Carbon trading is not enough to tackle climate change

Unambitious emissions caps provide no incentive for businesses to cut CO2 output

Stuart Brady
The Guardian, Thursday 3 December 2009
Your article explaining how the global carbon market could be worth $3tn a year, but "enthusiasm to place it at the heart of the Copenhagen treaty is matched by growing criticism of the concept", elucidated the issues of the expanding yet unproven policy of emissions trading (Fear that $3tn market of future benefits few, 30 November).
Having worked advising British industry on international climate change policies, I would concur with many of the points made about the flaws of market-based mechanisms.
Shell's chief executive, Peter Voser, was quoted as calling on governments to introduce a carbon tax or a minimum price for CO2 because "the ETS [emissions trading scheme] was failing to deliver sufficient incentives to kickstart expensive technologies such as carbon capture and storage". This lack of incentive comes about because if industry surpasses expectations by cutting emissions far below the cap set within the ETS, or if the cap is unambitious, the price of carbon will be low and return on low-carbon investment reduced. This is exactly what has happened during this recession, where an economically induced reduction of emissions has caused the price of carbon to plummet.
Emissions caps have an advantage over a carbon tax as they should guarantee emission levels are reduced at a specified rate. But, without a minimum price for CO2, they provide very little incentive to industry as a whole. Policies should encourage industry to reduce emissions as much as possible, not just to the level of the cap – which, if achieved, would still leave a good chance of dangerous climate change.
Vincent de Rivaz, chief executive of EDF Energy, "warned of the dangers of a 'sub-prime' crisis inside the ETS if complex financial instruments were created by market participants". There could indeed be a crisis, not because of the complexity of the financial instruments, but rather because of the quality of the underlying carbon credits. The EU common agricultural policy (CAP) gives us a great example of how large regional policies can be abused.
The article also states that John Browne, "a former boss of BP and an early ETS promoter, has also expressed reservations about such schemes, saying it was 'wrong' to place all your faith in them". He is entirely correct. Globally, where the greatest strides have been made in climate and energy policy, carbon markets have not played a role. Instead, government intervention and planning (such as in the Danish and now Chinese energy sector), guaranteed return on investment (such as through "feed in tariffs" for renewables in Germany and elsewhere), and heavy regulation of the energy sector (as in California's energy efficiency improvements) have been key. My experience with UK industry was that any substantive decarbonisation was as a result of high energy costs and more direct policies such as the Renewables Obligation.
Copenhagen will undoubtedly envisage a role for emissions trading. However, its shortcomings must be addressed and its limitations acknowledged through a commitment from all countries to a broad range of other policy measures.