March 14, 2010

The Strange Death of Emissions Trading

A few data points:
  • The EU is kicking around the idea of a carbon tax in addition to their cap-and-trade system. An earlier version had set the tax at €10 per ton of CO2, but that was nixed; the new proposal is likely to be lower.

  • The Kerry-Graham-Lieberman climate bill still isn't in writing yet, but what we do know is that there'll be some kind of cap-and-trade program for utilities, a phased-in cap for the industrial sector, and a carbon tax on transportation fuels, the latter put at the apparent request of the oil industry.

  • India is looking at a tax on coal, as well as increasing duties on transportation fuels.

  • Australia, like the US, has also gotten bogged down on passing a cap-and-trade bill, and Kevin Rudd's government could well switch to a carbon tax in order to win support from the Green Party, though that seems unlikely.
So does this mean that cap-and-trade is out, and carbon taxes are in? Eh, probably not. For one thing, the oil industry's interest in a carbon tax appears to be motivated mainly by a desire to demonize climate legislation; and so far, the Kerry-Graham-Lieberman team is walking right into their trap. And all the other carbon tax proposals I mentioned are speculative, to put it charitably.

But I wanted to mention them because it seems connected to the slow decline in the prospects of emissions trading, which for a long time was viewed as the linchpin to any global effort to combat the effects of global warming. Ever since Kyoto, emissions trading, whether the EU ETS or the Clean Development Mechanism or the voluntary carbon market, has given birth to a whole industry, from climate desks at major financial firms to all the measurement and verification companies you need in order to ensure that the carbon offsets you're selling or buying are leading to real emissions reductions. And now there's a good chance that the carbon market industry might go kaput, or at least become much smaller than many had hoped. A national cap-and-trade system isn't looking likely, either in the US, Japan, or Australia; the current functioning cap-and-trade systems -- the EU ETS and RGGI -- are underperforming, though part of that is due to the flagging economy; and the CDM, which has endured a multitude of scandals, could disappear after 2012 if no successor to the Kyoto Protocol emerges. Indeed, carbon traders on Wall Street are now afraid of losing their jobs.

So why is this happening? I doubt it's simply a matter of the problems with emissions trading: Yes, Wall Street's reputation is in the gutter, and emissions trading may be suffering by association; but it's hard to disaggregate cap-and-trade's problems from the sorry state of international climate policy today. Given how intractable the divisions between the developed and the developing world still are, and how feckless and schlerotic the US Congress has become with respect to the climate crisis, fixating on the technical problems of emissions trading seems inadequate, at best.

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