Global Carbon Trading Won't Work

August / September 2008 By: Ross Gelbspan Volume 6 Number 4

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The author argues that the only meaningful solution lies in replacing the world's oil and coal-based energy sources with renewable, non-carbon technologies. So it's up to the entrepreneurs, scientists and innovators.

Faced with the increasing fury of our overheated atmosphere, many policy makers and economists continue to promote such "market-based" solutions as international emissions trading. They won't work. The science is unambiguous: to restore our climate to a hospitable state requires humanity to cut its carbon emissions globally by 70 to 80 percent. There is no way international carbon trading can deliver reductions of that magnitude. The only meaningful approach lies in replacing the world's oil and coal-based energy sources with renewable, non-carbon technologies: in other words, what nature demands to stabilize the climate is a global public works program to rewire the world with clean energy.

The saviors we need won't be carbon accountants. Rather, they will be clean energy engineers and entrepreneurs. All they need from the world's political leaders is a set of policy mechanisms to channel their ingenuity and creativity into a wholesale restructuring of the world's energy systems.

Absent that political leadership, however, policy makers are trying to finesse nature with accounting tricks—€”best exemplified by a regime of international carbon trading. Popularly known as "cap-and-trade," emissions trading requires that the world determine an acceptable upper limit (or "cap") of carbon concentrations in the atmosphere—€”say 350 parts per million. (Today those concentrations are about 387 ppm.) Under an international trading scheme, each country would receive emission rights reflecting its traditional proportion of global emissions. The total of those allocations would equal the overall "cap." Countries whose emissions exceed their allocations would buy additional pollution rights from other countries that are emitting less than their full allotment.

Unfortunately, international emissions trading has proven dismally inadequate to the challenge of heading off accelerating climate change.

Emissions trading can work relatively well within nations. Domestic cap-and-trade programs—€”like the U.S. trading program set up to reduce sulfur dioxide emissions—€”were relatively successful because they are easy to monitor and enforce. Most of the sulfur emissions came from about 2,000 smokestacks in the Midwest, a manageable number to monitor. The program, moreover, was subject to an enforceable system of national regulation.

At the international level, however, the system of "cap-and-trade" totally breaks down. It is not monitorable. It is not enforceable. And it is plagued by irreconcilable equity disputes between the industrial and developing countries.

For one thing, there are far too many sources of carbon dioxide around the world to effectively monitor emissions—€”without turning half the world's population into carbon police.

At another level, there is a profound controversy between industrial and developing countries over how to allocate emission rights. The industrial nations want each country's emission rights based on its 1990 levels to ensure continuity of their economies.

By contrast, most developing countries contend that only a uniform global per capita allocation is fair and democratic. Every inhabitant of the planet, they argue, should have equal rights to pollute the atmosphere. The problem is that the typical American is responsible for 25 times more carbon emissions than the typical resident of India. If the emission quota for each U.S. citizen were the same as for each citizen of India, that would decimate the U.S. economy.

A second equity issue, articulated by the late Anil Agarwal, a pre-eminent Indian environmentalist, focuses on trading provisions in the Kyoto Protocol, which allow wealthy nations to buy limitless amounts of cheap emission reductions in poor countries and to bank them indefinitely into the future. This means that when developing nations eventually become obligated to cut their emissions, they will be left with only the most expensive options since the cheaper offsets will have already been bought up by industrial countries. This, in Agarwal's view, clearly constitutes a form of environmental colonialism.
Moreover, most trading proposals involve industrial countries offsetting their emissions by paying poor countries to plant trees or protect existing forests and grasslands to absorb carbon emissions. But the science underlying such schemes seems to have eluded policymakers. A slew of recent findings have determined that the capacity of the world's forests and grasslands to absorb more carbon dioxide is about exhausted.

One team of scientists, studying the carbon-absorption potential of the world's vegetation, concluded in a report in the journal Science, "[T]here is no natural savior waiting to assimilate all the—€¦CO2 in the coming century." Another team of scientists, headed by William Schlesinger of Duke University, found the world can not rely on forests to store our excess carbon dioxide. The best solution, he added, is to burn less coal, oil and natural gas. As to the potential of the world's vegetation to absorb heat-trapping carbon, Schlesinger told U.S. News & World Report: "I would count on nothing."

Sir Nicholas Stern, a former chief economist at the World Bank, calculated that climate change could eventually cost the world as much as 20 percent of its gross domestic product. Recently, Stern revised his initial estimates, saying: "We underestimated the risks—€¦we underestimated the damage associated with temperature increases—€¦and we underestimated the probabilities of temperature increases."

In the face of those miscalculations, the loopholes embedded in the system of "cap and trade" seem even more damaging.

A recent investigation of carbon trading by the Financial Times found:
—€ Widespread instances of people and organizations buying worthless credits that do not yield any reductions in carbon emissions;
—€ Industrial companies profiting from doing very little—€”or from gaining carbon credits on the basis of efficiency gains from which they have already benefited substantially; and
—€ A shortage of verification, making it difficult for buyers to assess the true value of carbon credits.

Ultimately, even if all the shortcomings involving monitoring, enforcement and equity could be resolved, international carbon trading would most effectively be used as a fine-tuning instrument—€”to help countries attain the final 10 to 15 percent of their obligations. It is not the workhorse vehicle needed to propel a worldwide energy transition.

By contrast, a program to replace the world's carbon-based energy infrastructure with non-carbon, non-nuclear and renewable sources—€”solar, wind, tidal and ocean current technologies, small-scale hydropower and, eventually, hydrogen fuel—€”would trigger a worldwide economic boom.

Economists point out that every dollar invested in energy in developing countries creates far more wealth and far more jobs than the same dollar invested in any other sector of their economies. A public works program to rewire the world with clean energy would create millions of jobs, especially in developing countries. It would raise living standards abroad without compromising ours. It would allow developing countries to grow without regard to atmospheric limits—€”and without the budgetary burden of imported oil. And in a very short time, it would jump the renewable energy industry into a central, driving engine of growth of the global economy.

One model of such a plan would involve three simultaneous strategies.

—€ In industrial countries, the withdrawal of subsidies from fossil fuels and the establishment of equivalent subsidies for clean energy sources;
—€ The creation of a large fund—€”perhaps through a small tax on global currency transactions—€”to transfer clean energy technologies to developing countries; and,
—€ The incorporation within the Kyoto framework of a progressively more stringent Fossil Fuel Efficiency Standard that rises by 5 percent per year.

On the subsidy issue, the United States currently spends about $45 billion a year to subsidize fossil fuels. In the industrialized countries overall, those subsidies have been estimated at more than $200 billion a year.

In industrialized countries, those subsidies should be withdrawn from fossil fuels and equivalent subsidies established to promote clean energy sources. (Clearly a small portion of the U.S. subsidies must be used to retrain or buy out the nation's approximately 40,000 coal miners.) But most of the subsidies would still be available to the major energy companies to retrain their workers and re-tool to become aggressive developers of wind farms, solar systems and fuel cells.

Were the U.S. to establish $45 billion in subsidies for clean energy technologies, that would mobilize an army of energy engineers and entrepreneurs—€”with successively more efficient generations of solar film, turbines and tidal devices—€”in a burst of creativity. But even if the countries of the North were dramatically to reduce emissions, those cuts would be overwhelmed by the coming pulse of carbon from India, China, Mexico and Nigeria.
So the second element of the plan involves the creation of a fund of about $350 billion a year for several years to jump-start renewable energy infrastructures in developing countries.

That fund could be financed by any number of sources—€”a carbon tax in industrial countries or a tax on international air travel, to name two. One promising mechanism is a very small tax on international currency transactions, named after its developer, the late Nobel prize-winning economist James Tobin. While Tobin conceived his tax as a way of damping the volatility in capital markets, it would also generate enormous revenues. Today the commerce in currency swaps exceeds $1.5 trillion per day. A tax of a quarter-penny on a dollar would net out to about $300 billion a year for wind farms in India, fuel-cell factories in South Africa, solar assemblies in El Salvador and solar-powered hydrogen farms in the Middle East.

Since currency transactions are electronically tracked by the private banking system, the need for a large, cumbersome bureaucracy could be avoided by paying the banks a small fee to administer the fund. That fee would offset their loss of income from the contraction in currency trading that would result from the tax. The involvement of the banks in administering the fund would, moreover, minimize corruption and ensure that the money went directly to clean energy projects.

The only new bureaucracy might involve a small international auditing agency to ensure equal access for all energy vendors and to minimize corruption in recipient countries.

If a currency transaction tax proves unacceptable, a carbon tax in industrial countries or a tax on international airline travel could fill the same function. Economists estimate that if carbon emissions were taxed at the rate of $50 a ton, the revenue would amount, as well, to about $300 billion a year.

The third element of the plan—€”which makes it all work—€”calls on the parties to Kyoto to subordinate the uneven and inequitable system of international carbon trading to a simple and equitable progressive Fossil Fuel Efficiency Standard which goes up by five percent per year. This mechanism, if incorporated into the Kyoto Protocol, would harmonize and guide a global energy transition in a way that emissions trading can not.

Under this approach, every country would start at its current baseline to increase its fossil fuel energy efficiency by 5 percent every year until the global 70 percent reduction is attained. That means a country would produce the same amount of goods as the previous year with five percent less carbon fuel.
Alternatively, it would produce five percent more goods with the same carbon fuel use as the previous year. (In this context, domestic "cap-and-trade" schemes could be valuable tools to help countries meet their national goals.)
Since no economy grows at five percent for long, emissions reductions would outpace long-term economic growth.

For the first few years of the efficiency standard, most countries would likely meet their goals by implementing low-cost or even profitable efficiencies—€”the low-hanging fruit—€”in their current energy systems. After a few years, however, as those efficiencies became more expensive to capture, countries would meet the progressively more stringent standard by drawing more and more energy from non-carbon sources, most of which are 100 percent efficient by a fossil fuel standard.

That, in turn, would create the mass markets and economies of scale for renewables that would bring down their prices and make them competitive with coal and oil. It would also be far easier to monitor than emissions trading, with its morass of legalistic detail. A nation's compliance would be measured simply by calculating the annual change in the ratio of its total carbon fuel use to its gross domestic product. That ratio would have to change by 5 percent a year.

The warnings from our inflamed climate seem to be growing more insistent every month. The solution does not involve rocket science. Some of the technologies may need refinement, but they have already been invented. The global solution to global warming ultimately requires only focused investment, market creation and political will.

The entrepreneurs can take it from there.

© 2008 Ross Gelbspan