Carbon Trading: a Dangerous Obsession

A DANGEROUS OBSESSION

THE EVIDENCE AGAINST CARBON TRADING AND FOR REAL SOLUTIONS TO AVOID A CLIMATE CRUNCH

Urgent action is needed to bring down The report fi nds that carbon Relying on carbon trading to tackle global greenhouse gas emissions and trading is not delivering the urgent climate change is gambling with the avoid catastrophic climate change. cuts in emissions needed to prevent future of billions of people. The report on which this summary catastrophic climate change, is A completely different, faster and is based evaluates whether carbon failing to realise promised incentives more strategic approach is needed – trading can deliver these emissions for investment in new low-carbon one that relies on simple, direct and reductions quickly, strategically, and in technology, and is a dangerously proven policy tools such as taxation, a just and equitable way. It also looks unstrategic approach to making the regulation and public investment. At at what alternative tools are available transition to a low-carbon economy. the same time, governments must to governments. Carbon trading schemes rely on tackle the underlying drivers of uneven offsetting, a controversial, ineffective development which prevent developing and increasingly discredited countries from tackling climate change mechanism. They also risk a repetition themselves, while promoting poverty of the subprime mortgage crisis, reduction and sustainable development. and provide a smokescreen for rich developed countries’ failure to provide developing countries with adequate support to tackle climate change.

7 Dangerous obsession / Friends of the Earth Tackling greenhouse gas emissions greenhouse gas emissions or ABOUT THIS SUMMARY to prevent dangerous climate provide this much-needed fi nance This is the Executive Summary change is one of the most pressing to the developing world. of a report prepared by Friends challenges facing humanity. The In this context carbon trading is of the Earth England, Wales chance of keeping global average increasingly being put forward as and Northern Ireland for its temperature increases below the a tool for tackling climate change. 1 Demand Climate Change critical threshold is fast slipping Proponents of carbon trading argue campaign. The full report is away. It requires a peak and that it helps to reduce emissions, and being distributed to decision decline in global emissions by that it does this at the lowest cost, makers, media and campaigners 2015. Rich developed countries stimulates investment in low-carbon ahead of the UN climate talks in are responsible for three quarters infrastructure and can help generate Copenhagen in December 2009. of emissions historically despite fi nance for developing countries to For the full report, visit: http:// representing only 15 per cent of tackle climate change. www.foe.co.uk/resource/reports/ the world’s population. They have Friends of the Earth’s report on which dangerous_obsession.pdf a legal and moral obligation to this summary is based evaluates make the biggest reductions and to whether carbon trading can provide fi nance and technology to deliver the necessary emissions Author developing countries to compensate reductions quickly, strategically, Sarah-Jayne Clifton for climate impacts and support and in a just and equitable way. It clean development. But developed Editor also looks at what alternative tools are countries have largely failed to available to governments. Martin Cullen take suffi cient action to reduce Editorial Advice Professor Steve Rayner, Oxford University; Larry Lohmann, The Corner House; Professor Gwyn Prins, London School of Economics; Dr Yacob Mulugetta, University of Surrey; Oscar Reyes, Transnational Institute. Photo:iStockphto.com

1 G8 countries have agreed on the need 3 See estimates on mitigation and adaptation to prevent global average temperature fi nance from The Africa Group of Nations increase of 2 degrees Celsius over pre- and the United Nations: Africa says poor industrial times. This would still threaten need $267 bln/yr in climate fi ght. Reuters, the existence of low-lying small island 20 April 2009: http://www.reuters.com/ states. The Alliance of Small Island States article/latestCrisis/idUSLK631928; and (AOSIS) is calling on the global community Fighting climate change: Human solidarity to aim for a 1.5 degree target: http://www. in a divided world, Human Development presstv.ir/detail.aspx?id=106831§ion Report 2007/2008: http://hdr.undp.org/en/ id=3510212. reports/global/hdr2007-2008/. 2 Meeting Carbon Budgets – the need for a 4 See reference 3. step change. Progress report to Parliament Committee on Climate Change October 2009, p70: http://hmccc.s3.amazonaws. com/21667%20CCC%20Report%20 AW%20WEB.pdf.

2 Dangerous obsession / Friends of the Earth CARBON TRADING

The basics The global carbon market • Carbon trading is the buying and selling of an artifi cial • ETSs are already operating or planned in 35 countries commodity – the right to emit carbon dioxide. around the world.

• It is a market-based mechanism and is an indirect • The European Union Emissions Trading Schemes (EU tool for tackling emissions, in contrast to more direct ETS) is the world’s largest carbon trading market. tools available to governments such as investment and • The global carbon market has roughly doubled in size regulation. every year since 2005 and was worth US$126 billion in • Emissions trading schemes (ETSs) are created by 2008. government regulation with the following steps: • It has been predicted to grow to a market value of 1. An upper limit – or cap – is set on emissions from a US$3.1 trillion per year by 2020. sector or sectors of the economy. • UK businesses are the biggest investors in carbon offset 2. Businesses in those sectors are given or auctioned projects globally. permits for a proportion of those emissions. • The UK Government and the European Union are major 3. Businesses that don’t use all of their allowances proponents of carbon trading. They are pushing for can sell their surplus to others that exceed their the extension of the schemes to developing countries allowance. and the inclusion of new international carbon trading mechanisms in international climate negotiations. • All existing and planned ETSs allow for the inclusion of offsetting.

• A wider variety of actors including banks and investment funds are active in the carbon markets and there is increasing use of complex fi nancial instruments known as derivatives.

PROBLEMS WITH CARBON TRADING The report identifi es six central problems with carbon trading, namely that it: 1. Is ineffective at driving emissions reductions. 2. Fails to drive technological innovation. 3. Leads to lock-in of high-carbon infrastructure. 4. Allows for, and relies on, offsetting. 5. Creates a risk of subprime carbon. 6. Provides a smokescreen for lack of action on climate fi nance by the developed world.

Dangerous obsession / Friends of the Earth 3 The report fi nds that: 3. Carbon trading risks a carbon 5. Proposals to reform carbon subprime crash trading are unrealistic 1. Carbon trading fails to deliver The complexity of the carbon markets, Powerful vested interests from industry necessary carbon cuts or technical and the involvement of fi nancial and fi nance have exerted a signifi cant innovation speculators and complex fi nancial infl uence over emissions trading Carbon trading is not achieving the products, carries a risk that carbon schemes. Given these interests’ emissions reductions promised, nor trading will develop into a speculative historical impact and continued is it driving the major technological commodity bubble that could provoke infl uence it is likely that the sweeping innovations that are needed to shift our a global fi nancial failure similar in changes needed to emissions trading economies to low-carbon pathways. scale and nature to that brought about schemes to address these problems The fi rst phase of the EU ETS (2005- by the recent subprime mortgage and increase their effectiveness would 2007) has failed and Phase II (2008- crisis. Such a crisis would risk further meet powerful resistance. Wholesale 2012) looks on course for a similarly undermining the effectiveness of reform of carbon trading in the time dismal outcome. The perverse trading as a tool for delivering cuts in available looks unrealistic. incentives created by the trading emissions, and a far greater chance of mechanism itself – particularly the catastrophic climate change if carbon 6. Proposals to extend carbon focus on low-cost solutions – is further trading is adopted as the primary tool trading are dangerous locking us in to high-carbon pathways. for delivering emissions cuts globally. It is implausible that a global cap and The UK’s respected Committee on trade system could be established Climate Change recently confi rmed 4. Carbon market finance is a within the time available to avoid this: “We cannot therefore be smokescreen for inaction dangerous climate change, even if confi dent that the EU ETS will deliver Carbon markets are failing to generate it could be agreed and made just, the required low-carbon investments the fi nance that is urgently needed equitable and operationally effective. for decarbonisation of the traded for developing-country mitigation and Pursuing carbon trading as a key 3 sector through the 2020s. Given this adaptation. What’s more, developed tool for tackling climate change at risk, the Committee recommends that countries are using the prospect of the expense of more effective policy a range of options such as regulation increased carbon market fi nance to instruments is therefore a highly and taxes for intervention in carbon hide from their commitments under the dangerous obsession. and electricity markets should be United Nations Framework Convention seriously considered.”2 on Climate Change (UNFCCC) to 7. The real driver behind the UK and provide new and additional sources EU agenda is economic interest 2. Carbon trading relies on of fi nance to developing countries. The UK and EU have invested offsetting – a dangerous Carbon market fi nance is not “new signifi cant time and resources distraction and additional” fi nance as envisaged developing their carbon trading All existing and planned emissions by the UNFCCC, as it comes scheme and therefore have a strong trading schemes allow for the inclusion from offsetting developed-country interest in making it work and seeing of offsetting and, to a great extent, rely emissions cuts which should be it expanded elsewhere. Industry and on the ability of fi rms to purchase offset additional. Counting it towards the fi nance are key driving forces behind credits to escape their emissions cap fi nancial commitments of developed the European push to see carbon by paying for reductions to take place countries is double counting. trading expanded globally. elsewhere. Offsetting is profoundly unjust, fundamentally fl awed and cannot be reformed. We need emissions cuts in both developed and developing countries in order to avoid catastrophic climate change. Offsetting projects frequently do not deliver emissions reductions at all, are sometimes worse than doing nothing, and lock developing countries into high-carbon development pathways with minimal social and environmental benefi ts and many detrimental local impacts.

4 Dangerous obsession / Friends of the Earth Key recommendations: provide government revenue for low- costs of climate mitigation and carbon investment. adaptation in developing countries. The report supports a new This requires the urgent commitment € approach to tackling climate • Standard setting and direct and delivery of at least 200 billion 4 change which relies on policy regulation: A return to the use of in public funds per year by 2012 tools that are simple, direct, proven, direct regulatory approaches from developed countries. This and proven to be effective. As to drive emissions reductions fi nance must be delivered under the highlighted by Lord Nicholas Stern, by heavily polluting industry, framework of the UNFCCC and ensure climate change is the greatest incorporating key lessons from the respect for human rights and a focus on market failure the world has ever successes of the EU’s Integrated social and environmental outcomes. seen. Relying on indirect, Pollution Prevention and Control untested and unproven directive. • Technology transfer and mechanisms such as carbon intellectual property rights: trading to address this • Public fi nance: A major increase Supporting developing countries in fundamental threat to humanity in public investment to address making emissions cuts necessitates and the environment is high risk, the climate crisis, prioritised in the large-scale technology transfer of irresponsible and dangerous. research, development and deployment environmental goods and services. of renewable energy, improvements to Current intellectual property rights stand The report makes three sets energy effi ciency in buildings, effective in the way of this and must be tackled. of recommendations covering measures to tackle fuel poverty, and emissions trading schemes, new public infrastructure, including • Stopping unfair trade and alternative tools for tackling sustainable transport. New carbon investment policies: International emissions, and wider changes taxes and other innovative instruments trade and investment agreements needed to address climate change such as a Tobin tax could provide are a driving force behind the growth in a just and equitable way: new sources of funding for these of energy-intensive industries investments, but it will also necessitate and also undermine development 1. Emissions trading a reprioritisation of government prospects in developing countries. A • Halt expansion of emissions spending and an end to perverse major refocusing of global trade and trading schemes globally. subsidies such as those to fossil fuels. investment rules is needed. • No linking of emissions trading schemes. All policies should be underpinned • Unconditional cancellation of • Fundamental reforms to existing by greater transparency and scrutiny illegitimate foreign debt: Developing schemes such as the EU ETS to close in formulation and decision-making. countries cannot be expected to pay loopholes and ensure they are not All policies should also ensure a for emissions reductions while paying subject to abuse and profi teering by just transition for workers in affected US$100 million per day in debt to the industry and fi nance. industries and include actions to mitigate developed world. There must be 100 • Focus government policy-making against any regressive impacts on low- per cent cancellation of all unpayable and spending on the rapid deployment income and other vulnerable groups. and unjust debts, and US$400 billion of the proposals set out below. in immediate debt relief. 3. Addressing global inequality and 2. Developed-country emissions supporting low-carbon development • A new development paradigm: cuts – rapid deployment of simple, in developing countries Developed countries must stop direct and proven policy tools Urgent action should be undertaken by promoting export-led development Developed-country governments must developed countries to support climate that contributes to climate change. agree to emissions cuts of at least mitigation and adaptation in developing Instead they must prioritise support 40 per cent on 1990 levels by 2020, countries and to address historic for sustainable livelihoods and poverty excluding offsetting, and adopt a huge patterns of uneven and inappropriate reduction. transformational agenda to ensure development which prevent developing that these cuts are delivered. This countries from tackling climate change • Addressing unsustainable programme should comprise taxation, and making progress on poverty consumption: Rich countries regulation and publicly-funded reduction and sustainable development. use far more than their fair share investment: of the world’s resources. This is • New and additional climate unsustainable and unjust. Rich • Taxation: Increased use of fi nance: Developed countries must countries must set targets to reduce hypothecated and escalating carbon deliver on their commitment through their resource use and put in place taxes to drive behavioural change and the UNFCCC to pay the full incremental plans to achieve them.

5 Dangerous obsession / Friends of the Earth A DANGEROUS OBSESSION

Friends of the Earth’s report on which this summary is based evaluates whether carbon trading can deliver the necessary emissions reductions to avoid dangerous climate change quickly, strategically, and in a just and equitable way. It also looks at what alternative tools are available to governments. Read the full report at: http://www.foe.co.uk/resource/reports/dangerous_obsession.pdf

Further reading: Friends of the Earth: A Dangerous Distraction – why offsetting is failing the climate and people: the evidence. http://www.foe.co.uk/resource/briefi ng_notes/dangerous_distraction.pdf

Friends of the Earth is calling on people to demand a strong and fair global agreement to tackle climate change. Governments should: 1. Agree that developed countries must reduce their own emissions by at least 40 per cent by 2020, and reject all forms of offsetting, including proposals for new and expanded offsetting schemes. 2. Negotiate a new fi nancial mechanism under the authority of the UN Framework Convention on Climate Change (UNFCCC) to ensure adequate fi nancial fl ows of at least 200 billion per year by 2012 to developing countries to support their transition to low- carbon development and fulfi l their adaptation needs. 3. Reject plans to introduce Reducing Emissions from Deforestation and Forest Degradation (REDD) offsets, and instead negotiate effective and fair policies that do not involve offsetting or plantations, and that recognise and enforce customary and territorial land rights of Indigenous Peoples and forest-dependent communities.

Friends of the Earth is: • the UK’s most infl uential national environmental campaigning organisation • the most extensive environmental network in the world, with around 2 million supporters across fi ve continents, and more than 77 national organisations worldwide • a unique network of campaigning local groups, working in more than 230 communities throughout England, Wales and Northern Ireland • dependent on individuals for over 90 per cent of its income.

Making life better for people by inspiring solutions to environmental problems Friends of the Earth England, Wales and Northern Ireland 26-28 Underwood Street London N1 7JQ www.foe.co.uk Tel: 020 7490 1555 Fax: 020 7490 0881

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