From rigged carbon markets to investing in green growth

Hazel Henderson    September 6, 2011

Real-World Economics Review Blog

Abstract
Reviews failure of global carbon trading underKyotoand reasons why alternatives emerged. Assesses prospects for climate policies beyondKyotoand covers shifts toward green growth in governments and private sector investments.
The Kyoto Protocol and its global carbon emission-trading scheme expire in 2012. The World Bank in State and Trends of the Carbon Market found that the market declined in 2010 and is at a crossroads, due to loss of political momentum. There are many new signs of a re-focusing the 20 year international effort to craft national policies and international agreements to curb human (anthropogenic) caused changes to the Earth’s climate. As a longtime theorist and participant in this hugely complex set of issues, I will try to connect most of the dots necessary to explain why the Kyoto Protocol design led to the disappointing UN conferences at Copenhagen (2009) and Cancun (2010). Unlike the scorn UN diplomats and many NGOs heaped on “fragmented” pacts and regional “side deals” that have emerged, I applaud them, as does expert David Victor in Global Warming Gridlock (2011). These smaller “clubs” of powerful emitter nations are now creating pragmatic agreements, such as those between China and the USA to cooperate on green technologies and Norway’s pact with Indonesia to cooperate on managing and protecting forests. Such bottom-up deals reflect local and regional realities and may involve more logically, other pollutants such as soot, ozone-producing VOCs and methane. Curbing these pollutants can actually lower total CO₂ emissions faster and cheaper while protecting the health of those directly exposed, such as providing solar cook stoves to rural women to avoid families inhaling smoke.
The Kyoto Protocol’s targets for controlling CO₂ emissions worldwide by creating a global emissions trading structure was a visionary and ingenious plan devised by brilliant economists and mathematical modelers, notably Dr. Graciela Chichilnisky of Columbia University, inventor of catastrophe bonds. Kyoto promised financial markets a bonanza by creating a new asset class for carbon and many CO₂ derivatives, auctionable emissions permits, free allowances, offsets and the alphabet soup of CDMs, CERs, secondary CERs, RECs, along with trade on new exchanges: ETS, ECZ, RGGI, as well as those in China, India, Brazil, Australia and New Zealand. Today, with evidence that CO₂ emissions increased to the highest ever in 2010 of 30.6 gigatons from the International Energy Agency (IEA), new approaches are vital. Carbon markets are blamed for scandalous profits on CDM offsets related to perverse incentives encouraging the burning of HCFC-23, a greenhouse gas 11,700 times more polluting than CO₂ garnered by JP Morgan Chase, Citigroup, Goldman Sachs, Rabobank, Fortis, along with energy companies, E.ON, Enel, Nuon, RWE and Electrabel. European governments of Italy, Holland and Britain, along with these companies, bought these CDM “offsets” which actually increased polluting emissions. Only whistle-blowing by NGOs brought this to the attention of Jos Delbeke, director general of the European Commission for Climate Action, who called for ending “usurious profits” that are “repugnant”. Meanwhile, a judge in California is forcing the state to analyze alternative measures to its proposed “cap and trade” plan which experts at a recent carbon expo agree will delay carbon trading there (Reuters). The upcoming conference inDurban,South Africa, is expected to be a showdown over the Kyoto Protocol and between developing countries and NGOs versus fossil fuel lobbies and carbon traders.
The deeper reasons why this theoretical Kyotovision of a seamless global emissions trading market, assumed to provide efficient reductions of actual CO₂ emissions, has failed, are explained by Prof. Victor. Creating new markets (and most markets are created by humans not by God’s “invisible hand”) is in reality, a complex governmental task involving new laws, monitoring compliance, fairness and regulating free riders. Powerful incumbent fossil-fueled industries must be brought into compliance while compensating blameless low or non-emitters, mostly in developing countries. The financial markets geared up to compete for their share of trading the new carbon “asset class” after the UN Framework Convention on Climate Change was set up in Kyoto in 1997. Trading desks at most big banks on Wall Street, inLondon and a bevy of new firms appeared – as well as early voluntary trading platforms like the Chicago Climate Exchange (CCX) now merged into ICE.
The economic theory behind Kyoto’s global emissions trading followed the same expansion of global financial markets after the deregulations of the 1980s led by Britain’s Margaret Thatcher and USPresident Ronald Reagan. This market ideology was underpinned by the Arrow-Debreu model assuming these expansions were part of the desirable goal of “market completion.” This goal is now questioned since the bubble in financial markets which burst in 2007-2008 and the rise of theories of the global commons which acknowledge vital global public goods beyond the reach of markets (Transforming Finance). Such planetary resources as air, oceans and biodiversity are essential to human survival and indivisible common property along with the electromagnetic spectrum. Tax payers’ publicly funded infrastructure of communications networks, satellites and the internet are all crucial platforms underlying global finance.
You may download the whole paper at: http://www.paecon.net/PAEReview/issue57/Henderson57.pdf