Carbon trading: One burning question, no easy answers

Does carbon trading herald the green shoots of recovery — or add fuel to the fire of global warming?
Richard Girling
A few weeks ago, in central Mozambique, I stood in a clearing of blackened tree stumps in a landscape of weeds. This was a classic example of “slash-and-burn” agriculture, in which dirt-poor farmers constantly move on from depleted fields to hack new ones out of virgin forest.
A few miles away, thanks to a carbon-trading scheme, another community of farmers was working differently. Through a few simple agricultural techniques they were able to go on cropping the same land year after year. They had surplus food to sell, some burgeoning rural industries providing jobs, a health clinic and a school in which every child sat at a solar-powered computer linked to the internet. And they were planting hundreds of thousands of trees, all sucking carbon out of the atmosphere.
The principle of carbon trading, or “offsetting”, is that it doesn’t matter where in the world you cut emissions of greenhouse gases, as long as they are cut. So companies are given limits — “caps” — on how much they are allowed to emit. If they go over those limits they must buy “carbon credits” from cleaner companies; in other words, they pay other companies to be greener.
Fans of carbon trading say it works. Creating a market means, in theory, that companies can sort it out between themselves and meet global targets cost-effectively. Opponents argue that the worst polluters can simply pay to go on blackening the sky until the coal runs out.
The European Union has had an official emissions-trading system (ETS) since the Kyoto agreement in 2005. Each country has a national allowance to distribute among its companies. But the effectiveness of the market as an emissions regulator depends on the price of carbon, which reflects supply and demand.
If the price is high, then companies have an incentive to cut their emissions. If it isn’t, they don’t. The system therefore will work only if the “cap” is set at a relatively low level and the supply of carbon credits is limited. This is not what has happened. Firstly, the cap is much too low. Secondly, far too many permits were handed out.
This will have two damaging effects: the system will fill up with permits that can be bought and sold with zero impact on emissions; and continuing oversupply will further depress the trading price. For much of European industry, it will be business as usual.
This is even worse than it sounds, for it removes the incentive for companies to invest in low-carbon technologies. Without such investment, the EU risks long-term reliance on the same old carbon-intensive polluters it is supposed to be discouraging. And unless the EU can convince the rest of the world that it is cutting emissions, the likelihood of an effective global agreement will melt away like Arctic ice.
Lord Stern, the author of a government-commissioned review on the economics of climate change, argues that if carbon trading could be enforced, it would not only put a limit on emissions but also generate private-sector finance for low-carbon initiatives in developing countries, helping their economic growth. Rich polluters would literally be rewarding greener projects overseas.
This is exactly what I was witnessing in Mozambique. Income from the sale of carbon credits was being passed directly to local farmers. Mothers and babies who might have died were alive and healthy. There were well-attended schools, clean drinking water, a nascent cash economy, trees that were still standing, and fields that were ringed with new planting.
Unfortunately, under the Kyoto agreement, projects such as this are excluded from official carbon-trading schemes, so its credits have to be sold on the voluntary market instead. Given that deforestation is responsible for 20% of carbon emissions, there is a powerful argument for bringing agri-forestry, and forest protection, within the scope of whatever deal is done at Copenhagen. Yet opposition is fierce. Environmental campaigners argue that carbon trading lets polluters go on building coal-fired power stations just by buying a few cheap offset credits in the developing world.