Objections to carbon trading

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Carbon trading has been criticised, with some justice, by at least the following people and organisations:
We believe that the criticisms are largely valid for "downstream" systems of control (where emissions are controlled at or near the point where CO2 is released into the atmosphere) -- like the EU Emissions Trading Scheme (EU ETS) and related schemes such as the Kyoto Protocol's Clean Development Mechanism (CDM) and the EU's range of national targets for reductions in emissions. But with "upstream" systems like Kyoto2 (where fossil carbon is controlled at or near the point where oil, gas or coal is extracted from the ground) the picture is very different. The issues are summarised in the next section and examined in more detail in the sections that follow.

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Summary of the issues


 EU ETS, CDM, and related schemes
 Kyoto2
Permits have been given away for nothing ("grandfathering") leading to windfall profits.
All permits would be auctioned.
There is no mechanism to raise funds to pay for mitigation and adaptation.
Money from the auctioning of permits would go into a 'Climate Fund' of about US$1 trillion every year, to be spent on mitigation and adaptation.
The number of permits issued is determined by negotiations, with many temptations to issue too many.
The number of permits issued would be determined by science, not negotiation. 
National targets for reductions, and baseline dates, are determined by negotiation, with many temptations to water them down.
Since there is only a global cap on emissions, without national targets or baseline dates, and since the cap would be determined by science, not negotiation, there are less opportunities to water things down.
Countries or businesses may buy 'carbon offsets' but there are several problems here including "additionality", opportunities for fraud and spurious accounting, credits for projects that achieve no net reductions in emissions, and more.
Concepts like 'carbon offsets' make no sense in an "upstream" system like Kyoto2. Consequently, all the associated problems disappear.
Buying carbon offsets is a distraction from the task of making real cuts in emissions.
There is no distraction because there are no carbon offsets to buy. The decreasing cap on permits will force up the price of fossil carbon and thus provide an incentive for all users of fossil fuels to cut emissions and migrate to clean technologies. The Climate Fund may also help smooth the transition from dirty to clean technologies.
With the 'grandfathering' system of the EU ETS, the price of permits can collapse, undermining investment in clean technologies - which is exactly what has happened. Also, there may be spikes in the price that can be very disruptive in other areas of the economy.
With an auctioning system, it is easy to build in a floor price for permits. It is also possible to build in a ceiling price if that proves necessary. In general, Kyoto2 contains mechanisms to inhibit excessive peaks and troughs in the price of permits.
There is potential to create over-complex derivatives that may lead to speculative booms and busts, as in the banking crisis.
Regulations may be used to inhibit the creation of over-complex derivatives that may lead to speculative bubbles.
Both the EU ETS and the CD are vulnerable to fraud, largely because of their complexity.
The relative simplicity of upstream controls should help to make fraudulent activities more difficult.

Downstream systems like the EU ETS and the CDM could be made to work better by auctioning permits instead of giving them away and by putting the money raised into a climate fund. But there are no easy answers to the several problems with downstream 'flexibility mechanisms' such as carbon offsets and the CDM, and there are several other problems with downstream systems.

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Cartoon Kate

Cartoon Kate has produced a great critique of "The Carbon Super Market" (PDF, 3.7 MB). Her main objections are:
  1. Emissions permits may be given away rather than being sold (as has happened with the EU ETS). The sale of permits should be used to raise funds to help poorer people adapt to climate change.
  2. Politicians may be tempted to give extra permits to their own 'national' industries. Also, too many permits may be issued overall - as has happened with the EU ETS.
  3. Industries may exagerate their emissions so that they get more permits.
  4. Industries report their own savings, with a corresponding temptation to exagerate them.
  5. Industries may achieve 'savings' by buying 'carbon offsets' (eg paying for the planting of trees), but there are several problems with such schemes (described in Carbon offsets are not the answer).
  6. There is too much reliance on technologies such as CCS (which is not yet proven and is at least 20 years away from being commercially viable) or adding iron compounds to the sea to stimulate the growth of algal blooms (which is unlikely to be an effective means of removing CO2 from the atmosphere).
  7. If emissions fall because of a recession:
    • The market for permits may dry up, thus causing the price of permits to fall and reducing the flow of funds into mitigation projects.
    • Industries make large profits by selling their spare permits (this point seems to contradict the previous one).
  8. Carbon traders make profits by taking advantage of fluctuations in the market and gambling on the future price of carbon. The complexity of this kind of derivatives market is "gonna make the sub-prime housing bubble look like soap suds."
  9. A traditional and sustainable lifestyle has no value in the carbon supermarket.
  10. We're stuck on the idea that profits are more important than people. That kind of thinking got us into the mess and is not going to get us out of it.
Most of Kate's objections are valid criticisms of carbon trading when controls on emissions are applied 'downstream', at or near the point where CO2 is released into the atmosphere. With 'upstream' controls on fossil carbon, at or near the point where oil, gas or coal is extracted from the ground, the picture is quite different. In particular, the Kyoto2 proposals largely escape Kate's criticisms or provide answers to them:
  1. A key part of the Kyoto2 proposals is that Permits would be auctioned, not given away, and the money raised -- about US$1 trillion every year -- would be spent on mitigation and adaptation, with an emphasis on addressing the needs of the poor and those most adversely impacted by climate change.
  2. Under Kyoto2, the number of Permits issued each year would be determined by science, not politics. The aim is to restrict emissions to a level that minimises the chance of dangerous runaway global warming.
  3. Since Kyoto2 applies controls 'upstream', close to where oil, gas or coal is extracted from the ground, there is no need for estimates of emissions, either by industries or anyone else.
  4. For the same reasons, there is no need for estimates of savings by industry or anyone else.
  5. Since Kyoto2 applies controls 'upstream', it makes no sense to assign emissions to individuals or to countries, which means that there is no place for carbon offsets or any of their problems.
  6. Under Kyoto2, any CO2 that was verifiably stored in underground reservoirs using CCS would be rebated Permits according to the quantity stored. However, CCS-equipped fossil-fuel power stations would have to compete with several alternatives which are likely to be cheaper. From what we know now, it seems unlikely that CCS will ever have a major role to play, however the decisions on whether or not to build CCS will be taken by power companies and we cannot pre-empt their technology choices. Generators in countries with large coal reserves but poor in renewable resources such as wind, wave and solar are more likely to make use of CCS. It may be that research into CCS would attract some research money from the Climate Fund. The most promising geoengineering technologies would also attract research funding and it may be that carbon drawdown will be achievable at a lower cost than CCS through such schemes, whether by altering ocean chemistry to enhance algal growth, or accelerating the weathering of alkaline rocks.
  7. Under Kyoto2, Permits may be traded and there may be fluctuations in the price of Permits, depending on the economic cycle, progress in decarbonisation of the world's economies, and other factors. Kyoto2 does contain mechanisms to dampen excessive peaks and troughs in prices but it does not attempt to eliminate fluctuations altogether -- and there may be some effect on the funds available in any one year to be spent on mitigation and adaptation. For comments on profits, see next.
  8. Carbon traders may indeed make profits if they can anticipate market trends more accurately than their competitors. But this is no different from the situation with anything else that is traded on world markets. The price of steel, for example, depends on supply and demand and within that framework, some traders in steel may be more successful than others in anticipating trends. Unless there is a monopoly or cartel in operation (and any such monopoly or cartel should be broken up), successful anticipation of market trends helps to keep supply and demand in balance. If carbon traders start creating over-complex and opaque derivatives, there may be a case for regulations to restrict such developments.
  9. People that are already living sustainably may be vulnerable to changes in the world's climate that are already in the pipeline and cannot now be stopped. Kyoto2 has the merit that it would create a constantly-replenished 'climate fund' to be spent partly on helping people adapt to such changes. It also promises to be one of the most effective ways of moving us all towards sustainable ways of living.
  10. From the dawn of history and probably before, people have been capable of getting themselves into a mess, as is well described in Jared Diamond's excellent book "Collapse". Kyoto2 provides the means and the incentive for people everywhere to cut emissions of greenhouse gases, thus tapping into their natural desire to better their situation.

Annie Leonard

In her online film "The Story of Cap and Trade", Annie Leonard makes similar points and our response is essentially the same. Probably the main additional point that she makes is that carbon trading is a distraction from making genuine cuts in emissions of CO2. As with the other points, this is largely true of cap-and-trade with downstream systems but it does not apply to upstream systems like Kyoto2. With an upstream system, the cap raises the price of fossil carbon everywhere and creates an incentive for everyone to cut emissions.

Friends of the Earth

Friends of the Earth have produced a critique of carbon trading, called "A dangerous obsession", which may be downloaded via a link from "A new report on carbon trading".

The main objections to carbon trading in the report are that:
  1. It is ineffective at driving emissions reductions and that it fails to drive technological innovation.
  2. Carbon trading relies on offsetting, with its several problems.
  3. Carbon trading may develop into a speculative commodity bubble like the one that caused the sub-prime mortgage crisis.
  4. It provides a smokescreen for lack of action on climate finance by the developed world.
Our response to these points are:
  1. The first two objections are largely right for the EU ETS. This appears to be mainly because many of the permits have been given away for nothing, because too many permits were issued, because the scheme only applies to emissions from large organisations, because of the inherent difficulties of measuring emissions from a large number of outlets, and because the relative complexity of the scheme offers opportunities for fraud. We believe that what is proposed under Kyoto2 would be largely free of these problems because:
    • Permits would be auctioned, not given away for nothing.
    • The number of permits issued would be determined by science, not politics or negotiations. The progressively-decreasing cap on emissions would be designed to minimise the risk of dangerous runaway global warming.
    • Fossil carbon would be controlled close to where oil, gas or coal is extracted from the ground. The system would provide for comprehensive control of all fossil carbon, without the exceptions that apply to the EU ETS.
    • It is much easier to control fossil carbon at the relatively few places where it is extracted from the ground than at a multitude of outlets.
    • For that reason, there is much less complexity in Kyoto2 than in the EU ETS and correspondingly less opportunity for fraud.
  2. Since Kyoto2 controls fossil carbon at its sources rather at the many points where CO2 is released into the atmosphere, there is no need to assign emissions to people or to countries and, for that reason, there is no place for any concept of carbon offsets. Thus the problems with carbon offsets are avoided. 
  3. Under Kyoto2, it is possible that carbon traders might start to create over-complex and opaque derivatives. In that case, it would be appropriate to introduce regulations to restrict such developments.
  4. A major strength of Kyoto2 is that the auction of Permits would create a 'Climate Fund' of about US$1 trillion every year, which would be spent on mitigation and adaptation, with an emphasis on addressing the needs of the poor and those most adversely impacted by climate change. This largely overcomes the problem of raising the necessary funds.
In general, many of the problems with schemes like the EU ETS stem from the idea that emissions should be controlled 'downstream', at or near to where CO2 is released into the atmosphere. With Kyoto2, most of those problems disappear because fossil carbon is controlled 'upstream', at or close to the point where it is extracted from the ground.

Institute for Policy Studies

Daphne Wysham

In Cap and trade should go the way of the dodo before we do, Daphne Wysham's main objections to carbon trading are:
  1. By shifting the baseline for emissions reductions from 1990 to 2005, President Obama has greatly reduced the size of the cuts that will be needed.
  2. Carbon offsets have many problems including the difficulty of verifying any reductions that may be achieved via offset projects.
  3. Carbon trading may lead to speculative booms and busts, as in the banking crisis.
  4. People with a genuine interest in cutting emissions have been hoodwinked by the idea that buying carbon offsets can enable them to be "carbon neutral".
  5. Planting trees is not a reliable way to reduce emissions or to remove CO2 from the air. Likewise for the idea of adding iron to the ocean to stimulate the growth of algae.
Much the same can be said as in the sections above. In particular, the concept of carbon offsets has no place in upstream systems like Kyoto2 and so the several problems with carbon offsets are largely avoided.

Another advantage of upstream systems like Kyoto2 is that targets cannot be massaged by shifting the baseline for emissions cuts. In Kyoto2, the size of the cap would be determined by science, not negotiation. There would be no baseline year: only an absolute 'budget' for emissions within a given time span, driven by science not negotiation. Every year's delay in making cuts will simply mean that bigger annual cuts will be needed in the future.

Janet Redman

In Climate scams won't save the planet, Janet Redman says:
  1. Carbon trading schemes are easy to cheat:
    • In EU ETS, energy companies made windfall profits by charging consumers for emissions reductions even though the companies themselves had been given the emissions permits for nothing.
    • By over-estimating the number of permits that would be needed, companies ensured that there would be no net reductions in emissions.
  2. There are many problems with carbon offsets.
  3. Carbon traders may create complex derivatives leading to the kind of boom and bust we have seen in the banking industry.
  4. Carbon trading is a dangerous distraction from the task of decarbonising the world's economies.
Most of these points have been covered in previous sections. As regards the opportunities for cheating, none of the Permits issued under Kyoto2 would be given away for nothing -- all of them would be auctioned. And the number of Permits that would be issued under Kyoto2 would be determined by science, not from estimates made by energy companies. Opportunities for fraud would be much reduced because the number of places where fossil fuels are extracted from the ground is relatively tiny compaired with the number of outlets for CO2 emissions.

James Hansen

In Carbon Tax & 100% Dividend vs. Tax & Trade (PDF, 34 KB), James Hansen's main objections to cap-and-trade systems are:
  1. The cap raises the price of fossil carbon so that, in effect, it is a tax. For that reason, he proposes that the system should be called "Tax & Trade". He says that, without an offsetting dividend, people will rebel against this 'tax'.
  2. There is unpredictable price volatility.
  3. The scheme "makes millionaires on Wall Street and other trading floors at public expense".
  4. It is an invitation to blackmail by utilities that threaten “blackout coming” to gain increased emission permits.
  5. It has overhead costs and complexities, inviting lobbyists and delaying implementation.
Here are some responses:
  1. Kyoto2 largely escapes this criticism because moneys from the Climate Fund will offset the 'tax' of raised prices for fossil fuels.
  2. This is true but in Kyoto2 there are mechanisms to dampen large peaks and troughs in prices. Also, levels of taxation can vary, depending on the political weather.
  3. As with anything else that is traded on world markets, people who are good at anticipating trends will be able to make money while people who are less good are likely to lose out to the more successful traders.
  4. Kyoto2 escapes this criticism because caps would be determined by science, not negotiation.
  5. What James Hansen says is true of downstream systems but is likely to be much less true of upstream systems like Kyoto2. The latter can be simple because oil, gas and coal is extracted from the ground at a relatively tiny number of sites.
Conventional taxation, which is James Hansens's preferred solution, is not without problems:
  • There is no carbon budget and no cap on emissions. It is hard to know how high the tax must be set in order to achieve the reductions in emissions which are needed to avoid dangerous climate change.
  • Lobbyists will put enormous pressure on politicians to make carbon taxes lower than they should be. This is what happened with the road-fuel protests in the UK in the year 2000, when the government backed down from its policy of annual, above-inflation increases in the taxes on road fuels.
  • The kind of system that James Hansen is advocating (high taxes on fossil fuels with the money recycled to the public) has been in existence for road fuels in the UK for many years -- but it has not prevented the steady growth of traffic and it has not led to decarbonisation of the nation's fleet of vehicles.
Kyoto2 recognises that there is a role for taxation, direct regulation, and other non-market mechanisms. But a global cap on emissions is essential and that implies a system of permits. Since the trading of "upstream" Permits under Kyoto2 would be largely free of the problems that have arisen with "downstream" systems, it makes sense to take advantage of the undoubted benefits of trading: as a means of determining the value of permits and as a means of assigning permits to applications where their value is greatest.

Carbon Trading - How it works and why it fails

This book covers essentially the same points as other critiques of carbon trading but in much more detail. As before, the criticisms are largely valid for downstream systems like the EU ETS and the CDM but not for upstream systems like Kyoto2.

The book suggests that emissions may be brought down by some combination of:
  • Reducing subsidies in some areas and increasing them in others.
  • Regulation.
  • Taxation.
  • Direct public investment in energy conservation and renewable sources of energy.
Kyoto2 recognises that those kinds of mechanisms are necessary and that they may be applied at any or all of the global level or regional, national or local levels. But, as was mentioned in the section about James Hansen's proposals, a global cap on emissions is essential, and that means there must be a system of permits. And without the problems of "downstream" systems, there are undoubted benefits in allowing permits to be traded.