Emissions Trading: The Green Trojan Horse

Posted on February 11, 2013 by Bobo Bose-Kolanu and Prashanth Kamalakanthan

As the oft-repeated slogan among environmentalists goes, “there is no Planet B.” To preserve the human species we need an effective set of tools to ward against the crises associated with unmitigated greenhouse gas release. Historian Dipesh Chakrabarty has posited that global warming “poses for us a question of human collectivity” requiring “a global approach to politics without the myth of a global identity.”^[1] Chakrabarty points to the dual tension of effectively combating climate change: the effects of pollution are dispersed globally, while our politics are fractured along social, political, and historical divisions. This tension has dovetailed, unresolved, into what is currently the most globalized scheme for climate change mitigation: the various market-driven mechanisms of carbon emissions trading.

Emissions trading was elevated as the international policymaking community’s preferred mitigation solution by the passage of the Kyoto Protocol in 1997, a multilateral agreement ratified by 156 sovereign states and infamously ignored by the United States, then the world’s largest emitter.^[2] Seeking to accommodate corporate firms’ capital accumulation strategies, emissions trading policies issue commoditized credits to pollute (one credit allowing one legal ton of CO₂ emissions) capped on a nation-by-nation basis toward the overall goal of reducing emissions through decentralized redistribution of credits among actors with different propensities to pollute. While proponents perceive the market as a neutral means for resolving the tension between climate change’s global reach and the divisive state of global politics, further investigation reveals this supposed neutrality to be a sham.

Dodging Historical Responsibility

As a complex phenomenon with an inexorable historical context, one might expect solutions to global warming to deal with history frankly. Cap-and-trade approaches, however, do exactly the opposite. The Kyoto Protocol’s allotment of credits on a historical basis is most gracious toward those countries with the most significant historical responsibility for emissions, the United States and the countries of the European Union, which in 2007 accounted for more than half of the world’s cumulative CO₂ emissions with less than a sixth of its population.^[3]The prevalent system of “grandfathering,” where countries allocate the largest portions of their credit quotas to their most polluting industries, similarly reinforces embedded inequality but on the scale of individual domestic economies.^[4] Nations and industries with the greatest historical responsibility for emissions are, with emissions credits, perversely given the most freedom to continue polluting.

An institutionalized moral hazard framework for allocating carbon credits cannot change long-standing behaviors responsible for creating the climate crisis in the first place.

The Market Cannot Fix The Planet

Despite the fact that the Kyoto Protocol’s recourse to the market evades historical justice, proponents of carbon trading schemes are slow to realize the deeper, structural problems with the cap-and-trade approach. From the perspective of the biosphere it is expansion of the traditional economy itself that is the problem. As John Bellamy Foster and Brett Clark note, “in a properly functioning capitalist economy savings are redirected into investment or new capital formation designed to expand the scale of the entire economy… it is such expansion that is the chief enemy of the environment.”^[5]

In other words, as firms save money (for example, by switching to greener technology that lowers fixed costs like electricity bills), they redirect that money into expanding the scale of their operations in order to make even more profit. Environmentalist Wes Jackson sums the point up sharply: “When the Wal-Marts of the world say they’re going to put in different lightbulbs… what are they going to do with savings? They’re going to open up another box store somewhere. It’s just nuts.”^[6] An economy based on carbon-intensive, production-based growth cannot cleanly transition away from this reliance by replicating its profit-maximizing market-based approach in carbon trading. Instead of addressing the core of the problem cap-and-trade schemes expand it.

Cap-And-Trade Is The New Bubble Economy

Industrial capitalism is not the only capitalism at play in cap-and-trade. In today’s heavily finance-based market systems, risky trading schemes analogous to those responsible for the global recession and subprime mortgage crisis are beginning to appear in carbon trading markets as well.^[7] Understanding how carbon credits are calculated is necessary to understanding how these markets evolved.

In theory cap-and-trade enables markets to efficiently allocate plots of land to their most economically productive uses, while building in the risk associated with greenhouse gas pollution. For example, a polluting firm might purchase a carbon credit to offset its emissions, and the credit may represent a tract of land in the Amazon to be kept clear of development in order to act as a carbon sink.

In order for these calculations to take place cap-and-trade first requires establishing baselines. The baseline process is essentially arbitrary. Setting a baseline requires measuring the projected change in emissions a climate-friendly project might accrue against the amount of emissions happening would the project not be implemented. While at first glance this process seems logical, the blind spots are significant. Since greenhouse gasses are a function of human activity, the baseline requires deciding on quantity and quality of human activity over time. Furthermore, since accurate measurements of carbon sequestration — a natural process for trees, akin to breathing — are difficult to produce, it is easy to be seduced by the market incentive to overvalue the amount of sequestration taking place. Since valuation schemes are not rigorously regulated, traders are free to manipulate conditions as they see fit, allowing polluters to continue emitting greenhouse gasses while doing little to abate global warming overall.^[8]

The picture gets more complicated with the introduction of the negative futures contract, where sellers of credits promise not to emit. In exchange for no effective change in behavior, a firm is able to offset its carbon emission on paper while not performing or causing any real offsets ecologically.

Like the relationship between collateralized debt obligations (CDOs) and home mortgages, emissions credit prices are not aligned with any real underlying asset such as the health of the environment. Instead their prices are determined by market demand. Since the debt obligations are bundled in tranches to offset risk and regulatory oversight is absent, no real assets guarantee the debt. As both a trade in debt and a negative futures contract, the buyer-seller relationship of emissions trading is cemented by the seller’s appearance of not having emitted a set amount of carbon, which is then borrowed by the buyer to emit the same amount. In a vein similar to the collateralized debt obligation market preceding the 2008 financial crisis, this sweet but unsustainable arrangement foreshadows a massive risk of default, namely that the parameter of the emissions trading game, the health of the atmosphere, is not improving but instead deteriorating at a rapid pace. Emissions credits, while meant to insure buyers against overall rises in emissions, thus aggravate the destruction of the environment.

The cap-and-trade market is not a solution to the greenhouse gas problem. In fact, it is a Trojan horse, a magnification of the problem masquerading as a solution. Not only does it ignore the historical responsibility of the United States and Europe in creating the climate scenario we are now embroiled in, it also actively rewards and incentivizes increased pollution with risky trading structures that proved their volatility in the subprime mortgage crisis. Effective environmental solutions will need to look elsewhere.

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