MONTE CARLO, February 2008. All the high rollers are in town, discussing the biggest bet of them all: that capitalism can save the planet and turn a profit at the same time. In a room near the famous old casino, bankers are talking to green technology companies hungry for cash. Just down the road, at a UN Environment Programme (UNEP) meeting, politicians from around the world are deliberating on how best to lure the financiers into staking their cash on a greener future. Welcome to the dynamic new world of carbon capitalism.
On 1 January the Kyoto protocol's emissions targets came into full force, creating a long-anticipated market in permits to emit greenhouse gases. To service this marketplace a financial infrastructure of bankers and brokers has sprung up - and people are getting rich. "Carbon is a new commodity, a new currency," says Tom Whitehouse of UK-based consultancy Carbon International. "I believe a robust carbon market can and will deliver the emissions cuts that will delay and avert climate change."
On the face of it, even as the wider world economy stutters, everything is going swimmingly for carbon capitalism. Yet, inexplicably, the two sides in Monaco rarely spoke. The politicians never came to talk to the money men and the financiers were not involved in the political deliberations. Was this a mere social oversight, or does it point to a bigger problem? Many fear the latter, claiming that carbon capitalism is already out of control, delivering big profits while doing little to halt global warming. They are deeply sceptical of the notion that market forces can fix climate change. "To believe that is to believe in magic," says Tom Burke, a former director of Friends of the Earth in the UK and adviser to several British environment ministers.
There's little doubt that free-market capitalism helped to get us into the mess we're in. As Nicholas Stern, former chief economist at the World Bank, puts it: climate change is "the greatest market failure the world has ever seen". The question now is whether capitalism is able to make amends. Can it provide a mechanism that rewards people for reducing their carbon emissions instead of increasing them? Or will it simply give big polluters a way of dodging their responsibilities?
The bare bones of carbon capitalism are simple enough
There's more to it, though, than rich-world companies trading permits. Many of the cheapest ways of cutting emissions are to be found in the developing world, where industrial processes are often inefficient and polluting. The Kyoto protocol allows companies in the rich world to invest in emissions-cutting projects in developing countries. This will earn them credits known as certified emissions reductions (CERs) which they can use to offset their own emissions, or trade on the open market. The result is that for every tonne of CO2 or methane or other greenhouse gas they prevent from spewing up a chimney stack in China, somebody can emit a tonne of gas up a stack in Europe.
This system is known as the Clean Development Mechanism (CDM), and by late last year the UN had approved more than 1600 projects for CERs. Carbon capitalists have funded wind turbines in India, geothermal energy in central America and methane capture from landfills in Latin America, and sold the CERs on to the highest bidder.
Alongside the CDM is a growing "voluntary" market in unofficial carbon credits. These are mostly earned by small carbon offsetting schemes (New Scientist, 9 March 2007, p 38) that have not gone through the UN accreditation process. They are substantially cheaper than official CERs because they cannot be used to offset Kyoto caps on emissions. Nonetheless, they are popular among individuals and companies who want to voluntarily offset their emissions. The biggest market is in the US, where many companies are keen to show they are doing something.
Most of the companies that want to buy carbon credits have no expertise in green energy projects - or indeed in buying and selling financial instruments as esoteric as carbon credits. So middlemen are moving in, closely followed by speculators. Some set up energy projects to earn carbon credits. Others buy these credits and sell them on. Still others buy options on credits not yet generated or which might be awarded by regulatory regimes that don't yet exist - such as the next phase of the European Emissions Trading Scheme, due to start in 2013. These speculators anticipate that rising prices for carbon permits will eventually deliver a juicy profit.
Carbon brokers
Even ordinary people are getting involved. For example, if you offset your holiday flights with UK company Climate Care last year, some of your money will have gone into a Chinese wind turbine project. This was set up by a local company, which sold the carbon credits to a broker, which then sold them to Climate Care, which finally sold some of them to you in the form of the offsetting deal.
Carbon trading is catching on in a big way. In 2007, the value of the deals being done doubled to an estimated $60 billion - though because many credits are traded more than once, the value of credits in circulation is considerably less than this. Nonetheless between now and 2012 European companies are expected to buy about $25 billion worth of carbon credits. With this sort of money up for grabs, it is no surprise that what began as a niche market is now attracting major financial institutions such as Morgan Stanley, Credit Suisse and Barclays Capital. Climate Care has just been bought by JP Morgan.
Yet the critical question remains: does this frenetic activity actually keep greenhouse gases out of the atmosphere? There are widespread fears that it does not. One flaw in the CDM in particular is that credits are being claimed for investments that would have happened anyway, without the added stimulus of earning carbon credits. These projects should not qualify for the CDM because they do not create additional emissions reductions. In fact, they actually make matters worse by allowing companies in the rich world to exceed their limits without genuinely offsetting it elsewhere.
Some of the evidence that this sort of thing is happening is alarming. More than one-third of the official CDM projects approved so far are for hydroelectric dams, mostly in China. The rationale is that by building dams rather than coal-fired power stations, the investors are reducing emissions and so are entitled to carbon credits. Maybe so. But International Rivers, an NGO that campaigns against dams, has shown that most of the dams issued with CERs were either completed or already under construction before the application for carbon credits was made - suggesting they were going to be built anyway, without the incentive of carbon credits. For instance, the Xiaogushan dam in Gansu province began construction in 2003. Later it qualified for carbon credits. Once sold, those credits will allow their purchasers, probably in Europe, to pump out some 3 million tonnes of CO2 that they would not otherwise have been allowed to emit.
Perhaps surprisingly, there is a widespread view among investors and politicians alike that this is perfectly acceptable. Almost any project that cuts emissions is entitled to carbon credits, they argue - even if those investments would have happened anyway. In Monaco, green technologists were keen to show how adept they were at earning CERs, but many also claimed their schemes would be profitable anyway, without the windfall of carbon credits.
Take the case of Canadian company Polaris Geothermal, which is tapping geothermal energy in Nicaragua. Its chief executive, Tom Ogryzlo, said in Monaco that he had sold CERs equivalent to 100,000 tonnes of CO2, and would soon be selling a million tonnes a year - worth around ¬20 million at today's market rates. "Carbon credits could be 10 per cent of our income," he said. But since he also claimed the project had a rate of return on its sales to the Nicaraguan grid of 25 per cent, that would suggest it may be profitable even without the credits. When we put this to the company, it explained that "Polaris needs the carbon credit revenue in order for the project to be economically attractive and viable."
False assumption
Situations like this are a weakness of the system itself, which presumes that without the CDM nobody would invest in green technology in developing countries. This assumption is false. Over the past 30 years, global CO2 emissions have grown only half as fast as the world economy, thanks mainly to cleaner energy generation. As economies develop, they almost always start to use energy more efficiently even without any external incentives. So it is almost unavoidable that some of the carbon credits the CDM hands out go towards projects that would have happened anyway. Advocates of schemes like the CDM counter this with the argument that whatever their flaws, the pursuit of healthy profits in a buoyant carbon market increases investment in climate-saving technologies.
Investment in green technologies is certainly on the increase. "Mainstream money is flowing into clean tech," says Paul Clement-Hunt, head of UNEP's Finance Initiative. "That is a big market signal. Corporations are building climate change into the way they do business." The London-based consultancy New Energy Finance estimates that $148 billion was invested in renewable energy in 2007, 60 per cent up on 2006. Highlights included wind and solar power, biofuels and the development of lithium-ion batteries, which are expected to be powering new fleets of hybrid cars and buses by 2010.
Even so, critics point out that another reason for the growth of investment in renewable energy is the soaring cost of oil, which has also triggered other developments that are far from climate-friendly - in particular, a rush to exploit dirtier fossil fuels such as coal and tar sands.
The danger now is that governments are seduced into believing the initial success of the carbon market allows them to avoid hard political choices on climate change. But markets are unpredictable, says Burke, and can only be part of the solution if regulated by laws such as a ban on new coal-fired power stations and guaranteed prices for renewable electricity. In other words, the politicians need to go to the casino and cut a deal with the money men.
Another danger of making a market in carbon emissions is the least discussed, but perhaps the most important: only a minority of emissions are covered by legal caps. Most industrial and transport emissions in developing countries remain outside the market. So too do most of the huge emissions caused by deforestation, draining wetlands and ploughing fields.
What that means is that market solutions to carbon emissions risk displacing the problem to activities and places where nobody is counting, and there are no penalties. Most obviously, companies facing limits at home can simply relocate their polluting processes to developing countries where there are no emissions targets. The steel and aluminium industries are already doing this. In November 2007, Ian Rodgers, director of the trade association UK Steel, warned that European carbon pricing "is not going to curb emissions. It will just move the emissions elsewhere".
Just as insidiously, it now makes market sense to cut your emissions in ways that cause much larger emissions from natural ecosystems. You can gain carbon credits for burning biofuels in Europe, even if the crops from which they are produced are grown in fields created by draining peat swamps or cutting down forests. For some hydroelectric schemes, gains are more than outweighed by the methane bubbling up from vegetation rotting in the reservoirs behind the dams.
One answer might be "full carbon accounting", in which all exchanges of greenhouse gases - both into and out of the atmosphere - would have to be included in national and corporate carbon accounts. Remote sensing may soon make this possible.
The danger for now is that carbon capitalism becomes disconnected from the reality of the planet's carbon cycle. If that happens, we face an environmental version of the Enron saga. The giant Texan energy corporation prospered through the 1990s by keeping many of its transactions "off the books". The company appeared wealthy while hiding a mountain of debt. Eventually, someone blew the whistle and the company collapsed. The same thing could happen with carbon capitalism, if big reductions in carbon emissions continue to appear on the books while increases always stay off them.
With Enron, it was the shareholders who suffered. But if the atmosphere continues to be filled with greenhouse gases and the planet's climate crashes as Enron did, no one will be spared.
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Source :http://www.newscientist.com/article/mg19826521.600-carbon-trading-dirty-sexy-money.html?full=true
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