The role of carbon markets in preventing dangerous climate change - Environmental Audit Committee Contents


Memorandum submitted by Greenpeace UK

GREENPEACE

  Greenpeace UK is the autonomous regional office of Greenpeace, a campaigning organisation which has as its main objective the protection of the natural environment. Greenpeace has regional offices in 40 countries, 2.8 million supporters worldwide and around 150,000 in the UK. It is independent of governments and businesses, being funded entirely by individual subscriptions.

  Greenpeace was one of the first organisations to campaign for action to be taken to halt anthropogenic climate change. It has built up considerable expertise and has access to independent expertise on, amongst other areas, deforestation, and the links between energy use and climate change. The expertise includes scientific knowledge, understanding of the economics of the energy and carbon markets, analysis of state subsidy, as well as an understanding of how the development of traditional, centralised systems of electricity generation can have detrimental effects on the development of new, cleaner technology to combat climate change.

INTRODUCTION

  1.  The reality of climate change continues to outstrip research projections; it is becoming clear that reaching the "tipping point" is a far more immediate threat than climate scientists had imagined and the window of opportunity for avoiding dangerous runaway climate change is rapidly closing.

  2.  We now know that an increase in global temperature of even 1.5°C could lead to irreversible impacts and 2°C risks triggering catastrophic runaway climate change. We need a global plan that peaks global temperature rise as soon as possible and enables us to return atmospheric concentrations of carbon to below current levels.

  3.  This year will see an intensive round of international negotiations, culminating in the Copenhagen Climate Change Summit in December as governments attempt to finalise a deal and the details of the next commitment period of the Kyoto Protocol of the United Nations Framework Convention on Climate Change (UNFCCC). This 15th Conference of the Parties (COP15) to the UNFCCC represents the best chance we have of reversing current emissions trends in time to prevent the worst impacts of climate change.

  4.  A "good" deal at COP 15 will require legally binding emissions reduction obligations for industrialised countries, as a group, of at least 40% below 1990 levels by 2020, at least three quarters of which need to be met by domestic action. There will be no ambitious deal without unprecedented leadership by developed countries. They must take responsibility for the problem they have already created and continue to contribute disproportionately in comparison to the developing countries.1

  5.  Additionally, industrialised countries must also pay for their emissions permits in order to generate adequate and predictable funding, in the order of at least $140 billion annually, to support clean energy and other mitigation activities, forest protection and adaptation in developing countries.

  6.  It is unlikely—in political as well as cyclical financial terms, if no other—that such large sums will be pledged and channeled annually through national budgets. Instead, we need mechanisms that generate predictable funding automatically, independent of national treasuries. The main fund-generating mechanism should be either the international auctioning of developed countries' Assigned emissions Amount Units (AAUs); putting a levy on these emissions permits—or a combination of both, so that industrialised countries would have to pay for (a portion of) their emissions allowances in the future.

  7.  In this context, the role of the carbon markets becomes significant, and improvement to the current mechanism is essential. Of the three existing carbon market mechanisms under the UNFCCC, only the Clean Development Mechanism (CDM) has generated significant funds. While the CDM has succeeded in channeling significantly more funding to developing countries than any of the climate funds under the UNFCCC, it has disbursed the money to only a few countries and the projects have delivered very little emissions reductions or sustainable development.2 In fact, the mechanism has allowed a net increase in emissions, compared to hypothetical projections in which the CDM had not been brought into existence. It is clear that this cannot be a model for the carbon market post 2012.3

  8.  However, the failure of existing market mechanisms do not necessarily mean that market mechanisms are essentially flawed, but rather they need to be carefully designed, with a sound climate-related outcome being paramount. If new carbon market mechanisms are to deliver additional emissions reductions whilst lowering costs they need to go beyond simply offsetting industrialised country emissions. They must instead incentivise developing countries' own actions and sustainable development, through sectoral and national no-lose targets.

  9.  From 2013 onwards, the CDM or its successor as a project-based mechanism should be limited to least developed countries and other developing countries with little capacity to act. For other, more able developing countries, the post-2012 deal needs to provide new mechanisms, such as no-lose targets, which incentivise long-term low-carbon development planning on a sectoral and economy-wide level, deliver additional emissions reductions and reduce transaction costs. Activities in the covered sectors should also be supported by capacity building, technological cooperation and up-front financing by industrialised countries, where appropriate.

  10.  Carbon markets can be designed to reduce energy-related emissions under certain conditions (see paragraphs 8/9), but the particular nature of emissions from forest destruction and their reduction is best served by strong public control. Forests are not only carbon sinks, but are also global centres of biodiversity which provide homes and livelihoods for millions of people. Furthermore, there are many technical problems associated with the monitoring, calculating and accounting of emissions from deforestation. Public control over forest protection measures and funding is necessary to ensure that emissions reductions go hand in hand with protecting biodiversity and forest dependent peoples' rights. Greenpeace urges governments to reject the use of simplistic market-based mechanisms to reduce emissions from deforestation in developing countries.

  11.  Approximately one fifth of all greenhouse emissions come from deforestation. As Sir Nicholas Stern said "curbing deforestation is a highly cost-effective way to reduce greenhouse gas emissions." There is a near international consensus on the need to reduce emissions from deforestation and degradation (REDD), but no concurrence over how this should best occur. One of the critical questions in relation to proposals for REDD is the extent to which forest credits should be allowed into carbon markets in general and the European Emissions Trading Scheme (ETS) in particular.

  12.  An essential part of the Copenhagen deal will be a funding mechanism for ending gross deforestation and associated emissions in all developing countries by 2020, and achieving zero deforestation by 2015 in priority areas, such as the Amazon, the Congo Basin, and the Paradise forests of Indonesia. These emission reductions must be in addition to the cuts in emissions as described in paragraph 1. Priority protection should be given to areas with high conservation value and those areas which are important for the livelihoods of indigenous peoples and forest communities.

  13.  The fundamental justification for carbon markets is that they provide a mechanism for cutting emissions in an economically efficient way. In relation to forests in particular, the central argument is that large sums of money can be raised for rainforests through allowing rich countries to buy forest credits and trade them in the carbon market. The UK Government is committed to reducing emissions by 80% by 2050, but has not established whether these reductions will take place at home or abroad and in what proportions, leaving open the possibility of heavy reliance on offsets, including forest credits. Greenpeace of course supports the proposition that emissions should be reduced as efficiently as possible. However, market mechanisms that are not fit for purpose or inappropriately structured will not lead to greater efficiencies.

  14.  REDD presumes that developing countries willing and able to reduce emissions from deforestation should be financially compensated for doing so. If REDD is to be included in a post-2012 framework, a decision about what the mechanism will entail needs to be agreed at COP15 in Copenhagen.

  15.  On 4 February 2009 the minimum standards necessary for REDD to be efficient and effective were set out in a joint letter from Friends of the Earth, Greenpeace UK, RSPB, WWF-UK, the Rainforest Foundation UK and FERN to Joan Ruddock.[42] As set out in this NGO letter, at a minimum REDD must:

    — provide sufficient, reliable funding to tackle deforestation and forest degradation;

    — ensure that reducing deforestation is additional to industrialized nations actions to reduce their own emissions;

    — encourage involvement of all developing countries with forests;

    — protect the rights and livelihoods of indigenous peoples and local communities;

    — protect Biodiversity values as well as maintaining carbon values; and

    — protect against leakage via national-level reductions in deforestation

  Above all of course, REDD must be effective in contributing to an overall reduction in global emissions.

PROBLEMS WITH ALLOWING FOREST CREDITS INTO CARBON MARKETS

  16.  Rich developed economies need to start demonstrating that a low-carbon economy is possible and compatible with economic prosperity in order to gain developing country commitment to long-term emissions reductions. Developed states must drive the technologies and energy efficiency improvements which will make a low-carbon economy possible. They can only do this by employing measures which drive down emissions in rich developed economies rather than relying solely on purchased credits. An over-reliance on markets mechanisms will mean that developed countries will lack incentives to make the shift to low-carbon technology, leading to lock-in of high-carbon infrastructure, such as unabated coal fired power stations.

  17.  By 2050 the scope to achieve radical reductions via purchased credits is likely to be very limited because mitigation will require all countries to be limiting their emissions to well below current developed country levels. A policy of relying too much on purchased credits now could make 2050 domestic targets unachievable. In metaphorical terms, we cannot afford to pick all of the low-hanging fruit too quickly at a cost of delaying on tackling that which is higher up and harder to reach. Ultimately there is a need for an overall global reduction of carbon emissions and a market mechanism that is not accompanied by appropriate caps on overall emissions applied at a national level will not achieve that end.

  18.  Offset credits are essentially a bookkeeping device, rather than a form of emission reduction. And even in bookkeeping terms, there are inherent methodological uncertainties associated with mapping, measuring and governance in relation to measuring carbon emissions and sequestration in the context of deforestation. Any system of credits for reduction against a hypothetical business-as-usual scenario is inherently less robust than a cap and trade system where reductions are required in the certifiable total of all emissions. In lay terms, it is more of a gamble.

  19.  In addition, if "cheaper" (in relative terms) forest credits are traded in carbon markets with more expensive carbon credits from other sectors, it may well depress the price of carbon. Crucially, even at current levels, the price of carbon is too low to drive investment in clean technologies. The EU Commission for example acknowledges that allowing forest credits to be tradeable within the ETS could depress the carbon price and argues against such a measure being taken in the short term.4 One recent study quoted by the Commission shows that including forest credits in the ETS could depress the carbon price by 50%.5

  20.  Even assuming that the market mechanism will eventually mature to deliver adequate funds, it will take far too long for the money to become available from carbon markets. The Eliasch Report strongly argues that even if markets do eventually function to provide finance to tackle deforestation, with the comparatively modest target of just halving the rate of deforestation by 2020, there will still be what he terms a "funding gap" of around $11-19 billion per year.6 The significance of this finding cannot be understated: it is Eliasch's clear conclusion that in the vital next decade markets simply cannot deliver the level of finance necessary to slow and halt deforestation.

  21.  Finally, there are very serious conceptual and practical difficulties with introducing carbon credits for forests in nations with significant capacity problems. Markets are constituted by states. As the current global financial crisis makes abundantly clear, in order to function effectively, markets require effective structuring and regulation. Accordingly, an over-reliance on markets mechanisms could lead to nations which are not market-ready being effectively precluded from full participation in REDD.

REFERENCES1  While emissions in some developing countries have been growing rapidly in recent years, per capita emissions of industrialised countries are still much higher than those of developing countries, definitely if one takes into account the historical emissions of greenhouse gases.

2  Clean Development Mechanism, CDM, enables industrialised countries to avoid emission reductions at home by financing emission reduction projects in developing countries. Other existing market mechanisms under the UNFCCC are Joint Implementation (JI), where an Annex I country can acquire credits by implementing/funding emission reductions in other Annex I countries (economies in transition) and International Emission Trading (IET), through which Annex I countries likely to exceed their quotas could buy AAUs from countries who are overachieving their quotas (practically countries in transition). JI and IET have not, and are not likely to play a big role in the first commitment period, and are likely to have an even smaller role in the second commitment period.

3  Schneider L 2007: Is the CDM fulfilling its environmental and sustainable development objectives? An evaluation of the CDM and options for improvement. Öko-Institut/WWF (www.oekoinstitut.de/oekodoc/622/2007-162-en.pdf); and: Wara M. 2006: Measuring the Clean Development Mechanism's performance and potential. Stanford University. Program on Energy and Sustainable Development.

(http://iis-db.stanford.edu/pubs/21211/Wara—CDM.pdf)

4  "If forestry credits were to be allowed unrestricted into the EU ETS, and if the only demand came from the EU (ie unilateral case of reducing EU emissions by 20% in 2020 compared to 1990) together with the anticipated inflow of credits from other CDM/JI4 projects, the magnitude of the supply of emission reduction credits could cause a significant drop in the carbon price": Communication From The Commission To The European Parliament, The Council, The European Economic And Social Committee And The Committee Of The Regions: Addressing the challenges of deforestation and forest degradation to tackle climate change and biodiversity loss. IMPACT ASSESSMENT 2008—p 43

http://ec.europa.eu/environment/forests/pdf/sec—2008—2619.pdf

5  Reducing deforestation and trading emissions : "Economic implications for the post-Kyoto Carbon Market", N Anger and J Sathaye, (2008) p 23

ftp://ftp.zew.de/pub/zew-docs/dp/dp08016.pdf

6  http://www.occ.gov.uk/activities/eliasch/Full—report—eliasch—review(1).pdf, p.xix.

March 2009






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