Thursday, June 2, 2011

Carbon Trade Fading

The World Bank yesterday issued its annual State and Trends report on carbon trading, and the trends it highlights have to be discouraging for those who thought the cap-and-trade approach would be the mechanism for a large part of the world’s reduction in greenhouse gas emissions. The total monetary size of the carbon market fell in 2010, compared to 2009, and the carbon trade has become more concentrated than ever (97 percent) in the European Union. The U.S. market declined. The international carbon trade, which mostly allows industrial countries to finance carbon-friendly projects in developing countries, collapsed. What is left of the carbon trade under the Kyoto protocol is forecast to decline by 41 percent this year.

Much of the report is devoted to the political challenges surrounding carbon emissions policy. There is confusion and disagreement about what needs to be done, and pessimism about the prospects for a coordinated global approach going forward. The World Bank sees the carbon trade as essential for establishing a market price for emissions reductions, but the world is coming to see cap-and-trade as a false start, and is experimenting with a patchwork of different approaches, some of which may prove more viable in the end.

The cap-and-trade experiment has at least showed us how complicated the issue of carbon emissions can be. The World Bank report points out that the technology doesn’t yet exist to achieve the reductions currently being sought. Part of the reason for that, though, is that many reductions don’t count under the current protocol and its carbon accounting rules — rules that are hard to explain and harder still to connect to their climate objectives. These rules will have to be made more simple and direct if the carbon trade is to mean something in the end. The stated ideal of creating a market value for carbon emissions and sequestration is not really possible as long as the market in question so depends on a central bureaucracy keeping score.