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Last Updated: Tuesday, 16 May 2006, 23:14 GMT 00:14 UK
Carbon trading's real colours
By Clare Davidson
BBC News business reporter

Incineration plant (Getty Images)
Carbon producers need to be set challenging emissions targets
There are no shortage of nightmare consequences that could result from rampant global warming: starvation, failing crops, extinct species, droughts, diseases - all are chilling scenarios.

So it's all the more worrying that cracks are already appearing in one of the industrialised world's most publicised weapons for fighting climate change.

The big idea is that polluters have the right to emit a certain amount of carbon dioxide - believed to be the biggest contributor to human-induced climate change.

But if they reduce their carbon dioxide emissions beyond a certain level, they can make money by trading the unused part of their quota.

However, several recent developments in the carbon markets, especially under the European Trading Scheme (ETS), have raised the question about whether this market actually works.

The whole point of any [carbon trading] scheme is that what is given out is less than what would have been released
James Wilde, head of strategy at the Carbon Trust
European Union member states set an overall carbon dioxide (CO2) limit, supposedly below what would have been emitted anyway, before distributing permits to individual companies.

But the latest figures for the ETS - started in January 2005 and heralded as a template for such schemes - revealed that 21 of the 25 member states produced 2.5% less CO2 in 2005 than participants had forecast.

This might sound like good news, but carbon reduction targets only work if they are a challenge to meet.

In effect, allowance levels under the ETS were excessive in most cases.

"The whole point of any [carbon trading] scheme is that what is given out is less than what would have been released," said James Wilde, head of strategy at the Carbon Trust, which helps organisations cut their carbon emissions.

'Devil in the detail'

Proponents of carbon trading, notwithstanding the flaws recently exposed in the ETS, argue that it is still the best way to tackle climate change, by giving polluters choice - to reduce emissions themselves or get someone else to do so.

What matters is the total amount of carbon being emitted, not where, explained Roger Salmons, a senior environment research fellow at the London based think-tank the Policy Studies Institute.

ETS has created volatility in carbon prices and it has also [failed to] encourage meaningful investment in carbon reducing technologies
Tony Ward, energy director at Ernst & Young
Taken alone, this concept was very easy to understand he said. In practice, however, it is "very murky". "The devil is in the detail," he said.

But according to Tony Ward, energy director of consultancy Ernst & Young, unpredictability within the ETS has had a two-fold effect.

"ETS has created volatility in carbon prices and it has also [failed to] encourage meaningful investment in carbon reducing technologies."

Business as usual

It is this second aspect that most concerns opponents of carbon trading.

By allowing polluters to keep polluting, carbon trading fails to change the underlying behaviour that causes emissions, they say.

Power companies are arguably the worst polluters, but far from suffering under the scheme they have benefited.

IPA Consulting told the BBC that UK utilities firms stood to gain up to a 1bn "windfall" from carbon credits they had been given free of charge by the government before passing on the value to customers as if it were a cost.

Lucrative market

In fact, the development of a carbon market has spawned a whole industry of people, ranging from consultants to traders, who make money from schemes aimed at reducing emissions.

The World Bank, which acts as a middleman largely for developing-country projects, handled $10bn (5.3bn) in carbon financing last year.

The bank predicts that the market could bring more than $25bn in new financing for sustainable development to poor nations and the developing world.

Developing countries have done the least to contribute to climate change and will be the first to face it
United Nations Framework on Climate Change document
The bulk of project-based schemes aimed at reducing CO2 emissions by investing in alternative or cleaner energy sources occur in developing countries, even though developed countries have historically been the worst offenders.

But allowing developed countries to effectively outsource their pollution promotes the idea of business as usual, says Daphne Wysham, a senior fellow at the liberal Washington-based Institute for Policy Studies.

"Carbon trading is not going to provide the correct market signals fast enough," says Ms Wysham.

Limitations

Moreover, even if carbon trading is one solution to global warming, it has serious limitations. Whole sectors of the economy are excluded, as well as entire nations.

In the UK, for example, about a third of our carbon emissions come from industry. But about two-thirds, split evenly between homes and transport, are excluded from any carbon cap.

Plane
Aviation is the fast growing source of CO2 and exempt from any limits
The US, the world's biggest polluter, decided not to ratify the Kyoto climate change treaty, so is exempt from targets.

Although the US has started voluntary schemes, these are only in certain states and are not binding.

And China, which is tipped to become the biggest energy consumer by the middle of this century, is not obliged to cut carbon dioxide emissions.

'In denial'

Anyone who thinks that developed countries can go on as usual is in denial, says Aubrey Meyer, founder of the Global Commons Institute, aimed at protecting the environment.

"What happens to Africa today will happen to us tomorrow," he says.

As the United Nations Framework on Climate Change says: "Developing countries have done the least to contribute to climate change and will be the first to face it."

Africa is already experiencing severe droughts, especially in the sub-Saharan region, and a recent report by Christian Aid predicted that up to 185 million people could die from the impact of global warming before the end of this century.

Nonetheless, even those who are critical of carbon trading say it is here to stay.

But if such trading is to have a chance of working, businesses, policy-makers and environmentalists all say consistency is crucial - between schemes, companies and countries.


SEE ALSO:
Concerns over EU carbon trading
15 May 06 |  Business
'1bn windfall' from carbon trade
01 May 06 |  Science/Nature
Q&A: The Carbon Trade
20 Apr 06 |  Business
UK carbon emissions rise again
30 Mar 06 |  Science/Nature
Opinion: UK climate change policy
28 Mar 06 |  Science/Nature
Britain misses the climate bus
28 Mar 06 |  Science/Nature
Q&A: Europe's carbon trading scheme
23 Nov 05 |  Science/Nature



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