Carbon trading is the process of buying and selling tonnes of carbon dioxide so large companies can be allowed to pollute. Where carbon dioxide is reduced in one area, it is given a price per volume. A buyer purchasing a set number of these tonnes is permitted to emit the same amount of carbon dioxide elsewhere.
The scheme attempts to reduce global emissions through the introduction of tighter environmental controls and by encouraging the use of clean energy technologies.
In carbon trading, each tonne of carbon dioxide is called a carbon credit. Carbon credits vary in price. There are many regions and countries with their own form of trading schemes. The World Bank has recorded 39 national and 23 regional emissions pricing schemes to date. Bloomberg New Energy Finance has forecasted the global market to be worth $60 billion this year. But it has not taken off.
And the reason why carbon trading is failing is because there is no binding international agreement on how to prevent climate change which would underpin the carbon-credit scheme.
Limiting emissions, rather than offsetting them, is a stronger argument
Carbon dioxide is not a commodity. In this context, it is a waste or by-product with little reuse. Trading does not actually reduce direct emissions. It gives the buyers a choice to represent carbon dioxide reduced elsewhere – not necessarily cut their own. Limiting emissions, rather than offsetting them, is a stronger argument.
Carbon trading is the only trading scheme where it is impossible to establish exactly how much is being bought and sold. Unlike electricity that can be bought and sold with 0.2 per cent accuracy every half hour in terms of quantity, with carbon dioxide there is a significant margin for error, from 10 per cent sometimes up to 100 per cent, depending on the measurement methods used.
PRICE CRASH
During the launch of one of the oldest and largest trading schemes, the European Union’s Emissions Trading Scheme (EU ETS), prices crashed owing to an excess of permits granted than actual emissions warranted. The markets did not adjust and prices reached historic lows in 2013 and 2014 when a tonne of carbon dioxide cost as little as $0.10, down from $25 when it first started trading in 2005.
The value price per carbon dioxide molecule varies depending on source. Take trees and oil in the ground, for example. Once oil is extracted and used, the carbon dioxide released into the atmosphere is irreversible; it cannot go back into the ground. Trees, on the other hand, once burnt also release carbon dioxide (remember they have carbon properties too), but when alive they also absorb carbon dioxide. So, although chemically one molecule of carbon dioxide released from burning a tree is the same as that from burning oil, their pre-existing climatic effects differ. This is not recognised in carbon trading.
LOGIC OF UNIFICATION
There is logic in having one global price for carbon pollution which would enable the various schemes to link up regionally, nationally and internationally to form one global exchange. But when credits sold in one place, for example California, are three times the value elsewhere, for example in Europe, unification seems unlikely in the near future.
The market has also been subject to fraud. If you consider carbon offsets as a form of currency, thieves managed to steal $62 million from a cement maker and trading through the EU ETS was frozen thereafter. Counterfeits exist too. Interpol issued a warning last year that carbon trading schemes are at acute risk from criminal gangs and fraud. The police agency said that, if the world’s carbon markets become too complex, they could ignite a financial crisis on par with the 2008 crash. This has increased uncertainty over the pricing of carbon dioxide and carbon trading as a whole.
However, despite the drawbacks, carbon trading has its plus-points. Giving carbon dioxide a price in attempt to change behaviour, to move concern into action, is a design of great ingenuity. Carbon dioxide’s warming effect is global and pricing carbon dioxide is an attempt to shift the cause of environmental harm back to those responsible.
While Europe has seen the EU ETS suffer setbacks, other countries have learnt from its mistakes. China’s recently launched six-province emissions trading scheme works well and is expected to move from its regional set up to a national scheme up to 2020. Australia looks set to repeal its vote on carbon tax, which is the highest in the world, in favour of a policy of direct action and opposition politicians are pushing for carbon trading. And the World Bank’s Mapping Carbon Pricing Initiatives 2013 report suggests there may yet be a future for carbon trading.
