CLIMATE change is 鈥渢he greatest market failure the world has ever seen鈥�. That is the view of no less an authority than Nicholas Stern, former chief economist at the World Bank, and he has a point. As long as the market exacts no penalties from companies or industries that emit the gases that are beginning to transform the planet鈥檚 climate, it can do nothing to keep pollution in check as economies grow. So is there some way to fix the market so that it punishes polluters and encourages greener growth?
The world has just embarked on an audacious experiment to find out. It is called carbon trading, or carbon capitalism if you prefer. The idea is made possible by the , under which most industrialised countries have agreed to cut their emissions of greenhouse gases over the five years from now until the end of 2012. To help meet the targets, governments have issued permits to the major industrial polluters allowing them to emit carbon dioxide up to a certain limit or 鈥渃ap鈥� each year. The permits are tradable, and the potential for making a profit from buying or selling them has encouraged a whole landscape of speculators, hedge funds, carbon brokers and complex financial instruments to spring up (see 鈥淒irty, sexy money鈥�).
With the credit crisis still biting and a global recession looming, a cynic might say the financial market is the last thing we should be calling on to mend the climate. If we cannot trust financiers with something as apparently straightforward as the housing market, why should we imagine they can triumph at controlling global pollution? Yet we all have a vested interest in them succeeding, and the carbon market is growing fast.
Advertisement
This week, the UN鈥檚 climate bureaucrats announced they had approved the thousandth project under the trading system鈥檚 central element, the . The CDM allows western companies that expect to exceed their emissions cap to carry on polluting, provided they invest in projects that result in corresponding emissions cuts in the developing world. The total value of such trades reached $60 billion last year. The thousandth project was an energy efficiency scheme in India. It could just as well have been a project to reduce pollution from pig slurry in Mexico, tap gas from landfills in Brazil, build hydroelectric power plants in China, install energy-efficient light bulbs in South Africa or plant forests in Uganda.
A big problem with the CDM is establishing whether such projects result in real emissions cuts or simply subsidise people to do things they had planned to do all along. Too many dubious schemes have already been sanctioned, and we can only hope that these are teething troubles, not the start of another capitalist bubble that will bring down the Kyoto protocol and much else.
鈥淭here are too many dubious projects that subsidise people to do things they had always planned to do鈥�
It is also far from clear that carbon trading will benefit the climate in the long term. By reducing the short-term costs of cutting emissions it could be undermining research and development into the low-carbon and energy-efficient technologies without which the problem will never be properly solved. Bizarrely, no one has thought to address this issue. The presumption seems to be that the gains can be measured as the sum of individual projects.
There is an urgent need to investigate the broad impact of carbon trading. Urgent, because even though the Kyoto protocol only came into force in January, the world is already negotiating its successor, to take effect in 2013, and governments want to extend the CDM so that projects such as the protection of tropical forests and even soil conservation will be eligible for carbon credits.
As events continually remind us, capitalism is an unpredictable beast. The market may yet deliver emissions cuts that otherwise seem unattainable, but one thing is certain: it can only do so if strongly directed. Governments must intervene to ensure that investment goes where it is needed. That means guaranteed markets for energy from renewables, tough technical standards for energy-efficient buildings, industry and transport, and outright bans on dirty fuels and technologies.
The real danger of carbon capitalism is that it may encourage weak or naive politicians to shirk the tough decisions. There is everything to gain from using the market to do what we need it to. There is everything to lose from bowing down before it.
Climate Change 鈥� Want to know more about global warming: the science, impacts and political debate? Visit our continually updated special report.
Energy and Fuels 鈥� Learn more about the looming energy crisis in our comprehensive special report.
