Copenhagen climate summit issues: carbon trading

Countries from the US to South Korea debating whether to introduce an emissions trading system at Copenhagen this week will be looking to learn from Europe’s mistakes.

By Rowena MasonPublished: 8:00AM GMT 07 Dec 2009
It is too complicated for the world to invent a global carbon market – penalising heavy emitters of carbon dioxide and rewarding those who cut their emissions – in time for an agreement at the summit. But there are signs that countries have begun to look more favourably at the idea of emissions trading within individual nations, while complying with international standards.
Europe has already been trading permits to emit carbon dioxide since 2005 – not entirely successfully. But it looks as if President Barack Obama may push a law through the US political system early next year setting up a so-called emissions “cap-and-trade” system.

The economic concept of the European Emissions Trading System (EU-ETS) is simple, but the practice itself has been fraught with problems. In Europe, policymakers distribute permits to emit carbon to utility companies and heavy industrial polluters. At first these were given out free, but now a small proportion are auctioned off by governments and eventually most will be sold in this way. Any allowances not used or extras required may be traded on the open market, as each country gradually reduces the amount of available credits and begins to auction them.
On top of that scheme, there is the Clean Development Mechanism (CDM), where companies can buy up a certain number of extra credits (known as offsets) from low-carbon projects in developing countries.
However, the main problem is that industrial players, from cement-makers to paper companies, proved so effective at lobbying that they were showered with extra permits that they did not need in the early years. Between 2008 and 2012, the UK power sector will make at least an additional 1.3 billion euros purely from carbon trading, with windfall profits mostly going to the coal sector. The recession has only exacerbated the glut as industrial emissions fall, pushing down the price of carbon credit to approximately 13 euros. This means there is not enough incentive for utility companies to switch from burning coal or gas to building new nuclear plants or wind farms without huge incentives.
One key issue at Copenhagen will be whether countries ought to impose a lower limit – a “floor price” – possibly up to 40 euros per tonne, to keep the cost of carbon high. Governments will also want to talk about so-called “carbon leakage”, where heavy emitters in one nation with a trading system simply move abroad to having to buy permits and higher energy bills.
With more countries preparing for cap-and-trade schemes over the next decade, worries about global competitiveness ought to diminish. But the practical problem of international standards in auditing emissions remains. This is an issue that has dogged the Clean Development Mechanism regime.
Only last week, the UN suspended China from participating over concerns Beijing had deliberately lowered subsidies to make wind farms eligible for funding. Croatia and Greece have also been disciplined. And earlier this year, Greenpeace exposed phoney carbon offset projects in Bolivia, where 90 per cent of promised carbon reductions had not been delivered.
Other complaints centre on the fact that the European system has so far failed in its fundamental aim to reduce emissions, meaning its only effect is to redistribute wealth among companies and traders.
Secondly, the market is a magnet for derivatives that few people understand, which some believe may brew up a speculative bubble.
Lastly, there are easy opportunities for fraud, given the intangible nature of the product changing hands. Campaigners such as Friends of the Earth have argued that the entire system is so flawed it may need to be demolished in favour of a straightforward tax on polluters