Cap and trade. Clean Development Mechanism. Carbon offsets. This is the language of solving climate change. What are they, though? How do they work? Do they work? And are there alternatives to market-based solutions that might help to reduce global emissions?
I posed these questions to Oscar Reyes of Carbon Trade Watch, a project of the Transnational Institute and seeks a “justice-based analysis of climate change and climate analysis.”
The Nation: Explain cap and trade. How does it work?
Oscar Reyes: The idea behind cap and trade is that it sets a limit on pollution. It provides permission to pollute to industries and then it uses a trading mechanism – the market – to allow them to exchange these permissions to pollute between themselves with the idea that this system allows for the cheapest available pollution reduction mechanism. That’s the idea behind it. Unfortunately cap and trade doesn’t work like that. In fact: it simply doesn’t work.
The Nation: Why doesn’t it work? What’s the problem?
Reyes: It doesn’t work for three reasons.
The first reason – and there’s two parts to this – is that it simply doesn’t reduce emissions. What we’ve seen in the European Union, where the largest cap and trade scheme exists – it’s called the European Union Emissions Trading Scheme – is that far too many permissions to permit were handed out, which floods the market and pushes the price of these permissions down. And that’s because governments are far too susceptible to lobbying by corporations that are involved in the scheme. A secondary problem with this trading scheme is what’s called carbon offsets. This is a secondary type of carbon market, where instead of a company limiting its own pollution, it investments in what is called “emissions savings offsets,” most of which are located in the global south. The problem with these projects, when you look at them, is that they actually don’t lead to emissions reductions. The idea is that you set up a baseline for these projects – a scenario for what would happen – and then the credits are issued accounting for what would have happened versus what actually happened. The problem is that no one has a crystal ball. So, the projects get awarded when they have ambitious sounding claims and tell a convincing story. And there are studies that show that between 30% and 70% of these projects are actually not reducing emissions. Now if you say that you can exchange this kind of project for permits within a system that is meant to reduce emissions, what you end up doing is having a net increase in emissions because you’re flooding the system with things that represent reductions but in fact result in no reduction in emissions.
A second piece of the problem with cap and trade is that it profits polluters. In the E.U. this happened in two ways. One is that the power sector gets permits for free but they put they pass on the imagined costs of these permits on to consumers, which actually rewards them with billions and billions of Euros. It’s estimated that between 20 and 70 billion Euros will go to the power industry alone in windfall profits. On the other side of the scheme, every other economic sector is given too many credits. For example, ArcelorMitta, the world’s largest steel company: their allocation of permits is about 20% to 30% more than their actual pollution – meaning, without doing anything to reduce their pollution, they have a big surplus of the permits to sell. Estimates are that they actually made one and a half billion Euros since 2005.