DISCUSSION In search for the cap in ‘cap and trade’

by Luke Robinson _______25th July 2013

by Hanne Marie Mysen

As the debate on climate change has grown increasingly topical over the past decade, the temptation of market forces to incorporate the ecosystem into the financial markets has grown stronger. This has led to investment patterns prioritizing ‘natural’ capital over physical, financial and human capital as the latest frontier of the market economy. The rhetoric around the commodification of nature otherwise referenced as the ‘Green Economy’ is based on the ideal that ‘the invisible hand of the market’ will be responsible for guaranteeing the future of our planet.

In other words, it is through enhancing natural capital as an economic asset for the market utility that will resolve the problems humanity and the planet is facing.

The latest avenue of the green economy is the ‘cap and trade’ industry which aims to encourage companies to reduce their CO2 emissions by setting a limit on the level of the carbon dioxide emitted in a specific region. Companies are given carbon credits, each equal to a tonne of carbon, which they can then buy and sell according to how many credits they need. The companies that pollute less can make money by selling their credits for permits, while the bigger polluters have to bear the added cost of buying more credits. Many consider the cap and trade system to be a big step towards reinventing the traditional growth model.

Other academics, investors, farmers and the media are a lot more critical. Much like the last pyramid scheme we were introduced to by the people developing new markets, the subprime mortgage scheme, this too will burst.

The goal that is set is to cut 80 % of our carbon dioxide emissions through trading carbon permits. The problem is that most of our economy works on carbon. As permits get scarcer they gain more value as well, so the companies that have a surplus of permits can make money by selling off their credits. Thus there is an incentive to reduce carbon emissions and the goal is reached right? Unfortunately, this is where the scheme becomes suspect. Instead of actually reducing CO2 in their production, companies do so through trade.

Simply put, offset permits are created when a company supposedly removes or reduces carbon. The permits can then be sold to a polluter that wants to emit more carbon. In this way one’s activity is offset by another’s and carbon levels remain the same. In this predicament, there is a dangerous incentive to create false offsets that have an adverse effect on both the economy and the environment.

As of this month The European Commission says the carbon market now has a surplus of nearly two billion CO2 allowances, or permits. The confidence in the trading scheme was initially very high. But with the value of carbon allowances dropping from 40 USD to less than 4 USD due to an oversupply of permits traded, the durability of ‘cap and trade’ is uncertain in the current financial environment.

Despite previous failures, China just ventured onto their first carbon test scheme a few weeks ago due to pressure to reduce pollution in cities. Initially the Shenzhen Carbon Exchange will cover 635 industrial and construction companies. A previous statement from the exchange said it expects to add transport firms as well as all major companies that consume oil, gas, coal and power to this list. If China’s trading experiment works in Shenzhen, there are high hopes that Beijing will aim to reduce the amount of carbon dioxide emitted per unit of gross domestic product by 40-45% from 2005 levels by 2020[1].

While we wait in suspense of developments in Chinas ambitious carbon exchange project, government-, non-profit, and financial institutions around the world continue to look to the market for more solutions to the climate crises. Meanwhile it is perceived that it is precisely this market dogma that inhibits innovative growth models for sustainable development. It is much too easy to rely on the magic of the market to provide quick fixes to the issues we face, but in that there is a real danger of forgetting our role in their generation and in that the power we hold defending our future.

[1] http://www.bbc.co.uk/news/business-22931899

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