What goes up must come down – Carbon trading, industrial subsidies and capital market governance
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Transcript of What goes up must come down – Carbon trading, industrial subsidies and capital market governance
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7/30/2019 What goes up must come down Carbon trading, industrial subsidies and capital market governance
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no. 61 | september 2012
What Next Volume IIIClimate, Development and Equity
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What goes up must comedown Carbon trading,industrial subsidiesand capital marketgovernance
Oscar Reyes
When nancial ervice prodct are advertied in the UK, a govern-
ment health warning provided by the Financial Service Athority
(FSA) ie a reminder that [t]he vale o invetment may all a well
a rie Bt eller are oten not o catio when it come to oer-
ing carbon credit, prompting the FSA to ie a actheet with the
trapline: Find ot why yo hold be wary abot inveting in the
carbon credit market (Financial Service Athority 2011) It draw at-tention to ncrplo alepeople who call ot o the ble, oering
carbon credit a the new big thing in commodity trading, claiming
that a indtrie now have to oet their emiion and govern-
ment i ocing on green development thi i an ever growing
market
The rpriing thing abot the warning i not o mch that it draw
attention to carbon rad (which ha been prevalent in recent
year), bt that the langage choen by the radter cloely ech-
oe many o the claim made by the government, binee,non-governmental organiation and academic that have pro-
moted carbon trading (Deloitte, 2010; Chan, 2010) The idea
behind the cheme i that a market i created to pt a price
on carbon, which i a way to internalie the economic cot
o climate change onto company balance heet A limit
on greenhoe ga emiion grow, prred on by inter-
nationally binding emiion limit, the pply o carbon
hold become carcer, phing price p The reltant
carbon price will act a an incentive or binee to
invet in cleaner technology Mot invetment bank and
carbon market pecialit held omething akin to thi a-
mption, a can be ee in Figre 1, which illtrate their
orecat or the tre price o carbon
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186 Development Dialogue September 2012 | What Next Volume III | Climate, Development and Equity
It ha not worked thi way in practice, however The optimitic orecat
in Figre 1 were made in mid to late 2009, jt month ater the carbon
price had halved (rom a peak o 31) Since then, it ha crahed again,
with permit rom the Eropean Union Emiion Trading Sytem (EU
ETS), which accont or over 80 per cent o the global market, alling
below 650 each Thi led a enior climate change advior to Shell oil
company to warn o a vicio downward piral, while the CEO o
German tility EON, one o the larget player in the cheme, wa even
more blnt: The ETS i bt, it dead, he aid, adding that it gave no
ignal or low-carbon invetment (Krkowka 2012)
How cold the theorit and market practitioner have got it o wrong?
In ggeting that a carbon price hold incentivie clean invetment,
and that a market i the mot efcient mean to allocate that pr ice, pro-ponent o carbon trading have ollowed a narrowly economitic view
o the climate change problem, taking little accont o the complexitie
o commodity-ormation, or the reglar trmping o environmental
goal by competition and trade policy in the allocation and rle-etting
arond carbon allowance
Thi article oer a dierent accont, arging that the collape in car-
bon price i ymptomatic o deeper aw in the attempt to commodiy
carbon a a oltion to climate change The rt two ection look at
the two main type o carbon trading - cap and trade and oetting
An otline o the perormance o the EU ETS, the larget cap and
trade market, how that the cheme ha ailed to place any meaningl
2005 2006 2008 2009 2010 2012 2013 2015 2016 2017 2019 2020 2021
45
16,1 /t
30,4 /t
42 /t
33,6 /t
25,3 /t
19,2 /t
18,4 /t15,5 /t
13,3 /t
40
35
30
25
20
15
10
5
0
EUA spot Bluenext Mean Mean + standard deviation Mean standard deviation
Figure 1. Trend oprice orecasts or
European emissionallowances.
(Prada, Barbris and
Tignol, 2010: 35).
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187 Development Dialogue September 2012 | What Next Volume III | Climate, Development and Equity
limit on emiion, intead generating a rpl o permit to pollte
that ha collaped the carbon price The vat majority o carbon permit
have been handed ot or ree, with companie paing on the cota thogh they had paid or them The combined prot rom thi ac-
conting trick, pl the ale o rpl permit, mean that the ETS ha
mainly erved a a bidy cheme or indtry and the power ector
The econd part then look at the Clean Development Mechanim
(CDM), the world larget oetting cheme, which wa created by the
1997 Kyoto Protocol Carbon oet are created when a company p-
poedly remove or redce greenhoe ga emiion It receive credit
or thi activity, which can be old to pollter who want permiion to
pollte more One activity i intended to compenate or the other, bt
the bai pon which credit are created i a conteractal that i nearly
impoible to meare: Oet are an imaginary commodity created by
dedcting what yo hope happen rom what yo ge wold have hap-
pened (Welch, 2007) Moreover, the invetment ncertainty rronding
carbon price ha contribted to the act that carbon credit rarely drive
invetment, bt generally bidie project that wold have happened re-
gardle Economie o cale, moreover, have tended to concentrate thee
project arond a handl o heavy indtrie and, increaingly, arond
ntainable orm o power generation throwing a lieline to oilel inratrctre in both developed and developing contrie
The third ection look at how carbon i traded Althogh price have
declined, market volme are growing modetly a a relt o increaed
hedging againt other commoditie and nancial peclation The
emergence o an increaingly complex trading inratrctre i the tre
governance challenge that carbon market poe: concentrating power in
the hand o a mall nmber o nancial ector actor and nancialied
tilitie, while bordinating invetment deciion on clean development
to trategie that remain baed on oil el extraction and trading
The orth, and nal, ection o the article briey ketche an alterna-
tive ramework that cold tand in place o the varying objective o
carbon trading
Cap and trade: the EU Emissions Trading System
Under cap and trade cheme, government or intergovernmental bod-
ie et an overall legal limit on emiion in a certain time period (a
cap) and then grant indtrie a certain nmber o licene to pollte(carbon permit or emiion allowance) Companie that do not
meet their cap can by permit rom other that have a rpl (a
trade) The idea i that a carcity o permit to pollte hold encorage
The vast majority ocarbon permits havebeen handed out or
ree, with companiespassing on the costsas though they hadpaid or them. The
combined protsrom this accounting
trick, plus the sales osurplus permits, mean
that the EmissionsTrading System hasmainly served as a
subsidy scheme orindustry and the
power sector.
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For six o the seven
years in which theEU ETS has beenin operation, the
number o allowancescirculating has
exceeded the cap.In other words, the
cap did not capanything and the price
collapsed.
their price to rie; and the relting additional cot to indtry and
power prodcer hold then encorage them to pollte le
The Eropean Union Emiion Trading Sytem (EU ETS) i by ar the
larget ch cheme, acconting or 81 per cent o the global carbon
market, and covering almot hal o the EU CO emiion (Kooy
and Gigon, 2012: 17)1 It et an overall legal limit on the CO emi-
ion o over 11,000 power tation, actorie and renerie, and ince
Janary 2012 ha alo inclded CO emiion rom ight between
Eropean contrie, a well a into and ot o the EU Each intallation
covered by the cheme receive or ree, or by, permit to pollte
called Eropean Union Allowance (EUA)
For ix o the even year in which the EU ETS ha been in opera-
tion, the nmber o allowance circlating ha exceeded the cap The
rt phae o the cheme, which ran rom 2005 to 2007, aw too many
permit handed ot, with an overall rpl o abot 4 per cent o the
total emiion covered by the cheme2 In other word, the cap did not
cap anything and the price collaped
A imilar problem i being repeated in the econd phae o the cheme
(2008-2012), a the combined eect o the economic downtrn and gen-ero proviion or the prchae o oet Althogh the abolte gre
how EU emiion declining by 8 per cent ince 2005, according to the
Eropean Commiion it reqire a coniderable leap o aith to claim
thi decline a being caed by the cheme (Eropean Commiion 2011)
In part, the all i part o a trend toward indtrial otorcing otide o
Erope Thi pre-date emiion trading and i driven mainly by labor
market actor and trade policy (Peter et al, 2011: 3, 5)
It alo reect alling prodction a a relt o the Eropean Union
economic difcltie ince 2008 Allocation nder the ETS were madeon the amption that Eropean economie wold keep growing Bt
a receion ollowed by economic tagnation ha redced otpt and
power conmption, leaving companie with a rpl o permit Since
thee were mainly given ot or ree, the net eect i directly oppoite
to the cheme theoretical intention: pollter can delay taking action
by cahing in nwanted permit, while the over-pply mean that the
price ignal that i meant to aect change ha been netered
1 The EU ETS covers 30 countries: the 27 members o the European Union, plusNorway, Iceland and Lichtenstein. Negotiations are underway or Switzerland to jointhe scheme (European Council, 2010). The scheme includes most o the largest single,static emissions sources, including power and heat generation, oil reneries, iron andsteel, pulp and paper, cement, lime and glass production.
2 The 2005-2007 surplus ran to 267 MtCO2e (Megatonnes Carbon Dioxide Equivalent,the internationally recognised measure o greenhouse gas emissions).
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The latet data, or 2011, clearly bear thi ot Emiion or ector
covered by the cheme dropped by 24 per cent over the year, which
the Eropean Commiion heralded a a good relt [which] howthat the ETS i delivering cot-eective emiion redction (Lewi
and Chetney, 2012) For that claim to be tre, however, it wold need
to etablih both that companie involved in the cheme were bying
permit to cover a hortall, and that the cot o thee permit wa -
ciently high to aect operational and, ltimately, invetment deciion
The ame Commiion gre reveal a 900 million rpl in permit
(o ar) in the econd phae o the ETS, which mean that a ignicant
qantity o permit will be carr ied over into the pot-2013 period
Meanwhile, carbon price collaped to their lowet-ever level in 2011,
ending the year at arond 8 per tonne Invetor were blnt in their
aement: The EU ETS wa expected to pport emiion redction
by catalying innovation and driving invetment in low carbon ol-
tion Thi i not happening (Mrray, 2012)3
The inclion o carbon oet in the EU ETS (and almot all other
exiting or planned cheme) ha componded thee problem While cap
and trade in theory limit the availability o polltion permit to trading
between pollter, oet project are a licene to print new, even cheaperand le reglated one I all o the oet credit legally available or e
in the econd phae o the EU ETS were taken p, thee wold more
than cancel ot any cap on emiion (National Adit Ofce, 2009: 19)
In practice, the cheme ha a rpl o carbon permit even withot the
e o oet, o many companie will bank credit or e at a later date,
meaning that no dometic redction will be needed ntil at leat 2018
(Morri, 2011: 16) Mot o thee oet are ed by larger intallation,
three-qarter o which actally had a rpl o permit to tart with
(Elworth, Worthington, Bick and Craton, 2011; Trotignon, 2011) Withprice lmping, there ha even been a marked increae in the e o oet
de, in part, to the act that they remain cheaper than EUA, bt alo
reecting a rh to e credit rom controverial CDM indtrial ga
project, which the EU climate action commiioner, Connie Hedegaard,
admit have a total lack o environmental integrity (Carrington, 2010)
Thee will no longer be eligible or e in the EU cheme ater April 2013
Once the overpply o permit and the glt o oet credit are taken into
accont, Eropean Commiion gre gget that there cold be p to24 billion rpl emiion allowance in the cheme over the 2008-2020
period (Point Carbon 2012)
3 See Calel and Dechezlepretre (2012) or a statistical analysis backing up the claim thatEU ETS has ailed to induce shits to low-carbon technology.
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Polluter subsidies
The EU ETS ha alo acted a a bidy cheme or pollter, with the
allocation o permit to pollte more cloely reecting competition
policy than environmental concern
A two-tep proce ha een pollter benet in dierent way Energy-
intenive indtry ha rotinely been given extremely genero alloca-
tion o permit a trctral rpl o between 20 and 30 per cent, in
the cae o the teel ector The vale o thi over-allocation to indtry
in phae II o the ETS wa etimated (in 2010) at 65 billion, althogh
the evental gre i likely to be a bit lower, depending pon how
many o the rpl permit were actally old beore a rther collapein carbon price (Morri and Worthington, 2010: 26)
Thee nearned bidie or indtry have been achieved by etting
relatively more tringent cap in the power ector, on the amption
that it i not particlarly expoed to international competition and can
imply pa on the cot o allowance to electricity conmer In o
doing, the power ector win too and win big In paing throgh
to conmer the cot o allowance that were handed ot or ree, thetilitie companie gained an etimated 19 billion in windall prot
or phae I, and tand to gain an etimated 23 to 71 billion or phae II
o the ETS (althogh the collape o the carbon price may redce thee
gre below the 20 billion mark) (Ellerman, Convery and Perthi,
2010: 326; Point Carbon Adviory Service, 2008)4 Rle governing
the inclion o new entrant to the cheme alo relted in genero
award o ree certicate or hard lignite plant, which ha contribted
ignicantly to a dah or coal in German power prodction (Pahle,
Fan and Schill, 2011: 12)
4 See also Sijm, Neuho and Chen (2006) or evidence that electricity generatorswere able to generate windall prots by passing through opportunity costs. A recentassessment o the German electricity sector suggests that the ve largest companiesmay have beneted to the tune o 40 billion (Hermann et al., 2010).
Rules governing theinclusion o new
entrants to the schemealso resulted in generousaward o ree certicates
or hard lignite plants,which has contributedsignicantly to a dash
or coal in Germanpower production.
The Bechatw lignite-redpower station in Poland.
placidcasual(f
ickr)
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Depite repeated claim rom energy-intenive manactring ind-
trie that they cold not pa the cot o emiion allowance throgh
to prodct price, thi very ame trick ha alo helped manactringcompanie gain nearned prot rom the cheme Econometric analy-
i by CE Delt ond that oil el renerie and the iron and teel
ector rotinely paed on the entire notional cot o EUA which
they received or ree to conmer The windall prot received by
thee ector in the rt phae o the cheme were etimated at 14
billion (bringing the total bidy, inclding over-allocated permit, to
over 20 billion) (Bryn et al, 2010)
The third phae o the ETS will contine to ee ignicant bidie paid
to indtry, depite the actioning o permit in the power ector Indtry
lobbying ha relted in over three-qarter o manactring receiving
ree permit, which cold yield at leat 7 billion in windall revene
annally Energy companie ccelly lobbied or an etimated 48 bil-
lion in bidie, motly or carbon captre and torage (CCS, a cover or
new coal plant) In addition, the Eropean Commiion i reviewing tate
aid rle with a view to granting direct nancial bidie to companie
claiming that the ETS damage their competitivene (Reye, 2012)
Carbon osets: The Clean Development MechanismCarbon oetting i baed on emiion-aving project that are cre-
ated to compenate or contined polltion in indtrialied contr ie
A een above, oetting ally rn in parallel with cap and trade
cheme and generate credit that allow companie to pollte above
the et limit By ar the larget oet cheme i the Clean Development
Mechanim, which wa etablihed to give rich contrie exibility
in delivering their emiion redction obligation nder the Kyoto
Protocol The CDM ha over 4,000 project regitered to date, with a
imilar nmber awaiting approval (UNEP Rioe, 2012)
The global carbon market wa worth us$176 billion in 2011, althogh
the dicrepancy between thi headline market vale and Clean Devel-
opment Mechanim nancial ow ha contined to increae (Kooy
and Gigon, 2012)5 In 2011, the primary trade in CDM oet wa
worth us$09 billion, it lowet level ince the Kyoto Protocol entered
into orce in 2005 (ee Figre 2)6
5 The headline gure calculates the Gross Nominal Value (GNV) o carbon derivatives,
which account or approximately 85 per cent o all trades, at the price that theyare expected to be worth on their maturity date and assuming the contracts are allullled. This is likely to be an overestimate.
6 The primary market refects the overall value o credits at the point o their initial sale.It may be that this gure is higher than the actual sales, though, because it includesoptions or the sale o credits that may or may not materialise in uture.
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192 Development Dialogue September 2012 | What Next Volume III | Climate, Development and Equity
Figure 2. The rise and all o the CDM. Value o primary markettransactions, 2005-2011. Data source: World Bank.
In term o geographical cope, over 75 per cent o regitered CDM
project are in jt or contrie, with 48 per cent in China and 20
per cent in India Meared by the nmber o credit ied, China i
even more dominant, acconting or 64 per cent o the market (UNEP
Rioe, 2012) By contrat, the 48 leat developed contrie accont
or jt 1 per cent o project and 06 per cent o credit ied; while
b-Saharan Arica (exclding Soth Arica) hot 1 per cent o project
and accont or 15 per cent o credit ied (hal o which went toproject in Nigeria)
The main explanation or thee diparitie i economic The larg-
et global invetor direct their eort to the mot protable project
Economie o cale invariably point to the larger project, and ince
oet repreent avoided emiion, thee involve heavy indtrie or
power ector project in contrie where grid energy already regiter
ignicant greenhoe ga emiion Sch project opportnitie rarely
exit in b-Saharan Arica and LDC, which i not dirty enogh ordoe not conme enogh to compete ccelly within the CDM
When exception exit, a in Nigeria, thee generally relate to oil el
extraction
2005 2006 2007
2008 2009 2010
2011
Primary CDM market
US$(billions)
0
1
23
4
5
6
7
8
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Case study: Carbon credits ordestructive gas faring in Nigeria
There can be ew clearer example o the pervere incentive that
the CDM pt in place than the ga tiliation project in the Niger
Delta Thee inclde Kwale, a ite rn by the Nigerian Agip Oil
Company, which expect to receive arond us$180 million in oet
credit by the end o 2016, and the Pan Ocean Ga Utilization Project,
the larget regitered CDM project in Arica, which anticipate over
us$300 million in credit by 2020 Shell and Chevron crrently have
imilar project nder development
The Niger Delta project are baed arond claim to redce ga aring,an activity that ha already been jdged to be illegal by the Nigerian
High Cort Thi mean that carbon credit will reward companie or
their ailre to abide by the law Frthermore, while the project claim a
redction in ga aring, cloer analyi gget that they mainly proce
liqeed natral ga (LNG) and other gae that were not aociated
with crde oil prodction in the rt place (Ooka, 2009: 92)
Sch project rik reinorcing oil el dependency at both end o the
CDM pipe: the Nigerian Agip Oil company i co-owned by Eni, the
Italian tate oil company, which ell credit back to Eni renerie in Italy
The main byer o carbon credit rom the Pan Ocean project i Vatten-
all, one o the larget operator o coal-red power plant in Erope
The impossibility o additionality
Oetting cont claimed redction in emiion in developing contrie
a part o the actal ct promied by rich, indtrialied contrie amethod that ret on a awed additionality concept A baeline amp-
tion i made abot what the tre wold have held withot the project,
the CDM i amed to have altered that tre, and credit are awarded
a a relt Proving ch claim i virtally impoible, with the CDM
proce encoraging technical expert to ndertake a relentle earch
or ar-etched eqivalence among the mot ditant activitie (Lohmann,
2009b: 181) In reality, ch complex procee a methane redction, oret
carbon eqetration and conteractal hit in grid-connected energy
prodction cannot be compared and the ytem i eaily maniplated
Project are aeed ing the CDM additionality tool, which reqire
them to pa either a barrier analyi to identiy actor that might oth-
erwie prevent the project rom taking place (ch a a lack o in-contry
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experience with a particlar technology, or ncertainty rronding
electricity tari), or an invetment analyi to how that the project i
not nancially viable withot CDM revene Thi tool wa introdcedto improve the objectivity o additionality teting, bt it actally rea-
rm the impoibility o adeqately aeing project developer claim
It i generally poible to ininate rik that reglation may change
in tre, while claim that project deploy technologie that are not
common practice within a contry have been hown to be highly mal-
leable Either way, a Haya point ot, it i ar eaier to how that barrier
exit than to prove that thee are likely to have prevented the project
rom going orward withot the CDM, and the barrier analyi tet the
ormer claim rather than the latter (Haya, 2010: 34)
There i no way to etablih caality between barrier and additional-
ity, in other word, althogh there i coniderable reaon to believe that
thee are not actor determining invetment deciion To cite only the
mot obvio example, almot a third o hydroelectric dam applying
or CDM credit were already completed at the time o regitration and
almot all hydro project were already nder contrction while CDM
credit were being applied or (Haya, 2007: 3)
Invetment analyi i conidered to have the higher potential or beingaccrate (Haya, 2010: 33) The baic premie i that an accrate ae-
ment can be made o the predicted cot and revene accring rom
a project, etablihing a ingle benchmark gre that repreent the
prot that invetor can expect to receive in retrn or their project
nding In the cae o a wind arm, or example, thi wold inclde
otgoing rom the cot o manactre, land prchae, operation and
maintenance, taxe, and the cot o ervicing the interet on loan taken
ot againt the bilding cot I a project i not a nancially attrac-
tive propect or invetor once thee cot are et againt the expected
revene rom the ale o power, then it may be conidered eligible orCDM credit to help it to overcome thi hrdle Thi i ally dened
in term o an anticipated internal rate o retrn (IRR)
It i impoible to accrately determine a ingle benchmark, however,
ince there i alway a range o plaible conteractal amption
A one leading textbook on corporate nance warn: Do not trt
anyone who claim to know what retrn invetor expect (Brealey and
Myer, 2003:160, citing Haya, 2010: 45)7 Project developer have ex-
ibility in how they tate a broad range o variable, inclding the coto borrowing money (related both to the perceived creditworthine o
the company rnning the project and the contry rik), the percentage
7 In practice, as Haya convincingly shows, ew projects even achieve the stableassumptions set out in the ideal case above.
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o money borrowed, the anticipated rate o depreciation in the vale o
the aet and it implication or tax rate, how long the plant will rn
or, how oten it will be generating electricity at ll capacity (the plantload actor), variability in renewable tari, and o on Even in the bet
cae cenario, ch a a wind project plant with contractally agreed
bild cot and a long-term power prchae agreement in place, there
i a hge variability in potential invetment retrn In act, the range o
legitimate amption that can be loaded into the invetment analyi i
alway greater than the dierence that carbon credit are likely to make
to the invetment deciion It i an open ecret that thee analye are
ndamentally maniplable, a carbon market participant will admit
in ngarded moment In India, or example, a groping o invetor,
verier, project developer and even the Chair o the national CDM
athority conceded to US conlate ofcial that all Indian project ail
to meet the additionality in invetment criteria and none hold qaliy
or carbon credit (US Conlate Mmbai, 2008)
CDM reorm: better governance, same problems
Once thi memo wa revealed by WikiLeak, proponent o the CDM
were qick to claim that improvement in governance have already
improved the mechanim integrity, with rther reorm till to ollow
on completion o a high-level Policy Dialoge8
There are certainly plenty o governance ailing that need addreing9
Revolving door between Deignated National Athoritie (local regla-
tor in the hot contry), Deignated Operational Entitie (DOE, adit-
ing rm accredited by the Exective Board to ae whether project
meet the reqired tandard to be regitered) and project developer have
led to conict o interet (Newell, 2012; Newell and Phillip, 2011) The
oligarchy o large DOE that do mot o the validation reqired to reg-
iter project, and verication reqired prior to credit being ied, haa poor record The three main rm have all previoly been pended
or ctting corner in their work, inclding ailing to aign adeqately
trained ta, condct independent review and engage in internal adit,
and or veriying project depite dobt whether they were additional
(Schapiro, 2010) The act that thee DOE are paid by project participant
themelve pt a downward prere on tandard
Local takeholder conltation are oten rdimentary, poorly adver-
tied and inacceible, and take place ater the project i already nder
way or, in a nmber o reported cae, did not happen at all (CIELand Earthjtice, 2011; Newell and Phillip, 2011) Local participant
8 http://www.cdmpolicydialogue.org/
9 The ollowing section draws on orthcoming mapping and assessment o CDMgovernance, conducted jointly with Payal Parekh.
In India a grouping o
investors, veriers,project developers and
even the Chair o thenational CDM authority
conceded to US consulateocials that all Indian
projects ail to meetthe additionality in
investment criteria andnone should qualiy or
carbon credits.
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comment are generally obervational, with little evidence that they
have aected how project are implemented There i not even any
legal proviion to withdraw project i hman right abe and localpolltion impact are proven, a in the notorio cae o a palm oil plan-
tation in Hondra, which wa regitered depite the reported mrder
o 23 local armer who tr ied to recover land that they aid wa illegally
old to the project owner (Nelen, 2011)
The CDM Exective Board i bject to political conict o inter-
et, with board member (who ofcially erve in a peronal capacity)
imltaneoly working a climate negotiator and repreentative o
national DNA (taked with encoraging new CDM project within
contrie or prchaing credit) Statitical analyi ha hown that a
project chance o approval increae i there i a board member rom
the hot contry (Fle, Michaelowa and Michaelowa, 2008)
Some o thee ailing may be addreed by the Policy Dialoge, al-
thogh it hold not atomatically be amed that the relt will im-
prove the overall governance o the cheme The crrent arrangement
exit, in large part, becae the reglator and negotiator who created
and manage the CDM have a veted interet in encoraging ever more
project to pa throgh it pipeline Project developer and other bi-ne lobbyit are now advocating reorm ch a the at-track ap-
proval o certain project type that wold lead to even ewer check on
the environmental integrity or ocial impact o project
The oc on improving governance, moreover, doe nothing to addre
the central problem with oetting, a can be een clearly i we retrn
to the example o India non-additional project Since 2008, when
the WikiLeak memo wa written, the market ndamental nderpin-
ning the CDM have deteriorated: carbon credit price have collaped,
tre price projection have been revied harply downward, and theexperience o thi downtrn ha encoraged invetor to be more ca-
tio making it even le likely that CDM revene determine invet-
ment deciion (Kooy and Gigon, 2012) Any invetor who backed a
project today on the grond that the CDM revene wa the key to it
viability wold qickly nd themelve ot o bine
Mobilising nance, perverse incentives and subsidies
The ignicance o thi lack o additionality really come to the ore when
claim that the CDM traner technology, or i a mean to leverage evenlarger m rom the private ector, are aeed Once it i ndertood
that the CDM i motly bidiing exiting plan, rather than driving new
invetment, it cannot accrately be aid to drive technology traner either
althogh attempt to tdy the cheme eect in thi area identiy an
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197 Development Dialogue September 2012 | What Next Volume III | Climate, Development and Equity
important exception In 2008, the United Nation Framework Convention
on Climate Change oght to meare the extent o CDM-related tran-
er by looking at how many companie reported the e o eqipmentor knowledge not previoly available in the hot contry or the CDM
project (UNFCCC Regitration and Iance Unit, 2008) Indtrial ga
project came ot particlarly well in thi tdy However, it ha been clearly
hown that, in the cae o the detrction o HFC-23 (a potent greenhoe
ga ed a a rerigerant), a traightorward pre-exiting technology wa
tranerred in a maively inefcient manner, potentially generating 4,6
billion (us$6,3 billion) in oet credit or intalling lter in 17 indtrial
ite at a cot to the companie o le than 100 million (us$138 million)
(Wara, 2007) The overall relt, moreover, wa that the CDM created a
pervere incentive to increae the prodction o HFC-23 in order to gain
more oet credit (Schneider, 2011)More generally, the CDM ha alo
been ond to have provided incentive to retard the proce o creating
developing contrie policy in order to preerve credit eligibility (Drieen
and Popp, 2010)
Likewie, claim that the CDM ha leveraged large invetment in clean
technology all at the hrdle o awed and impoible additionality A
2011 World Bank report to the G20 on Mobilizing Climate Finance
claimed that oet market throgh the Clean Development Mecha-nim have relted in us$27 billion in ow to developing contrie in
the pat 9 year, catalying low carbon invetment o us$100 billion
(World Bank, 2011: 6) In act, the us$27 billion gre i the vale o
tranaction in the primary CDM market between 2002 and 2010
the etimated vale that the credit will achieve when they are rt
old (World Bank, 2011: 26) In the abence o additionality, thi i not
money mobilied by the CDM bt repreent, rather, the cale o the
potential bidie that the CDM i oering to companie to do what,
in all likelihood, mot wold have done anyway
The impreive-onding us$100 billion gre i ed to jtiy call to
cale p carbon market Yet a cloer look how thi to be mirepre-
ented The Bank goe on to explain that, a the blk o tranaction are
orward prchae agreement with payment on delivery, actal nancial
ow throgh the CDM have actally been lower, abot $54 billion
throgh 2010 (World Bank, 2011, 27)
Trading carbon
To rther nravel thee gre, it i worth looking a little more cloelyat how carbon i actally traded The carbon market ha both a primary
and a econdary market Primary reer to the rt time that a permit or
credit i old Mot primary credit (pCER), or example, are old in ad-
vance o actally being ied Thi i called orward elling, and typically
Once it is understoodthat the CDM is mostlysubsidising existing
plans, rather thandriving new investment,it cannot accurately besaid to drive technologytranser.
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involve the project developer igning an Emiion Redction Prchae
Agreement with a company, government or development bank The rt
ale o the CER can typically involve a contract that agree a xed priceor a pecied nmber o credit, which are expected to be delivered by
a certain date For the eller, the advantage i that p-ront capital i made
available, rather than the eller having to wait ntil ater the project i p
and rnning to gain the carbon revene
Thi type o arrangement ha increaingly become a loing propoition
or byer, however A carbon price have declined, byer are nding
themelve locked into prchaing oet at a rate way above their vale
in the crrent market In repone, many byer are now eeking to
renegotiate or dmp thee contract by whatever mean poible Thi
practice ha been enabled by the act that, otide o HFC or N2O
project, mot CDM project have delivered ewer credit than initially
pecied, or have ond that credit iance i lower than initially
expected providing legal mean or byer to break contract and
nd credit at a cheaper rate elewhere, or renegotiate xed-price into
oating-price contract (Kooy and Gigon, 2012: 51)
Where thi i not poible, the byer have reorted to other mean The
World Bank report that Some large byer alo reportedly ed theirize and contractal poition to impoe ERPA renegotiation Having
hired the Deignated Operational Entity (DOE) themelve, thee byer
threatened to delay verication or cancel the DOE contract Alternatively,
by being the ole CDM ocal point in certain project, they renegotiated
contract baed on the act that the project CER wold only be tran-
erred pon their ole reqet, th leaving eller with no choice other
than to accept new contractal term (Kooy and Gigon, 2012: 54)
New contract are being negotiated with increaingly exible term, mean-
while The majority o pCER are now old a option, meaning that thebyer prchae the option to by the credit at an agreed price at a later
date Thi traner rik rom the byer to the eller, making it even le
likely that any invetor wold take a chance on a CDM project i it were
not merely bidiing exiting activitie (Kooy and Gigon, 2012: 49)
At the ame time, there have been ignicant change in who i trading
carbon ince the tart o the cheme The CDM market wa pioneered
by the World Bank and government prchaer, with ew private inve-
tor taking an interet ntil ater Ria ratied the Kyoto Protocol in2004, which broght that agreement into orce (Alberola and Stephan,
2012: 9) The rt private ector involvement came rom botiqe carbon
pecialit, ch a EcoSecritie, which had advied government on how
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199 Development Dialogue September 2012 | What Next Volume III | Climate, Development and Equity
REDD+ pt a cah vale on oret on the amption that thi will relt in their
preervation and, in trn, a carbon aving1 The cheme ha been widely criticied,
however, on the grond that it wold mainly benet corporate invetor bt damage
the livelihood and threaten the cltre o indigeno people and other oret-
dependent commnitie (Hall and Zacne, 2010) Alternative approache to addreingdeoretation emphaie improving oret governance, in particlar by pporting the
territorial right o indigeno people and oret commnitie Thee are ometime
cat a a replacement or REDD+, and in other cae a a radical reorm o the cr-
rent REDD+ ramework (Boa, 2011; Rainoret Fondation, 2012)
The cope o the REDD+ propoal nder the UNFCCC ha already raied environ-
mental concern, ince the propoal ollow the Food and Agricltre Organiation
practice o dening oret o broadly a to inclde plantation (UNFCCC, 2010)
There i alo a rik that baeline or acconting avoided deoretation cold be et o
high that payment will be triggered or increae in deoretation, a wa the cae withthe aghip bilateral REDD agreement between Norway and Gyana (Lang, 2009)
Early experience o REDD project in Indoneia, meanwhile, have hown thee
to be concentrated on abandoned logging conceion and national park, a long
way rom the deoretation rontier In a context where the tate claim ownerhip
o the majority o oreted land, treating the 50-70 million oret commnitie
and indigeno people a illegal qatter, the implementation o thee cheme
i exacerbating land conict (Fried, 2012)
One o the mot contentio debate on REDD+ relate to how it will be nded
The debate centre on whether pblic or private orce will be prevalent, and
the extent to which it will generate carbon credit, and it i beet by lack o clarity
Althogh mot REDD nding to date ha been provided by the Norwegian ov-
ereign wealth nd (the contry oil revene), the jmp-tarting o a oret carbon
market remain an important element in REDD+ readine activitie (Horner,
1 REDD+ reers to proposals under the UNFCCC that go beyond REDD in making broader proposalsor the Conservation o orest carbon stocks; Sustainable management o orest; [and] Enhancement oorest carbon stocks (UNFCCC, 2011). REDD+ reers to UNFCCC-related proposals and REDD reers
to national and bilateral schemes and pilots that are not necessarily linked to the multilateral climatenegotiations.
Reducing Emissions rom Deorestationand Forest Degradation (REDD)
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200 Development Dialogue September 2012 | What Next Volume III | Climate, Development and Equity
2011) Thi i reected in the deign o pilot project already nder way For ex-
ample, the Intitte or Global Environmental Strategie ha created a REDD+databae with detail o 25 project (a o September 2011) Twenty-one o thee
conider the generation o carbon credit a integral to the project nancing,
three are conidering elling oet at a later date i a oret carbon market
emerge, and only one had not yet conidered oetting (IGES, 2011)
In common with the CDM, the complex acconting procedre involved in
commodiying oret tend to divert reorce rom oretry initiative to carbon
conting Initial etimate and comparion with the CDM wold gget
that 30 per cent or le o the cot o a REDD credit wold nd it way to
the project itel, while a little a 3 per cent may nd it way to the prodcer(Carbon Retirement, 2009: 7; Mnden Project, 2011: 8) The ret o the vale
wold be aborbed by taxe, conltancy and brokerage ee and adminitra-
tion cot Underpinning thi trctre i the likely emergence o monopony
power an imbalanced market with many eller bt ew byer trengthen-
ing the hand o nancial intermediarie, while enring that ew benet ow
to the prodcer o REDD project, the commnitie that live within them or
the contrie where they are located (Mnden Project, 2011: 11) In a igni-
cant, market-baed critiqe o REDD propoal, the Mnden Project alo point
ot that oret carbon commoditie are o poorly dened a to be nacceptablyriky a a bai or trading (2011: 4)
With carbon market beet by a maive overpply, REDD i not crrently
an attractive propoition or the majority o private carbon market invetor,
a a relt o which bilateral and mltilateral pblic nding i taking the lead
in timlating new invetment and carbon acconting methodologie Aide
rom the Norwegian contribtion, which accont or two-third o all money
pledged to REDD-dedicated climate nd, the major donor contrie are A-
tralia, the United State and Germany Atralia and Germany have ollowed the
Norwegian model in creating bilateral nd, while the larget mltilateral nd notably the Foret Invetment Program are coordinated by the World Bank
(Caravani, Nakhooda and Schalatek, 2011) A the market develop, it i likely that
pblic invetment in thi phere will ollow the broader trend in development
and climate nance toward pooled pblic-private nd, hielding them rom
pblic crtiny (Bracking, 2012)
The role o capital market, meanwhile, i ar rom retricted to carbon trad-
ing with ome invetor and conervation NGO now propoing new nancial
intrment, notably oret bond, that eek to diveriy the orce o revenebeyond carbon or ecoytem ervice credit (Cranord, Parker and Trivedi, 2011)
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201 Development Dialogue September 2012 | What Next Volume III | Climate, Development and Equity
While ch propoal may tackle ome o the acconting ncertaintie poed by
oetting, they do nothing to addre the ndamental problem o the nanciali-ation o tropical oret, ch a the ailre o REDD+ to addre the real driver
o deoretation (or example, large-cale monocltre plantation, indtrial-cale
cattle ranching, mining and oil extraction) or the threat that REDD+ poe to the
territorial right and cltre o indigeno people and oret commnitie
Boas, Hallie (ed) (2011), No REDD papers volume 1,Portland: No REDD Platorm. http://climatevoices.les.
wordpress.com/2011/11/noreddpapers_download.pdBracking, Sarah (2012), How do Investors ValueEnvironmental Harm/Care? Private Equity Funds,Development Finance Institutions and the PartialFinancialization o Nature-based Industries,Development and Change, Vol. 43, No. 1: 271-93.
Caravani, Alice, Smita Nakhooda and LianeSchalatek (2011), REDD-plus Finance, Washington DC:Heinrich Bll Stitung North America and OverseasDevelopment Institute. http://www.odi.org.uk/resources/docs/7472.pd
Carbon Retirement (2009), The eciency ocarbon ofsetting through the Clean Development
Mechanism, London: Carbon Retirement.
Cranord, Matthew, Charlie Parker and MandarTrivedi (2011), Understanding Forest Bonds, Oxord:Global Canopy Programme. http://www.globalcanopy.org/sites/deault/les/UnderstandingForestBonds_0.pd
Fried, Stephanie (2012), Osets in the Contexto Forest Crime, Carbon Crime and Corruption:A workshop or regulators and law enorcement,
Friends o the Earth USA, Berkeley, 4 April.
Hall, Ronnie and Joseph Zacune (2010), REDD: therealities in black and white, Amsterdam: Friendso the Earth International. http://www.oei.org/en/resources/publications/pds/2010/redd-the-realities-in-black-and-white
Horner, Kate (2011), State o the orest carbon market:A critical perspective, Washington DC, Friends o theEarth USA. http://libcloud.s3.amazonaws.com/93/a1/9/872/State_o_the_orest_carbon_market_a_critical_perspective_2011.pd
Institute or Global Environmental Strategies (2011),REDD+ Database. http://redd-database.iges.or.jp/
redd/Lang, Chris (2009), Guyana could be paid orincreasing deorestation: Jagdeo, REDD Monitor, 24November. http://www.redd-monitor.org/2009/11/24/guyana-could-be-paid-or-increasing-deorestation-jagdeo/Lang
Munden Project (2011), REDD and Forest Carbon:Market-Based Critique and Recommendations, NewYork: Munden Project. http://www.redd-monitor.org/wordpress/wp-content/uploads/2011/03/Munden-Project-2011-REDD-AND-FOREST-CARBON-A-Critique-by-the-Market.pd
Rainorest Foundation UK et al. (2012), Civil SocietySubmission to the AWG-LCA, Views on modalitiesand procedures or nancing results-based actions
and considering activities related to decision 1/C.P.16,
paragraphs 68, 69, 70 and 72. http://www.ern.org/sites/ern.org/les/Civil%20Society%20LCA%20REDD%2B%20submission.pd
United Nations Framework Convention on ClimateChange (2010), Ad Hoc Working Group on Long-term Cooperative Action under the Conventionnegotiating text note by the secretariat, FCCC/
AWGLCA/2010/14. http://unccc.int/resource/docs/2010/awglca12/eng/14.pd
United Nations Framework Convention on ClimateChange (2011), Outcome o the work o the Ad HocWorking Group on long-term Cooperative Actionunder the Convention. http://unccc.int/les/meetings/cop_16/application/pd/cop16_lca.pd
Reerences
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202 Development Dialogue September 2012 | What Next Volume III | Climate, Development and Equity
to et p Deignated National Athoritie (DNA) in the rt place Their
main interet wa in developing project, in order to then reell the relt-
ing credit to other nancial peclator and to EU-baed companie
Ater the primary carbon market peaked in 2007, however, many o the
initial peclator were over-expoed to project that had not delivered
credit, or holding o credit whoe vale had declined a the nancial
crii kicked in Thi led to a wave o merger and retrctring, which
inclded invetment bank taking a greater take For example, Eco-
Secritie (the larget project developer and one o the world larget
byer o CER) wa taken over by JP Morgan in 2009: while the
project developer OneCarbon wa acqired by Orbeo, a joint ventre
between Socit Gnrale and the chemical giant, Rhodia, in the ame
year (Alberola and Stephan, 2012: 9)
With thee new invetor came new carbon credit prchaing trategie,
a Alberola and Stephan point ot:
Since 2008, ome invetor have preerred to prchae carbon credit
portolio, containing a complete range o already prchaed credit,
rather than nance new CDM/JI project, a proce that can take p
to three year ntil delivery (2012: 9)
Thee portolio are arranged in a growing nmber o carbon nd
private, pblic and a mix o the two (Alberola and Stephan, 2012:14) The
private ector hare o the carbon market contine to grow, however,
alongide a hit in invetment pattern Government eeking oet to
meet their Kyoto target and companie looking or compliance with
the ETS have motly contracted fcient credit or thee prpoe,
while the majority o trade now relate to hedging or the prit o
peclative gain (Alberola and Stephan, 2012: 15) A broader range o
invetment trategie ha developed too, with a growth in direct eqitytake taken in the companie (pecial prpoe vehicle) that are oten
et p a the legal entity managing project
CER/EUA wap are alo becoming increaingly common Under ch
deal, companie agree to a tre exchange o EUA (the ETS permit)
and lower-priced econdary CER (CDM credit) The amption
with ch deal i that ince thee prodct are nctionally the ame or
compliance with ETS target, there i prot to be made rom peclat-
ing on the dierence between the traded price o the two commodi-tie (Erex, 2008: 4)
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In the EU market, trading ha alo become more concentrated in the
hand o a mall nmber o large nancial rm and energy compa-
nie, which rapidly expanded their market poition and inence in2011, amidt a re-ale o carbon aet a price collaped (Kooy and
Gigon, 2012: 34)
The larger energy companie have developed their own trading divi-
ion to hedge and peclate on EUA and CER Thi reect the
broader nancialiation o the energy ector, in which the leading com-
panie derive an increaing proportion o their prot rom nancial
peclation on the relative price o oil el commoditie (Kooy
and Gigon, 2012: 38) The introdction o carbon into thi mix help
energy companie to hedge the rik thee companie take when pr-
chaing energy tre, althogh it doe nothing to timlate a hit
toward renewable
Sch trategie are part o a broader trend toward more complex carbon
market trading trategie Wherea the theory o carbon trading preent
a ytem o exchange between two pollter to optimie the cot o
meeting emiion redction target, in practice the majority o the
market in operate in the ollowing way Speclator eek to prot rom
arbitrage opportnitie (analying and betting on price dierential), awell a on the bai o tatitical algorithm and model orecating how
carbon relate to the relative cot o coal and ga; oil, ga, coal, power
and weather derivative; crrency trading; and meta-analye o analyt
own expectation (Kooy and Gigon, 2012: 34; Karmali, 2008, 4)
Mot o what i traded i permit and credit, or the option to by thee
at a pecied point in the tre, which doe not yet exit (Kooy and
Gigon, 2012: 34)10
The development o ever more complex trading and peclative trate-
gie i the tre governance challenge poed by the carbon market, whichconcentrate power in the hand o a ew large nancial and energy cor-
poration It i conitent with the broader giant bow-tie trctre o
interwoven nancialied interet, where mot capital ow throgh a
tightly-knit core o intittion that traddle the nancial ector a well
a companie operating in the real economy, ch a power prodc-
er, which alo make invetment deciion baed on complex hedging
trategie and peclative gaming (Vitali, Glattelder, and Battiton, 2011)
The carbon market prodce knowledge (and ignorance) that reinorc-e thi nancialied power trctre (Lohmann, 2008) By abtracting
carbon a a tradable commodity, it rame climate change a a problem
10 Eighty-eight per cent o EUAs are transacted as utures, o which 10 per cent (andrising) are options trades.
In the EU market, tradinghas also become more
concentrated in thehands o a small number
o large nancial rms
and energy companies,which rapidly expandedtheir market positionsand infuence in 2011,
amidst a re-sale ocarbon assets as prices
collapsed.
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204 Development Dialogue September 2012 | What Next Volume III | Climate, Development and Equity
o cot adjtment that can be managed by a market that i amed to
allocate good efciently, rather than a a hitorically embedded problem
o the dominant oil el-baed development model A thi marketha grown, it ha etablihed a whole new inratrctre and market or
nancial derivative prodct baed on validating, veriying, acconting,
rik-aement, tre-modelling and commodity hedging that hit
the rame o deciion-making abot whether and where emiion re-
dction take place into the hand o analyt whoe interet are prot
maximiation, not environmental protection or ocial well-being
Community Disempowerment Mechanism orCommodity Development Machine?
The reraming o climate change a a nancial market problem i alo
proondly diempowering or the commnitie mot aected by the
extreme o weather, ood rik and poor harvet that it cae, althogh
not or the reaon (a i ometime ggeted) that they lack acce to
carbon market No matter o capacity bilding i going to redre the
power imbalance that i introdced once addreing climate change i
redced to a qetion o nancial ow that pa throgh capital market
The developing carbon market inratrctre, moreover, render policy-
maker increaingly dea to the demand o commnitie, except inoara reitance i regitered a dirptive to market development At the
ame time, ocial and environmental vale are redced to nancial
tatement o the ocial cot o carbon or natral capital acconting
Yet thi redction o vale to price can erve to ndermine the cae or
addreing climate change, a George Monbiot point ot:
Sbject the natral world to cot-benet analyi and accontant
and tatitician will decide which part o it we can do withot All
that now need to be done to demontrate that an ecoytem canbe jnked i to how that the money to be made rom trahing it
exceed the money to be made rom preerving it (Monbiot, 2010)
Althogh pricing i not the ame a commodiying, in a neoliberal
ideological and intittional context, the one ha tended to lead to the
other, with carbon the rt o everal ecological commoditie nder
contrction The market that emerge within thi ramework are et p
to rationalie contined environmental detrction A hown above, the
overpply o carbon permit and credit ha provided indtrial bidie
or pollter, and ha ailed to incentivie cleaner invetment However,the developing vale o thi market lie in the prodction o new po-
ibilitie or commodity hedging and peclative portolio invetment
which are, in trn, held mainly by the nancial and power companie that
are at the ame time the main invetor in oil el and the indtrie
The reraming oclimate change
as a nancialmarket problem
is also prooundlydisempowering or
the communities mostaected by the extremes
o weather, food risksand poor harvests thatit causes, although not
or the reason (as is
sometimes suggested)that they lack access to
carbon markets.
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205 Development Dialogue September 2012 | What Next Volume III | Climate, Development and Equity
reliant pon them Since thoe conventional, oil el-baed invetment
ar exceed the cale o carbon and other environmental niche market,
they alo tend to bordinate invetment deciion made in them Thatltimately aect not only private ector nance, bt alo the pblic
climate nance which, a we have een, i increaingly paing throgh
mixed nd trctred in which pblic money i deployed in accord-
ance with private capital market invetment trategie
One nal governance challenge relate to how carbon market growth i
reported, in particlar when thi i related to claim that the market mobi-
lie nance or cleaner development The World Bank State and Trend
o the Carbon Market report, the leading orce o global market data,
ha rotinely maximied the perception o a healthy market in contrat
to the detail o how thi ha been achieved In 2010, it trmpeted carbon
market growth in the EU, depite the act that a ignicant proportion o
thi increae wa the relt o radlent trading In 2012, the majority o
the carbon market growth reported by the Bank had to do with change
in how it report the gre which now captre a greater proportion
o tre option trade, even thogh the athor admit that a btantial
proportion o thee will not be exercied (Kooy and Gigon, 2012: 49)
The majority o trading, a thee report make clear, i not to comply with
Kyoto or ETS reqirement bt relate to hedging, portolio adjtment,prot taking, and arbitrage (Kooy and Gigon, 2012: 18)
Can carbon trading be xed?
One o the mot common repone to the clear evidence that car-
bon trading i not working i to gget xe that wold improve the
working o the ytem: changing rle on the banking o permit;
introdcing price oor and ceiling to control volatility; expanding
global carbon market to increae liqidity; and o on
What thee propoal have in common i an implicit amption that
carbon trading ail becae the rle have been deigned inadeqately
or have been badly applied Althogh intance o ch ailing certainly
exit, they bring no cloer to ndertanding why the ytem ha
mired o pectaclarly They dont, or example, anwer the qetion
o why o many corporation and tate phed or the inclion o
large volme o oet in carbon market, or addre actal carbon
market invetment trategie
Many carbon market reorm propoal, meanwhile, actally advocate ex-panion o carbon market and the relaxation o check on environmen-
tal integrity For example, propoed change ch a ectoral crediting,
the inclion o new ector in the Clean Development Mechanim, and
the generation o carbon credit aociated with Nationally Appropriate
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Mitigation Action, wold primarily erve to increae the volme o
carbon trading11 Sch propoal are not being driven by conideration
o environmental integrity, bt by nancial interet The drive to ex-pand carbon market i being accompanied by the development o more
complex carbon prodct, deploying a variety o derivative and hedge
nd techniqe
Looked at more holitically, it i clear that the carbon market will con-
tine to be prone to over-allocation, ditribtion o allowance and
rle on crediting that act a bidie or pollter The pply o carbon
i niqely at the mercy o the political pen where it wa conceived,
ince the act o allocating permit (or determining qantitie available
or actioning) i the relt o a political deciion, rather than omething
that i indexed to a real-world prodct (Gallagher, 2009: 2) The political
determinant on pply make the EU carbon market particlarly prone
to lobbying inence either throgh direct lobbying by Brel-baed
aociation, or by lobbying national government to act on behal o
certain indtrie in EU procee Sch lobbying aect not imply the
rle governing how the market operate, bt the pply o permit and
credit In the cae o international oet, government are both ppli-
er and er o credit, contribting to ignicant conict o interet
(Lohmann, 2011)
The combination o thee actor with the difclty oidentiying clear price driver or carbon market (becae the nderlying
aet i ndamentally ntable) make or arbitrary volatility, while the
bordination o carbon to oil el hedging and invetment prioritie
et their alleged environmental prpoe on it head (Gallagher, 2009, 2;
Lohmann, 2009a: 2830) The concentration o power in the hand o
a handl o nancial and corporate actor, and the tranormation o
the deciion-making ramework that carbon trading enable, are the tre
governance challenge that carbon trading poe
In eeking way orward, we need to look beyond carbon trading andlook again at the natre o the problem being addreed Tackling
climate change reqire, rt and oremot, a rapid phaing ot o oil
el e No ingle alternative will fce to achieve thi There i no
evidence that a complex ocial and economic problem o thi cale
can be eectively tackled by indirect economic incentive o the ort
oered by carbon trading, till le by an invetment trctre that con-
centrate power in the hand o a ew large nancial actor whoe main
interet lie in the contined extraction and trade in oil el
A planned tranition away rom oil el, and the ntainable ind-
trial and agricltral practice that they enable, reqire a broad range o
approache that hit money in dierent direction, while alo limiting
11 For more on sectoral carbon markets, see Reyes (2011).
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207 Development Dialogue September 2012 | What Next Volume III | Climate, Development and Equity
the role o nance a the principal determinant o deciion-making
In the EU thi wold inclde meare to hit bidie away rom
oil el prodction; a reaement o energy demand and efciency,inclding demand-ide management meare; and the expanion o
vario orm o conventional reglation, inclding the adoption o
non-tradable otpt limit on greenhoe ga emiion
Thee goal cannot be achieved withot pblic invetment, ince the
reearch and development cot aociated with large-cale tranorma-
tive technologie tend to reqire a greater invetment rik than private
capital i willing to bear However, pblic invetment itel i not a
fcient remedy, epecially within the crrent intittional ramework,
where pblic ownerhip generally take the orm o preerred-bid con-
tracting with private entitie, and control remain naccontable and
within private hand
More broadly, the natre o exiting pblic intittion need to be re-
examined, particlarly in the energy ector, where within the EU pri-
vatiation ha led to a conolidation, with control now in the hand o
a mall nmber o private and pblic companie ch a EDF, owned
by the French tate, and Vattenall, owned by the Swedih government
Thee tate companie are trctred a commercial enterprie, whoevale i increaingly provided by nancial peclation, aording little
cope or pblic inence in avor o a tainable and jt energy
prodction model For ch reaon, any increae in pblic nance to
change the energy ytem hold be accompanied by democratiing the
governance o the expenditre
On a global cale, meanwhile, EU contrie and corporation which
have done mot to contribte to accelerating climate change have
hge reponibilitie or the retittion and repayment o a climate
debt Thi implie not merely a commitment to pblic nance orcommnity-controlled project in the global Soth, bt adjtment in
trade rle to avor the patent-ree exchange o intellectal property
right to low carbon technologie; and a more robt ramework o
international corporate law to tackle the impnity o large corpora-
tion in repect o hman right abe and environmental degradation
In the cae o oret and land e, or example, a jt and tainable
approach wold tart with recognition o the exiting land tenre y-
tem o Indigeno People and oret-dependent commnitie, and the
promotion o tainable local arming and people ood overeigntyover and above the interet o indtrialied agricltre
Ultimately, however, there are no hort ct that bypa the difclt
work o political organiing and intittional change, and no policy or
market xe that obviate the need or moving beyond oil el
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