world's largest emitter is protected as a 'developing' nation."

    Well Hank, the U.S. is still the number 2 emitter.  If the U.S. were to join the EU's Scheme or link with it in some way, this would be a boon to the market and create the basis for a global scheme.  There would be greater incentives for other countries to join.

    It must be remembered that the global economy is integrated, and that countries like China are the outsourced locations for the "dirty" aspects of the global production process.  London is no longer the dark Dickensian industrial city of the 19th century precisely because of this process.

    China's GDP per capita at PPP is $8,400 (2011 est.) and ranked at 120 in the world.  India's GDP per capita at PPP is $3,700 (2011 est.) and ranked at 163 in the world. So these countries have quite a way to go before they can catch up with developed countries.  This is not to say that their emissions level should not be addressed but the resources to do so are more limited.

    The top 5 inventors, in terms of total climate related inventions from 1980 to 2007, are Japan (20.2%); Germany (19.8%); USA (15.4%); France (5.1%); UK (4.5%) - source: Dechezlepretre and Martin (2010)

    There is a role for technology transfers in reducing developing countries' emissions levels.  A credible cap and trade scheme creates financial incentives for such transfers through emissions reduction projects.  A carbon tax simply creates incentives for firms to move the "dirtiest" aspects of their operations to countries where no such tax exists, and for such countries to attract "dirty" investments, if for no other reason than the pressure to create short-term employment without regard for the long term consequences to the environment.

    "Emissions in the western world have gone down, a bad economy will do that, America is at mid 1990s levels of CO2 emissions, so laying this at the feet of America seems odd."

    This is not to lay anything at the feet of America but simply to note that America has not been leading the effort for emissions reduction.