Friends of the Earth report on carbon trading – risks burying its good points with garbled points

I just read the new report on carbon trading (pdf) from Friends of the Earth. Given the charity’s stance on anything related to carbon trading, the critical approach is unsurprising. The report makes some good points, but also makes some points that don’t seem well thought out. This is a shame because the charity could achieve much more by taking a reasoned position in the debate and focusing on the things that need changing.

One of my gripes is that the report contains some rash statements, like:

The EU ETS scheme has clearly failed to provide adequate incentives for European firms to reduce their emissions in Phase I;  Phase II is performing poorly and is likely to fail.

Is it? Last time I checked it was doing OK! Or:

The complexity of the carbon markets, and the involvement of financial speculators and complex financial products, carries a risk that carbon trading will develop into a speculative commodity bubble that could provoke a global financial failure similar in scale and nature to that brought about by the recent subprime mortgage crisis.

That’s not a good comparison. There is a lot of derivative trading in the EU ETS but we know exactly what the underlying asset is. The derivatives are simply tools to make trading smoother. The idea that carbon markets are a ponzi scheme run by speculators runs through the report, and some errors are made, including that most carbon credits are held by speculators (they aren’t; most credits are held by statutory market participants).

And the environmental economics get a bit shaky with the argument that cap and trade actually ‘locks in’ high emissions:

Polluters have an incentive to make extra emission reductions under emissions trading so that they can sell credits, therefore, emissions trading stimulates innovation. This model accurately explains the situation of sellers of credits. […But it ignores the buyers…] Carbon trading makes lower-cost credits available to these firms as an alternative to the higher-cost investments that they would otherwise have to make. Hence trading removes any incentive that they have for technological innovation.

This would be better explained as “cap and trade makes equally valuable emission reductions for less money”.

I do, however, agree with FoE’s stance on offsetting. The report says:

developed countries are using the prospect of increased carbon market finance to hide from their commitments under the United Nations Framework Convention on Climate Change (UNFCCC) to provide new and additional sources of finance to developing countries. Carbon market finance comes from offsetting developed-country emissions cuts which should be additional. Counting it towards the financial commitments of developed countries is double counting.

This is right. And the report makes a generally fair rehearsal of all the usual issues with offsetting and the CDM.

If the parties to the UNFCCC can turn the screw on carbon markets, by (a) using the cap to demonstrate greater commitment to more ambitious reductions and (b) cutting out offsetting, then carbon markets like the EU ETS can be an effective central tool in mitigation. There is no reason why cap and trade should exclude direct support for low carbon technologies where governments feel help is needed.

It’s not practical to ask the UNFCCC to throw out carbon markets, and I would like to see FoE take only its reasonable points to the negotiations.

Camp for Climate Action has a common sense failure

I strongly support the Camp for Climate Action. I attended the camp at Heathrow in 2007 and saw that the participants were engaged with policy in a relevant and radical way, and that they were exploring new and more sustainable ways of living and organising.

So I was dissapointed to see that the camp is organising a demo at the European Climate Exhange on the 1st of April.

ECX is the biggest exchange for EUAs (the permits traded in the EU Emmission Trading Scheme), and during February an average of 15m tonnes were traded there per day (1 EUA = 1 tonne of CO2. To put that into perspective, the annual carbon footprint of the UK is about 500m tonnes).

The Climate Camp’s website says:

By creating a brain-bending system of carbon pollution licenses, fossil fuel companies and trading firms have found a way to keep on churning out global warming gases and to reap huge windfall profits at the same time … [The UK government is] handing control of our climate over to the same people and systems that caused the financial collapse … Don’t let the financial and fossil fools make the rules!

This is wrong, of course – the Directives behind the EU ETS were written by the European Commission, not the traders and polluters, making the EC the most successful environmental regulator in history. The EU ETS will effectively limit carbon dioxide emissions within its perimeter to a known amount. Billions of Euros have already been invested in energy efficiency as a result of the carbon price this creates. This investment is the net economic effect of the scheme – not the windfall made a minority of companies.

Cap-and-trade is not viewed by anyone as the single solution to climate change, and it is not incompatible with the technology and lifestyle changes that the Climate Camp endorses. There’s not much to be gained from dismantling the EU ETS.

Finally, ECX is just one of several private exchanges that facilitates trade in EUAs – it has nothing to do with European or member-state level environmental policy.

The Climate Camp’s targetting of ECX is poorly informed and unconstructive. It panders to activists’ natural distrust of the market and establishment. As climate change moves into the mainstream and becomes more of a concern for governments, effective activists will need to engage with mainstream initiatives like the EU ETS rather than instinctively rejecting them.