The Howling Wilderness of Carbon Credits

By Chuck Spinney

One of central causes of the financial meltdown was the lack of transparency in the complex derivatives, like bundled mortgages and credit default swaps.  Advocates of global warming would have us to believe that they can construct a transparent carbon emissions trading scheme that will provide market incentives to reduce the emission of greenhouse gases.

At the center of this trading scheme is the idea of a carbon credit, which is a generic term for any tradable certificate or permit representing the right to emit one ton of carbon or carbon dioxide equivalent. Think of a carbon credit as property in a free market economy -- Ayn Rand, meet Global Warming.

Excessive Carbon emissions (like smoke from a steel mill or a coal fired power plant) can, in theory, be offset by buying carbon credits.  But the calculations involved will make bundled mortgage derivatives look like second-grade arithmetic, and, as Terry Macalister reported in the Guardian on 4 Feb 2011, carbon credits are very vulnerable to fraud and theft, so traders are wary of them, to say the least [emphasis added]:

Attempts to end the chaos inside Europe's emissions trading scheme (ETS) stumbled today when the market reopened, only for minimal trading to take place.

Traders were said to be worried that business could remain polluted by the theft of carbon credits in Austria and elsewhere that forced a shutdown of the scheme on 19 January, at the estimated cost of £90m in lost business.

The European commission has called on national carbon registries to beef up their IT security systems, but has upset traders by declining to publicly reveal the minimum standards now required.

The ETS is seen as a vital tool in the fight against climate change and the fraud is a setback to attempts to sell the cap-and-trade scheme to the US, Australia and elsewhere. ....[cont.]

I asked my good friend Marshall Auerback, an expert on the machinations of Wall Street who has degrees in philosophy and law, if he could elaborate on this vulnerability.  He responded as follows:

And here's another story, which should make one VERY wary.  The person who developed the credit default swap, Blythe Masters from JP Morgan, is also behind the creation of this carbon capture program.  Leave it to Wall Street to find a way to extract an economic rent from pollution!

The Emissions Trading Scheme (ETS)  amounts to nothing more than a privatisation of the commons asset which we call the atmosphere. The ETS would create private property relations over public space.  In Europe, it's been a colossal failure. The EU introduced what was known as the Clean Development Mechanism, which was an offset system allowing polluters in Europe to invest in emissions-reduction infrastructure in poor and developing countries and then use the "offsets" to avoid undertaking more costly emission reductions in Europe.

There is ample evidence of the projects having disastrous effects in poor countries and regions. There has been very little technology transfer from the rich to poor countries. The projects undertaken have often brought civic leaders in poor countries into conflict with land-holders with the latter enduring significant reductions in their capacity to feed themselves. Payola is rife!

This article in the Sunday Times (September 13, 2009) said:

The legitimacy of the $100 billion (£60 billion) carbon-trading market has been called into question after the world's largest auditor of clean-energy projects was suspended by United Nations inspectors.

SGS UK had its accreditation suspended last week after it was unable to prove its staff had properly vetted projects that were then approved for the carbon-trading scheme, or even that they were qualified to do so.

It is clear that emissions have not gone down much if at all yet prices of carbon-heavy goods and services have gone up. Yes: profits have gone up among the big polluters. The big winners have been the heavy polluters and the hedge funds (at least prior to the crisis) while the losers have been consumers, the environment, and poor communities.

Market-based systems are insensitive to equity issues. Fortunately, we'll never get this introduced here in the U.S., because it constitutes an attack on the Appalachian coal regions and Obama has already lost West Virginia and probably Ohio.  If he were to try this stuff, he might well lose Pennsylvania in 2012, and he'll be a one-termer."

Note particularly Marshall's comment about leaving it to Wall Street to hijack the "commons asset which we call the atmosphere."  The economic problem of any commons raises all sorts of squishy intellectual problems, because it is fundamentally about a question of moral values, not property values -- it deals with values we profess to uphold and expect others to uphold.

It is ironic indeed that the assault on the "commons"  by carbon credits is being spearheaded by those advocating policies to reduce global warming.  These people profess to be protectors of the environment.  Yet the seminal article on the moral character of the problems in dealing with a commons, i.e., The Tragedy of the Commons, was written by the respected environmentalist Garrett Harding and appeared in Science in 1968.  In fact, Hardin's brilliant essay became one of the most important sources of intellectual pressure that led to the emergence of a institutionalized environmental protection movement, with the establishment of the Environmental Protection Agency in 1970!

Chuck Spinney retired from the Defense Department in 2003 after 33 years service (bio) and now lives with his wife and dog on a sailboat in the Mediterranean.