US Version: The Weakest Link: Problems and Perils of Linking Carbon Markets
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Published by Food and Water Watch
Proponents of cap and trade increasingly seek to create a global carbon market under the false reasoning that doing so will achieve improved economic efficiency and better emissions reductions than individual markets alone, because carbon dioxide (CO2) is spread globally throughout our atmosphere.
Proponents of cap and trade increasingly seek to create a global carbon market under the false reasoning that doing so will achieve improved economic efficiency and better emissions reductions than individual markets alone, because carbon dioxide (CO2) is spread globally throughout our atmosphere.
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roponents of cap and trade increasingly seek to create a global carbon market
and better emissions reductions than individual markets alone, because carbon dioxide (CO
2
) is spread globally throughout our atmosphere.
Since no new inernaional agreemen, like he Kyoo Proo-col, has maerialized afer he irs Kyoo agreemen ran ou in 2012, he ocus has now shifed oward creaing a global carbon marke.
1
Doing so requires linking exising botom-up, regional and sub-naional carbon markes in places like Cali-ornia, China, he European Union, Qebec and elsewhere.While promoed as a way o reduce carbon emissions, he main drive behind linking is economic efficiency and cos reducion. Focusing on economic concerns downplays he real prioriy o reducing emissions. Unorunaely, companies will coninue o pollue as long as i is cheaper o buy carbon credis han o make he invesmens needed o reduce emissions direcly. And, i companies can creae markes and link hem ouside o regulaions ha would acually lead o meaningul emissions reducions, hey will do ha. Carbon markes are no abou emissions reducions — hey are abou inding he cheapes way o keep on polluing.
Cap and rade markes are no he soluion o emissions re-ducions ha hey preend o be. Insead o requiring polluers o sop or signiicanly reduce emissions wihou excepions, cap and rade allows polluers o
pay
o keep on polluing and mainains he saus quo. This is made worse as numerous examples o raud, corrup-ion, oversupply o emissions credis and lack o enorcemen o he cap coninue o plague hese markes.
2
These problems have been so sysemic ha he Inernaional Criminal Police Organizaion (INTERPOL) is invesigaing carbon rading crimes and published an exensive repor on his in June 2013.
3
As a resul o hese myriad problems, permanen reducions o greenhouse gas emissions may or may no be achieved. Cap and rade markes are a pay-o-pollue scheme, no a legii-mae soluion o emissions reducions and climae change.
THE WEAKEST LINK
Problems and Perils of Linking Carbon Markets
2
Wih his in mind, he idea o linking carbon markes is beyond counerinuiive; combining several auly markes does no make one uncional marke. Linking carbon markes poses many problems, no leas o which is he signiican impac ha his will have on democraic processes and domesic conrol o carbon markes. Oversigh and regulaion are required o make emissions reducions a prioriy over economic efficiency. Moreover, linking means ha volailiy and liabiliy rom one marke becomes shared across all linked markes.
4
The risks o leakage, increased emissions and minimal emissions reducions become serious problems when linking carbon markes as well.In January 2014, Caliornia and Qebec signed a bilaeral agree-men linking heir carbon markes.
5
Paricipans in Caliornia’s marke can now buy credis rom Qebec’s marke, and vice versa. Oher markes also have expressed ineres in linking, including he Regional Greenhouse Gas Iniiaive (RGGI), he European Union Emissions Trading Sysem (EU ETS), pilo proj-ecs in China and several ohers around he world. The ac ha carbon dioxide is a globally pervasive polluan does no mean ha he only soluion o reducing i lies in a global carbon marke. Signiican emissions reducions rom cap and rade have ye o be seen.
6
In addiion, he larges carbon marke, he EU ETS, is currenly on lie suppor afer he price o carbon allowances collapsed o €2.46 per on o CO
2
in April 2013, rom a high o €29.69 per on o CO
2
in July 2008.
7
Because o his collapse, he European Union has had o inervene and will wihhold 900 million emissions permis in hopes o saving he marke and propping up he price o emis-sions permis.
8
In a direc, bilaeral link beween wo carbon markes (mar-ke A and marke B, or example), allowances or credis rom marke A can be used o mee he reducion arges in marke B, and vice versa. Links can also be unilaeral, which is a one-way link where marke A can use allowances rom marke B, bu marke B canno use allowances rom marke A.
9
Muli-laeral links are a possibiliy as well, wherein more han wo markes become linked and share credis.
10
In addiion o direc linkages, indirec links can occur. This ypically happens by linking wo carbon markes via a hird marke, such as an offse marke or he Clean Developmen Mechanism (CDM).
11
“I neiher sysem recognizes he oher’s allowances, wo sysems can become indirecly linked hrough direc links wih a common hird sysem.”
12
However, offse markes like he CDM have become noori-ous or raud, corrupion, no emissions reducions, increased emissions and several oher signiican problems.
13
As a resul, any linkage wih he CDM or anoher offse marke would
Current and potential linked CO
2
markets
Smog hangs over Los Angeles, California and Montreal, Quebec. California and Quebec just linked their carbon markets in January 2014.
PHOTO SOURCE: (LEFT) CC-BY-SA © MASSIMO CATARINELLA; (RIGHT) CC-BY © JUSTIN QUINTAL
3
be disasrous. Indirec linking can also happen when several direc bilaeral links evenually creae indirec links.
14
The recen linking o Caliornia and Qebec is a direc, bilaeral link. I is also reerred o as botom-up linking, because hese are regional, sub-naional markes. Anoher characerisic o botom-up linking is ha rading occurs beween companies wihin he respecive counry and marke, no beween he counries.
15
This linking archiecure ypically has a decenral-ized decision-making srucure, which has negaive implicaions or oversigh, accounabiliy and democraic processes.
16
The ineres in botom-up linkages o regional and sub-naion-al carbon markes sems in par rom he lack o a new iner-naional agreemen, such as he Kyoo Proocol, which ended in 2012.
17
Bu he real drive or hese linkages is ha botom-up linking presens a more inormal, poliically easible opion because a bilaeral link only requires ha wo markes agree on linking, whereas a ormal inernaional agreemen has o gain he suppor o numerous counries; botom-up linkages can ge under way much sooner.
18
This kind o linking also aces less red ape, which is atracive o hose players ha do no like he resricions pu orward in ormal agreemens like he Kyoo Proocol.Oher reasons ha proponens avor his approach is he claim ha i will lead o economic efficiencies such as price equalizaion o carbon credis and allowances, which will sup-posedly lead o increased cos-effeciveness and marke liquid-iy, as well as eliminae inormaion asymmeries.
19
Linking allegedly leads o price equalizaion and cos savings because i allows companies o buy allowances wih lower abaemen coss. I marke A has a higher price per allowance, bu marke B has a lower price, companies rom marke A can hen buy allowances rom companies in marke B, allowing reducions o occur a a lower cos.
20
The atracion o increased marke liquidiy comes rom he claim ha by linking markes and increasing he overall number o allowances in he marke, his will decrease marke volailiy.
21
However, his can also have he reverse effec o inroducing volailiy ino a previously non-volaile marke.
22
The argumen or linking carbon markes assumes ha cap and rade achieves he oucome ha i promises: emissions reducions. I also assumes ha cap and rade is a good solu-ion. This remains o be seen, however, especially in ligh o he EU ETS’s all bu complee collapse. The price or carbon in he EU ETS has been incredibly vola-ile. I reached €29.69 ($40.10) in July 2008.
23
I languished below €10 or mos o 2012, hiting a low o €2.46 in April 2013.
24
This kind o volailiy undermines economic planning, while allowing some companies o reap a windall wih over-allocaion.
25
And i has atraced hackers and ourigh raud, culminaing in shuting down he spo marke in 2011 afer a group o Easern European hackers cos EU governmens up o €5 billion in an atack.
26
From solen and raudulen credis o sockpiling, plunging demands and miscalculaed caps, he carbon cap and rade program has more problems associaed wih i han any radi-ional regulaory program could.Moreover, cap and rade is a pay-o-pollue scheme. I allows polluers o avoid direcly reducing heir emissions and ceas-ing polluing aciviies, so long as hey pay or he necessary amoun o credis o keep on polluing. Thus, cap and rade will no lead o he necessary emissions reducions o comba climae change. Linking carbon markes is jus anoher way o coninue and expand hese pay-o-pollue schemes.
The Environment Loses
Despie claims ha linking brings economic efficiency, cos reducions and oher economic oucomes, a lieraure review shows ha many papers, such as hose rom Jaffe e al. (2009), Zeterberg (2012) and Flachsland e al. (2009), examine linking rom an economic perspecive bu pay very litle atenion o he implicaions o linking rom an environmenal perspecive. The rheoric is ocused primarily on how linking will make paricipaing in carbon markes cheaper, bu no necessarily on how hey will lead o beter environmenal oucomes. In addiion, botom-up linkages are a second-rae opion or effecively reducing emissions.
27
This is because regional and secoral markes cover only a small area o emissions, and he areas no covered by hese markes risk acing emissions leak-age.
28
Leakage occurs when regulaing emissions in one area leads o increased emissions in an unregulaed region.
29
Increased emissions could also occur rom linking markes. Increases could happen i a low-damage marke — a marke or region wih low emissions — decides o relax is cap on emis-sions in order o sell more permis o a high-damage marke.
30
Relaxing he cap increases he oal amoun o allowed emis-sions under he cap, and is counerproducive o reducions.
31
Linking carbon markes could also creae a siuaion wherein linking is similar o offses, bu on a larger and more unsable scale. Wihin a cap and rade marke, polluers can purchase offse credis ha represen an emissions reducion made elsewhere — no a he source o polluion — and his couns oward he polluer’s oal reducions. Wih linking, here is ofen a difference in permi prices beween wo linked markes. I permis in marke B cos $10 and permis in marke A cos $13, polluers rom marke A will wan o buy he cheaper permis in marke B, which also means ha more reducions will occur in marke B han in marke A. This creaes a back-door offse ha will coninue unil permi prices equalize beween he linked markes.
