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Government efforts to tackle climate change through carbon trading remain inadequate due to the driving motive of market led growth. But what are the ramifications of this policy and who will pay the price? By Daphne Wysham.

Carbon Market Fundamentalism

5th December 08 - Daphne Wysham, Institute of Policy Studies

The waste-pickers of Delhi may soon rank among the world’s endangered species if carbon markets continue their rise. Now numbering in the tens if not hundreds of thousands, waste-pickers have plied the garbage of Delhi’s streets for decades. A disturbing spectacle, often including women and children in their ranks, they nonetheless provide a vital service: recycling. In a country like India, paper, plastic and metals are an increasingly valuable commodity.

And for slum-dwellers, this may be their only source of income. And so they join the cows and dogs in a daily forage through garbage by the side of road, searching for plastic, paper, metals — anything that can be turned into cash.

Bharati Chaturvedi, director and co-founder of Chintan, a small non-governmental organization (NGO) servicing India’s waste-pickers, claims that more than 1 percent of Delhi’s population is engaged in waste-picking — a significant source of revenue for the poorest — and that they recycle 9 percent to 59 percent of all of the waste generated in the city. “These waste-pickers are providing a public service — for free,” Chaturvedi says.

But a waste incinerator now proposed in Timarpur, a suburb of Delhi, may change all that. Like other incinerators, this one will generate cancer-causing dioxins, mercury, and other heavy metals and persistent organic pollutants. What’s new and different about this particular waste incinerator: It will generate carbon credits under the Clean Development Mechanism (CDM).

The CDM was originally established under the Kyoto Protocol, the climate change treaty, to address the need to provide new aid to developing countries to acquire and implement new clean energy technologies and projects. Its intent was also to provide a vehicle for development.

However, critics say, the CDM is rapidly devolving into a subsidy for some of the dirtiest industries in the Global South and an excuse for inaction in cutting the significant greenhouse gas emissions by developed countries. Dirty industries and banks are growing rich on the schemes: The World Bank, for example, is becoming a major broker of many of them, charging a 13 percent commission on all of the carbon trades it brokers.

The Timarpur incinerator may be the first in a series of incinerators to benefit from the global carbon market, despite India’s informal and effective recycling industry and generally hostile posture toward incinerators. Gopal Krishna, a public health researcher at Jawaharlal Nehru University, New Delhi, had succeeded in dissuading government officials from accepting other proposals from Australian and Danish incinerator companies in Delhi, based on public health concerns. “We had managed to stop half a dozen of these dubious projects in the past,” says Krishna. “But this time around, in the name of carbon credits, fraudulent claims are being made with impunity.”

In addition to Krishna’s public health arguments, there is another reason incinerators have never gotten off the ground in Delhi: “Delhi’s garbage doesn’t have enough burnable matter,” says Neil Tangri, Waste and Climate Change Campaign Director for the Global Alliance for Incinerator Alternatives (GAIA). “It tends to be too wet, containing too much ash and sand, and non-combustible inert materials.” In other words, not enough combustible products like plastic and paper, thanks in large part to the diligent waste-pickers.

But today, with an incinerator contract looming on the horizon, and with it the potential for millions of dollars in revenue from the global carbon market, the political dynamic has changed. These waste-pickers are being harassed by dump managers and actively denied access to the dry, high-calorie items the incinerator will devour.

“They are effectively denying a livelihood to the poorest of the poor in setting up this incinerator,” says Chaturvedi. “To take that miserable existence away, it’s criminal. And now we’re seeing skyrocketing food prices in India. What will these people do? Huge local skills in recycling are now being wiped out, skills essential for a sustainable society.”

An additional problem with the incinerator is what to do with the fly ash left over. “I’ve been all over India,” says Patricia Costner, science adviser to GAIA and the International POPS Elimination Network. “I know what happens to incinerator ash. Most of it ends up by the side of the road. There are no engineered landfills in India. Fly ash and bottom ash is required to be managed very carefully in most countries, but in India, they simply do not have the infrastructure to do that.”

Improper disposal of incinerator waste isn’t the only problem: “When waste pickers are denied access to the waste stream, they go through the ash looking for metal, the only substance to survive incineration intact,” says GAIA’s Tangri. “I’ve seen people thigh deep picking through incinerator ash for metals. You’re using the human body as a toxic absorber — you’re basically spoon-feeding it to these people.”

Despite doubts raised by the Indian government and Supreme Court as to the advisability of incinerators in India, one of the most avid proponents of these carbon credit schemes is India’s former minister of environment and forests, Rajesh Kumar Sethi. Sethi was recently elected chair of the executive board of the CDM, the supervisory body that determines which projects qualify for CDM credits. “It would be impossible for [Sethi] to question any project that has been incorrectly cleared by the Central Pollution Control Board, a board that comes directly under the ministry he used to direct,” says Krishna.

Carbon Trading 101

Little understood by all but a few insiders, carbon trading was established under the Kyoto Protocol and involves two types of credits. There are “offsets” and “allowances.” Allowances are the limited number of government-allocated credits that are either auctioned or given away to certain industries within a developed country that has signed on to the Kyoto Protocol. One allowance equals one ton of carbon dioxide.

Polluters that emit more than they are allowed must buy enough carbon credits within their country or from other designated developed countries (grouped as “Annex B” countries in the Kyoto Protocol) to match their allocated greenhouse gas emission levels. Thus, Company A may have exceeded its permitted carbon allowances by 100 tons, and so buys from Company B, which has managed to reduce its emissions by 100 tons carbon.

The theory is: The overall cap is the same regardless of the trade, and the invisible hand of the market allows emissions reductions to occur with greater flexibility, less “command and control” and produces a “win-win” scenario for everyone involved.

The Clean Development Mechanism also permits carbon allowances to be traded between Annex B countries and developing countries — countries that are signatory to the Kyoto Protocol but don’t yet have limits on their greenhouse gas emissions. The problem here is that trading under the CDM is thus occurring between a set of countries that have an overall cap on their emissions, Annex B countries, and a set of countries that have no caps on their emissions, developing countries.

In order to avoid bogus emissions credits being sold by developing countries to Annex B countries, the UNFCCC decided that carbon credits would be issued under the CDM only if they were “additional” — or “not business as usual.” This concept of additionality, which requires the proof of a counter-factual, has been all but impossible to verify.

The CDM is a subset of an overall category of carbon trading, “offsets,” which critics claim do not constitute actual emissions reductions. There are two primary markets for carbon offsets: the voluntary market and the so-called “compliance” market of the CDM. The voluntary carbon offset market — much like the “compliance” one — offers up for sale the replacement of a climate “bad” with a climate “good.” So, for example, if I am going to fly across the country, I will “offset” the carbon emissions from the flight by investing in a tree planting program.

Greenhouse gas emissions may rise from my transcontinental flight; however, I can feel better knowing that I’ve “offset” my flight by investing in a tree farm that will absorb a quantity of carbon roughly equivalent to my flight. These voluntary offsets tend to be poorly regulated and therefore cheaper than compliance-based offsets, which have more rigorous — but still insufficient, to many — regulatory requirements.

Even the “Certified Emissions Reductions” sold under the CDM seem a far cry from actual “emissions reductions.” In fact, according to David Victor of Stanford University, as many as two thirds of the credits being produced by the CDM from projects in developing countries are not resulting in any emissions reductions.

Victor and Michael Wara, a law professor at Stanford, found in an April 2008 paper that virtually all of the hydropower, natural gas and wind projects in China are applying for CDM credits. Yet, clearly, China could not make the argument that none of these projects would have gone forward without CDM credits — a key criterion for support under the CDM.

A separate study published by International Rivers argues that nearly three quarters of all registered CDM projects were complete at the time of approval, suggesting that the requirement that project developers could not have gone forward without the “additional” source of CDM funds is being routinely waived.

Even compliance-based offsets, such as those sold under the CDM, are proving highly problematic. With the price of offsets remaining quite low, the most common form of offsets involves large dams, the destruction of industrial pollutants and the combustion of landfill methane — the “low-hanging fruit” in a carbon market where the price of carbon has hovered at very low levels.

Policy Goals Achieved? Not Really

The same deregulatory fervor that is playing out in the bankruptcy of Wall Street banks, credit card companies and derivatives traders brought the theory of carbon trading: Open up the free markets — in this case, the newly minted market in carbon — eliminate regulatory interventions such as carbon taxes or precise standards for polluters, and the market will seek out the most efficient means of achieving the same emissions reductions goals.

“None of us is clever enough to work out what is the best way to tackle climate change,” states Matthew Whittell of Climate Exchange, a company that owns the European Climate Exchange and the Chicago Climate Exchange. “But, if we have a global carbon price, the market sorts it out.”

However, early evidence suggests that what is being sorted out is just how much more consumers will pay for an increase in greenhouse gas emissions. The European Union Emissions Trading Scheme (EU ETS), has thus far resulted in a rise in greenhouse gas emissions while profits have skyrocketed for utilities and energy traders. In a powerpoint presentation entitled, “Citigroup Analysis of the Impact of the EU Carbon Market on European Utilities,” Citigroup’s Head of European Utility Research Peter Atherton summarizes the EU ETS this way: “All generation-based utilities: winners. Coal and nuclear generators: Biggest winners. Hedge funds and energy traders: even bigger winners. Losers?? Herm … consumers!”

He goes on to note: “Have policy goals been achieved? Prices up. Emissions up. Profits up. … So, not really.”

Emissions have risen under the EU ETS because companies essentially fudged their numbers at the outset, claiming they would emit more than they expected to, so they would have an excess of permits to sell. Others were equally crafty, and the price of carbon plummeted.

A similar fiasco is unfolding in the newly minted Regional Greenhouse Gas Initiative (RGGI) an emissions trading scheme for U.S. northeastern states launched in September 2008.

The RGGI initiative involves nine states aiming to provide a domestic pilot “cap and trade” market for carbon. Early results from the RGGI initiative, like the EU ETS, show evidence of over-allocation of permits to pollute and a concomitant drop in the price of carbon, as demand for carbon trades proved virtually non-existent.

Recently, the Chicago Climate Exchange (CCX), which claims to be “North America’s only and the world’s first global marketplace for integrating voluntary legally binding emissions reductions with emissions trading and offsets for all six greenhouse gases,” saw its shares drop in value by almost 80 percent from a high of $7.50 in June to a low of $1.50 on October 23, 2008. Bankrupt Lehman Brothers was among those “distressed sellers” of CCX shares that drove down the price of carbon on the U.S. markets to one of its lowest levels since carbon markets were launched in 2003.

The price dropped further after a Wall Street Journal article questioned whether carbon credits trading on the CCX represent emission cuts that would not have otherwise have happened.

“We Need Direct Action”

Larry Lohmann of the UK-based think tank The Corner House, and author of the book, Carbon Trading, argues that advocates of carbon trading overlook two critical things: first, the poor are often paying the price for the vast profits of carbon traders, while seeing few benefits; and, second, the most direct solution to climate chaos is not part of the equation — namely, reorganizing society so that fossil fuels can be left in the ground while the planet’s remaining forests are preserved and even enlarged.

As carbon markets gain steam internationally, forest carbon credits are now opening up as a new arena for investment: A country’s entire forests are now up for sale as offsets for continued pollution by wealthy countries.

And once again, it is the World Bank that is leading the way. Under its new “Forest Investment Fund” and “Forest Carbon Partnership Facility,” the Bank is preparing to show the world how to “scale up” forests as offsets — selling carbon from individual tracts of forests, or even an entire country’s forest reserves — as “offsets” for Northern countries to purchase, in lieu of reducing their own emissions at home.

Yet, in violation of the UN Declaration on the Rights of Indigenous Peoples, indigenous peoples who inhabit and have preserved these forests for generations, are often the last to be consulted on these schemes. For many of them, land rights, rather than cash for carbon credits, are a higher priority in the struggle for autonomy and the right to control their ancestral lands.

“Using market-based systems to privatize our land, forests and now to commodify the atmosphere is not a sustainable solution,” says Tom Goldtooth, executive director of the Indigenous Environmental Network.

Despite the early evidence of flaws in carbon markets, few environmental organizations are willing to be critical of this approach. All current legislative proposals being advanced on Capitol Hill to address climate change include some form of “cap and trade,” another name for carbon trading.

President-elect Barack Obama supports the idea of a “cap and auction” market-based approach to solve the climate crisis. Yet what few politicians mention, is that if the various market mechanisms for addressing climate change — the so-called “cap and trade” approach, where most pollution permits are given away to polluters, or the “cap and auction” approach, where pollution permits are auctioned — move forward nationally, they will eventually open up to the global market in carbon offsets, including the highly problematic CDM.

Representatives Jay Inslee, D-Washington, Ed Markey, D-Massachusetts, and Henry Waxman, D-California, are among the few Members of Congress to advance principles and legislation that recognize the problematic nature of “carbon offsets,” such as those being advanced by the World Bank and some environmental organizations. “We have to be very critical of any mechanisms involving offsets,” Inslee says. “We have to assure in the real world — not the abstract world — that you get something for your money. We do not have that right now. Until we do, I don’t think the offsets should be something you get credit for.”

S. David Freeman, former energy advisor to Presidents Carter, Nixon and Kennedy, and former director of the Tennessee Valley Authority, goes one step further: “If we’re on death row, as Al Gore and others say we are, then we need to take direct action, and I think the most important form of direct action is deciding from this day forward it’s all going to be renewable. Why don’t we outlaw new coal and nuclear plants?

“In World War II, we told the car companies to stop making cars and to start making tanks and airplanes and we won the war in less time than we’ve been in Iraq. When we have a flu epidemic, the government goes out and buys vaccines. Yet, now, with the climate crisis, there seems to be a reluctance in this country to act collectively through its government.”

Tom Picken, the Head of International Climate for Friends of the Earth-UK, puts it this way: “It is absolutely clear that there is no ‘spare’ [carbon dioxide] ‘in the system’ and therefore no ‘spare’ [carbon dioxide] to trade. If there is no spare [carbon dioxide] to trade, then this poses a pretty fundamental challenge to the means available to achieve emissions reductions — that there cannot be any more offsetting of any form. To do so is downright dangerous, in my view, and seems to me to be based on neoliberal economic fundamentalism rather than being environmentally and socially informed.”

Other key findings of the report include:

• To date, less than 10 percent of all the funds flowing through the World Bank’s carbon trust funds are going to support clean, renewable energy, defined as wind, geothermal solar and hydro-electricity power plants with a generating capacity of 10 megawatts or less.
• The bulk of the World Bank’s carbon finance portfolio (75 percent to 85 percent) has been directed to carbon trades involving the coal, chemical, iron and steel industries.
• The World Bank Group is experimenting in the carbon market, without taking significant risks, knowing that projects with little added value can be readily dumped — for a profit — into the voluntary carbon market, a market that is entirely self-regulated.

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Paying our Climate Debt

5th December 08 - Daphne Wysham, Foreign Policy in Focus

So we've heard the inconvenient truth: climate change is a really big problem, and we need to get serious about it. But what we haven't heard much about is the cost and who will ensure that bill is paid. How much will it cost us to slow down and stop climate change? What exactly is our financial obligation to the poorer countries that have little or nothing to do with causing the problem? And what institution will make sure the money gets where it's intended to go?

The first two issues — commonly referred to as "mitigation" and "adaptation" costs — are only recently being sketched out in any detail. And the final issue — which institution handles the money once it materializes — hasn't been seriously debated in any public way. However, it's this last detail that's being taken up with a degree of urgency by some governments and civil society groups gathering now in Poznań, Poland, for the United Nations climate negotiations.

The amounts of money that must materialize in rather short order if we are to handle the climate crisis are not small. One recent highly publicized study, the 2006 Stern Review, which was then revised upward in 2008, estimated that stabilization of global warming gases at roughly 500-550 parts per million of carbon dioxide would cost about 2% of gross domestic product annually, if done over the next two decades.

And 2% of GDP is roughly equivalent to $1.2 trillion per year. While daunting, this is a figure that gets us to an atmospheric target that many leading scientists say isn't nearly ambitious enough. For example, NASA's top scientist, Dr. James Hansen, tells us we need to focus on reducing our carbon dioxide emissions even further: to 350 parts per million.

But let's take the Stern target, and assume it's in fact $1.2 trillion per year that must be invested. This is less than the U.S. government was able to mobilize in the past few months to bail out financial firms. And it's over twice as much as the official budget for the U.S. Pentagon in the 2009 fiscal year, at $515 billion.

Silver Linings

But there are several silver linings in this rather large number. One is that much of this is money that would be invested anyway, at home and abroad — in energy infrastructure, transportation, agriculture, and other industries. The second is that the investment will save us money in the form of energy savings. The third is that if we don't invest this money, the cost of inaction is far higher.

And finally, while it is a large outlay of cash, making these investments will not slow global GDP significantly. Recent studies by the International Energy Agency, the Intergovernmental Panel on Climate Change, and McKinsey & Co. (a management consulting firm) found that shooting for a target of 450 parts per million of CO2 would slow global GDP by maybe 0.1% per year.

The other cost, ("adaptation") is a burden borne largely by wealthy countries to help poorer nations "adapt" to climate change. Here, cost projections are radically uncertain. The UN Development Program estimates the cost at around $86 billion. The World Bank estimates the cost could be as high as $41 billion per year. Oxfam projects a cost of $50 billion per year, but only if greenhouse gas emissions are curtailed quickly.

Currently, there are no institutional structures in place that would be up to the task of ensuring adequate financing for either mitigation or adaptation. However, there's one institution that's ready and willing to provide the service of managing the billions — if not trillions — of dollars in adaptation and mitigation finance: the World Bank.

While garnering some support for this role by countries such as the United States and the United Kingdom, it has run into opposition from China, India, and other G-77 countries as well as a broad array of civil society actors, who see in this new expanding role for the World Bank a serious problem.

Why would they be opposed to the Bank taking on such a role? There are a multiplicity of reasons, but the most central of objections seems to come down to the issue of participatory planning and representative governance. Long viewed as a Bank that caters to its wealthy donors more than to its targeted beneficiaries, the World Bank is eyed with suspicion by many countries in the Global South.

On climate change, it has ignored its own 2004 Extractive Industries Review recommendations, which called on the Bank to phase out all of its support for fossil fuels by 2008 and rapidly increase the uptake of renewable energy alternatives. Instead of listening to its own advisors, the Bank continues to invest in fossil fuels, with its investments in coal — the most carbon-intensive of fossil fuels — rising by 256% just in the last year.

Carbon Transactions

The World Bank is also home to over a dozen carbon funds, and garners a commission of roughly 13% on all of the transactions it brokers. Some of these carbon credits are being applied on the very coal burners it is helping to finance. And the Bank is positioning itself as a lead player in the UN's Reduced Emissions from Deforestation and Degradation (REDD), an initiative that aims to reduce greenhouse gas emissions from deforestation in developing countries.

Yet indigenous peoples, who are largely responsible for preserving what few forests remain, weren't consulted as the World Bank developed its own REDD plans, while timber companies had a seat at the table.

And so civil society groups are now calling for the creation of a new Global Climate Fund, one that would oversee "substantial, obligatory and automatic" funding for mitigation, adaptation, and reducing emissions from deforestation and degradation. They believe such an institution would best be overseen by the UN, not the World Bank, because representative governance will be key.

They also believe such a fund must abide by core UN agreements, such as the UN Universal Declaration of Human Rights and the UN Declaration on the Rights of Indigenous Peoples. Possible financing for this Global Climate Fund could include: taxes on bunker fuels, aviation, fossil fuel exports, and other sources of greenhouse-gas emissions; levies on gross national product and historical responsibility; carbon debits — comparable to carbon credits — charged to investors in international financial institutions and export credit agencies for their contribution to greenhouse gas emissions; auctions of national and international greenhouse gas emissions permits, and currency transaction taxes.

While those in the developing world fully understand what's at stake with a newly expanded role for the World Bank in managing climate funds, alas, for most in the global North, the debate seems far removed from any immediate concern of theirs. And yet, if we are to sufficiently address this issue — with financial resources flowing where they are needed most, and quickly — it must become crystal clear to all of us, particularly in the North, why the World Bank isn't the institution to make this happen.

And while this clarity emerges, we must take one more unlikely step and surrender a measure of oversight and control over the revenue we owe the developing world, our "climate debt," in order to allow it to be managed and overseen by those who need it most.

Daphne Wysham, a Foreign Policy In Focus contributor, is a fellow at the Institute for Policy Studies, where she directs the Sustainable Energy & Economy Network.

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