Page last updated at 23:34 GMT, Thursday, 29 January 2009

Recession threatens carbon trading

By James Melik
Business reporter, BBC World Service

Oil rig with burning oil
By 2008 the Kyoto Protocol had been ratified by 183 countries.

A crucial scheme to control greenhouse gases is under threat due to the recession.

Under the Kyoto Protocol adopted in 1997, since ratified by 183 countries, industrialised nations agreed to reduce their emissions of gases such as carbon dioxide (C02) which cause global warming.

Among the measures introduced was the European Carbon Trading System, whereby governments put a price on the amount of greenhouse gases that can be emitted by any company.

By forcing companies to pay for the right to pollute, it was hoped they would be more inclined to clean up their act.

Trading permits

Companies are issued emission permits and are required to hold an equivalent number of allowances (credits) which represent the right to emit a specific amount.

Selling allowances would not be happening if they'd had to pay for them in the first place
Mark Lewis, carbon analyst, Deutschebank

The total amount of allowances and credits cannot exceed the cap, limiting total emissions to that level.

Companies that need to increase their emission allowance must buy credits from those who are willing to sell.

In effect, the buyer is paying a charge for polluting, while the seller is being rewarded for having reduced emissions by more than needed.

Three-quarters of the main polluting greenhouse gas, carbon dioxide, comes from burning fossil fuels - oil, gas and coal.

The environmental group Carbon Trade Watch complains about imbalances in the sources of the burning of fossil fuels, as the world's richest countries consume more per capita than countries with larger populations.

For instance the USA produces 24% of the world's CO2 emissions yet has only 4.5% of the world's population. Conversely India has 16.7% of the world's population yet only produces 4% of the CO2 emissions.

Price freefall

It seemed like a market solution to global warming in Europe, but initially many of these permits were given away for nothing.

Now, as recession bites, industries like steel, cement and glass may be polluting less, but only because they're producing less.

So companies are desperately selling off the carbon credits they no longer need to bolster their faltering balance sheets

That has led to a big drop in the market value of carbon permits, and as the right to pollute becomes cheaper, there is less incentive for companies to stop polluting.

Mark Lewis, a carbon analyst at Deutschebank, told World Business News that the recession has cast a spotlight on the frailties of emissions trading.

"Selling allowances would not be happening if they'd had to pay for them in the first place," he says.

"Getting them free allows them to be sold on a risk-free basis and that is exacerbating the fall in the price of credits," he adds.

Tougher caps

Wind farm in the USA
Alternative renewable energy sources are being developed

Each year the cap on emissions gets tougher, but the price of the credits would have come down anyway as a result of the financial downturn.

"If everybody had to pay for the allowances on a pay-as-you-go basis, like other commodities they consume, the price for carbon allowances would have fallen anyway as a result of this recession," he says.

In the past, Russia has managed to achieve its Kyoto targets without any pain because its industrial output has declined so sharply.

Critics of carbon trading maintain this proves the inherent weakness of such systems, but Mr Lewis does not think a straight tax on fossil fuels would provide a better solution.

"It might be simpler on one level," he says, "you would know in advance what the price was but you wouldn't get any certainty on the level of emissions reduction."

Bubble fears

Another measure introduced under the Kyoto Protocol to curb greenhouse gases is also coming into question.

This is the clean development mechanism (CDM), which allows industrialised countries to invest in projects that reduce emissions in developing countries - as an alternative to what would undoubtedly be more expensive emission reduction programmes in their own country.

However, in recent years, criticism against the mechanism has increased.

Offset projects under Kyoto are only supposed to qualify for carbon financing if they represent emissions reductions above and beyond what would have happened anyway.

In practice, large numbers of projects that were already well under way, are presenting themselves as CDM projects in order to gain an extra revenue stream, and these projects do not represent additional emissions reductions, Carbon Trade Watch maintains.

Controversial CDM projects
Western Panama: the Naso and Ngobe peoples are fighting against the construction of hydroelectric dams being built on the land of indigenous peoples
India: large numbers of the Okhla community have been turning up to protest against the construction of a waste incinerator in a residential area
Indonesia: small farmers are being driven from their land to expand palm oil plantations
Source: Transnational Institute

David Victor, head of Stanford University's Energy and Sustainable Development Program, says that between a third and two-thirds of CDM offsets do not represent actual emission cuts.

If an offset project does not represent reductions and is being used to justify increased emissions at some other point, it actually represents a net increase in emissions.

If a high number of CDM projects are not additional, there is a real danger of a "carbon bubble".

Scientists are adamant that CO2 emissions must be sharply cut in the next 10 years otherwise there will be irreversible damage to the planet.

Otherwise, it might be too late to repair the damage the planet has already suffered.

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