Memorandum submitted by FERN
SUMMARY
— The ETS has hampered the transition to
low-carbon economies because resources have flown into setting
up an immense carbon trading apparatus, not research & development
into transitioning UK energy and transport infrastructure to be
fit for the low-carbon realities of the future.
— The EU ETS overestimates the potential
of pricing as a means to achieving structural changes in the energy
and transport infrastructure. While a carbon tax will certainly
not be sufficient in and by itself to trigger a just and swift
transition to low-carbon economies, its advantages over carbon
trading as a means of putting a price on carbon are many, as Dr.
James Hanssen pointed out in his recent testimony to the US House
Committee on Ways and Means: "Cap & Trade' increases
costs to the public as does `Tax & Dividend', but without
the dividend. Thus it should be termed `Tax & Trade'."
He further states that "[e]xcept for its stealth approach
to taxing the public, and its attraction to special interests,
`Cap & Trade' seems to have little merit."1
— Carbon offsets do not contribute to preventing
dangerous climate change because carbon offsets do not reduce
emissions. At best, they stabilise emission levels: A reduction
in one place justifies an extra emission in another place. This
best-case scenario appears to be rare in reality and it is not
possible to verify whether or not the claimed reduction has been
over and above any that would have occurred anyways. As a result,
any trading scheme involving carbon offsets may increase rather
than reduce ghg emissions because it will allow extra emissions
without the certainty of corresponding extra reductions elsewhere.
— Offset standards have not been able to
address this fundamental shortcoming: it is impossible to verify
whether credits sold by any one project are based on genuine,
additional emission reductions that would otherwise not have occurred.
At least 1/3 and possibly up to 2/3
of registered CDM projects are business-as-usual projects that
do not deliver additional emission reductions.2 Due to lack of
transparency, it is not possible to even assess with any certainty
the level of non-additional credits of offset projects in the
voluntary offset market.
— A November 2008 US Government Accountability
Office report states that its "Key lessons from the CDM include:
(1) the resources necessary to obtain project approval may reduce
the cost-effectiveness and quality of projects; (2) the need to
ensure the credibility of emission reductions presents a significant
regulatory challenge; and (3) due to the tradeoffs with offsets,
the use of such programs may be, at best, a temporary solution."3
In addition, offsets do not contribute to changing the energy
infrastructure either in the offset producer or the offset buyer
country and the UK government must phase-out its use of offsets
as soon as possible.
— Trading in credits from offset schemes
presents a high risk of creating a lemons market because it is
impossible to assess the true value of the credit being sold,
because "[o]ffsets are an imaginary commodity created by
deducting what you hope happens from what you guess would have
happened."4
— If the objective of the government's
climate policy were to trigger a swift, just and effective transition
to a low-carbon economy in order to prevent dangerous climate
change, carbon trading ought not be the central pillar. In our
view it should not even be part of the mix of policy instruments
because it (a) has neither triggered the kind of technological
shift needed to move our fossil fuel dependent economies onto
a low-carbon pathway; (b) turned the polluter-pays-principle into
a polluter-is-being paid principle by providing billion-euro windfall
profits to some of the largest ghg emitters (c) incorporates the
trading of offset credits whose generation is based on story-telling
and hence ultimately not verifiable. As Dr. James Hanssen stated
at a recent US House Committee hearing: "[t]he worst thing
about cap-and-trade, from a climate standpoint, is that it will
surely be inadequate to achieve the sharp reduction of emissions
that is needed. Thus cap-and-trade would practically guarantee
disastrous climate change for our children and grandchildren."5
— FERN believes that a crucial first step
in implementing an effective UK climate policy will be for the
UK government to end the use of carbon offsets. It will further
be crucial to identify a broad range of effective approaches that
will provide a realistic possibility of transitioning the country's
fossil fuel dependent energy infrastructure and transport systems
towards low-carbon dependence. Given the immensity of the task,
as well as the urgency to provide the right incentives before
long-term energy infrastructure decisions are taken, a thorough
assessment of available policy instruments that may include but
is not limited to market-based instruments such as taxation, and
financial incentives for innovation will enable the government
to replace the ineffective and costly carbon trading infrastructure
and begin focusing on policy measures that hold a chance of playing
a positive role in preventing dangerous climate change—carbon
trading does not.
INTRODUCTION
1. FERN is an environmental and social justice
advocacy non-profit organisation founded in 1995, which works
to promote environmental and social justice.
2. FERN has pursued research into climate
change policy, emissions trading, and carbon trading, in particular
carbon offsets, since 2000. Initially focusing on the analysis
of carbon trading as a potential new financing instrument for
the expansion of monoculture tree plantations, FERN has critically
analysed the climate justice implications of implementing carbon
trading schemes. FERN has documented the reality of carbon offset
projects and engaged in strengthening global networks advocating
for climate justice and a swift transition to low-carbon economies.6
Working closely with organisations in India, Brasil, Congo Basin
countries, Uganda, Indonesia, the US and Canada, FERN has analysed
the role carbon offsets play in the European Emissions Trading
Scheme and in voluntary offset markets.
3. FERN's submissions to the Environmental
Audit Committee inquiries into the International Challenge of
Climate Change, the role of the voluntary carbon offset market
and, recently, on "forests: the future role of carbon markets
in their protection and the timber trade" have argued that
(1) carbon markets, in particular where they include the use of
carbon offsets, delay or even prevent rather than accelerate a
just transition to low-carbon technologies; (2) carbon offsets
have not contributed significantly to sustainable development
but on the contrary, in many cases have had serious negative social
and environmental impacts; (3) reliance on carbon offsets as a
way to finance reducing deforestation initiatives in the context
of an international climate regime will threaten to ignore forest
peoples' rights and fail both, to reduce emissions and address
the drivers of forest loss; (4) any use of carbon offsets is incompatible
with the government's pledge to prevent dangerous climate change.
CARBON MARKETS
AND INNOVATION
4. A growing body of academic research shows
that emissions trading tends to discourage, not encourage, innovation
by lowering the cost of compliance through conventional measures
such as regulation or taxation. Driesen for example documents
how even innovation that costs a lot now can prove economically
and environmentally superior over the long run, because innovation
can make costs of new technologies fall over time. His research
further shows how some innovations provide very wide ranging environmental
and social benefits and can alter pathways while emissions trading
encourages selection of technologies and measures with the cheapest
short-term cost, not the cheapest long-term cost or the greatest
long-term value.7 With regards to triggering a transition towards
low-carbon economies such long-term values may far outweigh the
short-term cost savings. In their working paper `The Missing Instrument:
Dirty Input Limits'8, Driesen and Sinden also evaluate the use
of Dirty Input Limits (DILs), ie quantitative limits on the inputs
that cause pollution as a climate change protection instrument.
They state that "DILs provide an alternative to cumbersome
output-based emissions trading and performance standards. DILs
have played a role in some of the world's most prominent environmental
success stories."
5. Oxford University economics professor
Dieter Holm further points out that "[t]he price of carbon
has had virtually no effect on the market so far and virtually
no effect on climate change,"; he adds that "[t]he trouble
is that there are a lot of people out there making a lot of money
out of carbon trading and who want to perfect the market rather
than press for the changes that are actually needed." Driesen
and Holm's s analysis is echoed by Jim Watson of Sussex University
Energy Group: "Governments are relying way too much on the
price of carbon to deliver everything." Watson further points
out that "The oil price shocks of the 1970s didn't wean us
off oil, so why should we believe that a high carbon price will
wean us off carbon."9
6. Given the relatively short time span
left to initiate a just transition to low-carbon economies if
dangerous climate change is to be prevented with at least some
likelihood, a thorough assessment, identification and implementation
of the most effective policy instruments for triggering the kind
of energy and transport infrastructure change required to climate-prove
our economies is urgently required. The mounting evidence that
carbon trading will not be able to provide the right incentives
for these types of innovation or a switch to low-carbon energy
pathways adds further urgency to a thorough independent assessment
of the role carbon trading is playing in preventing or exacerbating
climate change before carbon trading is expanded and developed
into a global policy instrument.
THE EU EMISSIONS
TRADING SCHEME
Cap-and Trade component
7. Windfall profits, negligible reductions,
no change in energy pathway, three price crashes and a continuing
oversupply of permits summarise the experience of the first and
beginning of the second phase of the EU Emissions Trading Scheme.10
In 2008 the WWF stated in a report on the EU ETS second phase
that the organisation is "concerned that the ETS is financially
rewarding some of the worst carbon polluters in the EU."
And further that "Power companies in five EU member states
could realise windfall profits over the next four years of up
to €71 billion as a result of the handing out of emissions
allowances for free."11 A recent FERN Briefing12 shows that
the option to "bank" unused credits and allowances for
use beyond 2012 combined with the ETS's carbon offset loophole
allowing significant influx of carbon offset credits and the economic
downturn reductions by 2020 reduction obligations within the EU
may be as low as 3.9% compared to 1990 emissions.
8. The economic crisis and recession have
exacerbated the ineffectiveness of the EU ETS and it is likely
that neither phase II nor Phase III will deliver any significant
domestic emission reductions other than those related to the economic
downturn. Economists and carbon analysts have long been pointing
out the failings of the scheme: In 2007, IPA Consultants pointed
out that "By 2015, the UK's electricity system will look
remarkably similar regardless of assumptions on how the EU ETS
plays out." Citigroup's Peter Atherton stated in January
2007 that the "ETS has done nothing to curb emissions ...
is a highly regressive tax falling mostly on poor people ... Enhances
the market power of generators. Have policy goals been achieved?
Prices up, emissions up, profits up... so, not really." Philip
Luyten, environment manager at Total Petrochemicals states that
"The EU ETS has given no extra incentives for greenhouse
gas reductions or changes to the fuel mix,".13 Emissions
in the EU have increased by 5 percent since the start of the ETS.
This will mean that until 2020, the EU and the UK government's
key climate policy instrument will not deliver any meaningful
reductions in the highest emitting industry sectors, the sectors
where investments into a swift transition are most needed yet
will be least likely due to the availability of cheaper carbon
trading options.
9. Over-allocation is a problem not limited
to the EU ETS: According to research published by carbon market
analysts Point Carbon, the emissions of carbon dioxide covered
by the Regional Greenhouse Gas Initiative (RGGI) in the Eastern
US dropped by over 20 million short tons between 2005 and 2006,
leaving the scheme over-allocated by 24 million short tons or
13% of the cap in 2009.14
CARBON OFFSETS—THE
HOLE IN
THE CAP
10. The widely announced "tightening
of the cap" in the 2nd phase of the ETS has been accompanied
by the less-publicised "widening of the hole": Companies
will be able to use significantly more carbon offset credits during
phases II and III of the ETS. FERN's calculations15 and an analysis
by the Öko-Institute16 in Germany suggest that 60-90% of
reduction obligations can be achieved by purchasing carbon offset
credits and thus virtually no domestic reductions will be required
from the majority of companies covered by the ETS.
11. Up to 50% of the offset projects currently
registered by the Kyoto Protocol's CDM are believed to be business-as-usual
projects which do not deliver additional emission reductions.
Given that every offset project selling credits based on reductions
that would have happened anyways (ie are not additional) justifies
an extra emission under the ETS that is not covered by an equivalent
extra reduction from the offset, the offset hole in the ETS will
lead to higher, not lower global emissions. Michaelowa and Michaelowa
argue that carbon offsets "in developing countries provide
politicians in industrialized countries with a welcome strategy
to divert the attention of their constituencies from the lack
of success in reducing greenhouse gas emissions domestically."17
12. Neither offset standards nor an elaborate
bureaucracy of the UNFCCC's Clean Development Mechanism have been
able to prevent bogus offset credits from entering the carbon
market en masse. This is not surprising given the inherent flaw
of carbon offsets: They generate credits based on a counterfactual
story of how high emissions "would have been" in the
absence of the offset project. It is impossible to verify the
validity of such a story of "what would have happened if"
and thus, it is impossible to determine with certainty whether
an offset credit is based on a genuine additional emission reduction
or not: "Offsets are an imaginary commodity created by deducting
what you hope happens from what you guess would have happened"18
13. In addition to this fundamental and
insolvable shortcoming of carbon offsets, the structure of the
carbon market has also created incentives that favour offset projects
which deliver large quantities of cheap credits rather than projects
which arise from the needs and priorities of local communities
or that disburse appropriate renewable energy. This is reflected
in the experience of a long-term renewable energy and community
activist and specialist in Africa, "When the company for
which I worked for 10 years got into carbon trading, I became
increasingly distraught. It was no longer about "sustainable
development", it was about tonnes of CO2 on make-believe
spread sheets".19
14. Under the CDM the largest number of
carbon credits has been generated by projects claiming to reduce
the potent greenhouse gas HFC-23,9 rather than CO2. It has been
estimated that the value of credits given to HFC-23 projects at
average 2007 carbon prices is €4.7 billion. However, an estimate
of the cost of technology needed to capture and destroy the same
amount of HFC-23 is €100 million. Around €4.6 billion
has been generated in profit by HFC-23 generating plants, which
could then further expand their operations with the reinvestment
of this profit. Indian chemical company, SRF, made €87 million
from the sale of carbon credits in 2006-07. Ashish Bharat Ram,
managing director of SRF, noted that "Strong income from
carbon trading strengthened us financially, and now we are expanding
into areas related to our core strength of chemical and technical
textiles business."20
15. FERN and partner organisations in the
Durban Group for Climate Justice have documented extensively the
serious negative social and environmental impacts of a wide range
of carbon offset projects in both the CDM and voluntary offset
market.21 These include gas capture for electricity generation
in pig iron sector, HFC projects, biomass projects, avoided deforestation
projects, tree planting projects, small hydro projects, wind energy
projects, all in India; tree plantation and energy efficiency
projects in the charcoal industry, hydro projects and biomass
projects in Brasil, landfill methane capture in South Africa,
tree planting in Uganda and Ecuador.
16. Initial research by FERN into forest
conservation projects suggests that the same negative impacts
and a return to the "guards and guns" approach to forest
conservation can be expected at least in some areas if forests
are included in international carbon offset schemes.
5 March 2009
REFERENCES1 Statement
of Dr James Hansen, Adjunct Professor, The Earth Institute at
Columbia University, New York, New York Testimony Before the House
Committee on Ways and Means February 25, 2009.
2 Schneider, Lambert: Is the CDM fulfilling its
environmental and sustainable development objectives? An evaluation
of the CDM and options for improvement. Berlin, Germany 2007 and
Wara, Michael and Victor, David: A realistic Policy on International
Carbon Offsets. Stanford, California 2008.
3 http://www.gao.gov/new.items/d09151.pdf
4 Welch, Dan: "A Buyer's Guide to Offsets".
Ethical Consumer 106, May/June 2007
5 Statement of Dr James Hansen, Adjunct Professor,
The Earth Institute at Columbia University, New York, New York
Testimony Before the House Committee on Ways and Means February
25, 2009.
6 For a list of reports and documentation of
the impacts of carbon offset projects on local communities and
the environment, see www.sinkswatch.org
7 Driesen, David M: Does Emissions Trading Encourage
Innovation?. Environmental Law Reporter, Vol 32, January 2003.
http://ssrn.com/abstract=336661 or DOI: 10.2139/ssrn.336661; Driesen,
David M: "Sustainable Development and Market Liberalism's
Shotgun Wedding: Emissions Trading under the Kyoto Protocol",
Indiana Law Journal 83, 1: 21-69; 2008.
8 http://papers.ssrn.com/sol3/papers.cfm?abstract—id=1102299
9 ANALYSIS-Carbon price is poor weapon against
climate change. 24/ 09/ 2007 8:29am EDT
Jeremy Lovell http://www.reuters.com/article/latestCrisis/idUSL24396947
10 See for example US Government Accountability
Office: Lessons Learned from the Euopean Union Emissions Trading
Scheme and the Kyoto protocol's Clean development Mechanism. GAO-09-151
November 2008.
11 http://www.panda.org/news—facts/newsroom/index.cfm?uNewsID=129881
12 Reducing emissions or playing with numbers?
What the EU Climate Action and Renewable Energy Package commit
the EU-27 to in terms of reduced emissions. FERN Forest Watch
Special Briefing March 2009. www.fern.org
13 EUETS will not drive abatement in phase 2.
ENDS Report February 2007.
14 www.pointcarbon.com Emissions Trading in the
US: Is RGGI Over-Allocated? Washington D.C. Aug 17 2007.
15 Reducing emissions or playing with numbers?
What the EU Climate Action and Renewable Energy Package commit
the EU-27 to in terms of reduced emissions. FERN Forest Watch
Special Briefing March 2009. www.fern.org
16 Schneider, Lambert: Is the CDM fulfilling
its environmental and sustainable development objectives? An evaluation
of the CDM and options for improvement. Berlin, Germany 2007 and
Wara, Michael and Victor, David: A realistic Policy on International
Carbon Offsets. Stanford, California 2008.
17 Michaelowa, Axel/Michaelowa, Katharina: "Does
Climate Policy Promote Development?", Climatic Change 84:
1-4; 2007.
18 Dan Welch, Ethical Corporation.
19 Anon (2007b): Personal communication.
20 Cited in Lohmann, Larry: Climate Crisis: Social
Science Crisis In: Der Klimawandel: Sozialwissenschaftliche Perspektiven,
VS-Verlag, forthcoming.
21 See www.sinkswatch.org, www.carbontradewatch.org
and www.thecornerhouse.org.uk for links to reports and video documentation
on the impacts of carbon offset projects
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