Profiting From Pollution: the G8 and climate change

The hegemony of the G8
in international forums
such as the United
Nations Framework
Convention of Climate Change
means that global climate policy
is being chosen for its
compatibility with the existing
economic system rather than its
effectiveness in reducing
emissions.

Carbon trading is central to
this approach. It turns the earth’s
carbon-cycling capacity into
property to be bought or sold in
a global market.This use of
market forces to address
environmental problems takes
two forms. First, governments
allocate permits to big industrial
polluters who then trade these
‘rights to pollute’. Second,
surplus carbon credits are
generated from carbon offset
projects that claim to reduce or
avoid emissions in other
locations, usually in Southern
countries.These credits may be
purchased to top up any shortfall
in permits. Under the Kyoto
Protocol, such offset projects are
carried out in the South through
the Clean Development
Mechanism (CDM), or in Northern countries through Joint
Implementation (JI).

The market is growing enormously.A World Bank report
valued it at US$21.5 billion for the first three quarters of 2006,
up 94 per cent on its value of $11.1 billion in 2005.

Gleneagles onwards

Despite the hype, the 2005 G8 summit in Scotland produced
little in the way of concrete action in dealing with climate
change.The final communiqué made limp resolutions to
‘promote’ better practice on
climate change, with no mention
at all of reducing the rate of
extraction and consumption of
fossil fuels. Blair was widely
praised, however, for bringing the
heads of state of Brazil, China,
India, Mexico and South Africa
to the negotiating table, and it
was with these countries that the
G8 plus 5 Climate Dialogue was
launched.The dialogue brings
senior legislators together with
international business leaders,
civil society representatives and
opinion leaders to discuss a post
2012 climate change agreement,
with the aim of agreeing a
consensus statement at the G8
2008 Japan summit.

The dialogue has a heavy bias
towards trading schemes as the
best way of dealing with climate
change, with one of its four
working groups dedicated
specifically to developing market
mechanisms. Furthermore, the
G8 plus 5 summit has mandated
the World Bank to facilitate the
creation of a framework for
climate change management,
clean energy and sustainable
development.This is in spite of
the fact that the World Bank is part of the climate problem
rather than the solution: since the UN climate convention was
signed at Rio earth summit in 1992, the Bank Information
Centre calculates that the World Bank has single-handedly
financed over $25 billion in fossil fuel based projects.
In response to the G8 mandate, the World Bank produced a
report called Clean Energy and Development:Towards an
Investment Framework, an updated version of which was
presented at the G8 plus 5 meeting in Mexico in October 2006.

The report promoted carbon trading as the main means of
financing the development of clean technology.

The Bank’s promotion of emissions trading through the G8 plus
5 creates a clear conflict of interest in that it is also the largest
public broker of carbon purchases, with over $1 billion in its
carbon credit portfolio. It generates a great deal of revenue for
itself through receiving a percentage commission on all the
carbon credits it purchases to administer through its Prototype
Carbon Fund.Through its influence in political processes like the
G8 plus 5, it has actively lobbied to make the CDM a more
attractive proposition for
investors and less effective in
terms of actually reducing
emissions.

The G8 plus 5 met again in
February 2007 in Washington, at
a meeting spearheaded by five
US senators who have
introduced a congressional bill
that would allow US companies
to certify emissions reductions,
which may be traded on the
international market to other
nations. Keynote speakers
included German chancellor
Angela Merkel as well as
Nicholas Stern, whose
influential Stern Review on
climate change has been
promoted as providing the
economic rationale for the
global carbon market, and Paul
Wolfowitz, president of the
World Bank.

It is not yet clear what
targets there are for dealing
with climate change at the
2007 G8 summit in Germany,
but the majority of
governments, industry and
international financial
institutions are keen to see the
groundwork laid for an
international emissions trading
framework to extend beyond the 2012 Kyoto commitment
period that will include the other greenhouse gases and other
emissions-producing sectors, such as the airline industry.

Carbon trading won’t work

The G8 and free-market environmentalists have been at the
forefront of championing a rosy narrative of ‘win-win’ scenarios in
which the quest to maximise corporate profits can go hand in
hand with addressing the climate crisis. But this is largely an act of
faith, as there is no evidence that
climate change can be tackled
while maintaining an economic
growth pattern based on the
ever-increasing extraction and
consumption of fossil fuels.
Carbon trading encourages
the industries most dependent
on coal, oil and gas to delay
shifting away from fossil fuels.
There is little incentive for
expensive plans for long-term
structural change if you can get
by in the short term by buying
cheap permits-pollution rights
from operations that can reduce
their emissions.Yet for G8
countries seeking to
demonstrate their commitment
to climate action, these inherent
problems of emissions trading
are swept aside in favour of a
system that sustains the
economic dominance of the
most powerful industrialised
nations.

The G8 nations and emissions trading

France, Germany, Italy & UK

Since the start of 2005, France,
Germany, Italy and the UK have been
participating in the European Union
Emissions Trading Scheme (EU-ETS),
the biggest experiment yet in carbon
trading, and the harbinger of the
global market that will begin in 2008.
The EU-ETS works on a ‘cap and
trade’ basis. The amount of
permissible carbon pollution is
divided up between industrial
locations (called ‘installations’ in the
scheme) across Europe – this is the
‘cap’ part. If any installation goes
over its limit, it must purchase the
equivalent amount of permits on the
market, and conversely, if an
installation is under its limit, it can
sell its shortfall on the market – this
is the ‘trade’ part.

The first phase of the scheme has
been a disaster. Under sustained
corporate lobbying, almost all EU
governments made huge overallocations
of permits to industry in
the first phase. In 2005, the first year
of trading, the relevant industries
across Europe emitted 66 million
tonnes less than the cap that had
been allocated. This meant that the
cap was effectively meaningless as it
had not forced any net emissions
reductions. A preliminary analysis of
the 2006 data shows that 93 per cent
of the 10,000 installations covered by
the ETS emitted less than their
allotted quota.

These over-allocations have
resulted in windfall profits for the
biggest polluters who, in successfully
exaggerating their need for emissions
allowances, received enormous
amounts of permits that they could
then profitably sell on. The companies
also made money by passing on the
nominal ‘market costs’ of these free
permits to consumers. The German
environment minister has claimed
that the four biggest European power
producers – Eon, RWE, Vattenfall and
EnBW – have profited from this to the
tune of Ř6 billion and Ř8 billion.
With the second phase of the EUETS
due to start in 2008, the evidence
suggests that lessons haven’t been
learnt. A working paper released in
November 2006 by German researchers
said that of the 25 second-phase
national allocation plans submitted for
EU approval, 18 were too generous,
and many of the new caps were set
above 2005 emissions levels.

Japan

As the most energy-efficient country
in the industrialised world, Japan is
struggling to meet its Kyoto
commitment to below 6 per cent of
1990 levels (current levels are 8 per
cent higher than 1990). Consequently,
Japan is heavily committed to using
emissions trading to make up the
shortfall. The Japanese government
set aside 5.4 billion yen (US$45.9
million) in its 2006 budget to purchase
carbon credits from abroad, and has
approved some 41 predominantly
CDM projects, in countries such as
Malaysia, India, South Korea,
Indonesia, China and Vietnam, with
even greater numbers of such
projects in the pipeline. In addition,
Japan is one of the biggest investors
in the World Bank Prototype Carbon
Fund, with eight out of the 17
corporate investors being Japanese
corporations, as well as the
government’s own Japan Bank for
International Cooperation.

Canada

Canada’s conservative government
has been making disgruntled noises
about its Kyoto commitment of
reducing its emissions to 6 per cent
below 1990 levels. Environment
minister Rona Ambrose has stated
this target is ‘impossible’, that the EU
trading scheme was a failure, and that
the CDM was little more than a recipe
for corruption and wasted money. The
conservative administration has not
delivered on promised funding for the
CDM executive board, the
international body that oversees and
approves CDM projects, and it has
underfunded the Canadian office for
administering CDM and JI schemes to
the point of its near irrelevance.

Russia

The collapse of Russia’s economy
during the 1990s has seen a slump in
emissions, at one point reaching 40
per cent below 1990 levels. This has
resulted in Russia having a huge
supply of surplus carbon credits that it
can sell on to other countries when the
global emissions market opens for
business in 2008. But these have been
achieved by external circumstances
rather than by the country having
implemented any sort of energy
efficiency or renewable energy
measures, an example of how
emissions trading can be profitably
exploited with no sustainable action to
tackle climate change. Not surprisingly,
Russia has been enthusiastic about its
opportunities to profit from emissions
trading, with one World Bank estimate
suggesting that it could profit by $11
billion under Kyoto.

USA

George Bush famously refused to
ratify the Kyoto Protocol in 2001, so
the US is not taking part in emissions
trading in order to meet any domestic
compliance targets at the national
level. Yet several private initiatives,
including the Chicago Climate
Exchange, are trading in offset
credits. With the recent Democrat
takeover of Congress the US attitude
to emissions trading looks set to
change. Ten US corporations,
including DuPont and General
Electric, have joined with green
groups to form the US Climate
Action Partnership to urge Bush and
Congress to create a carbon market
for the US. At the 2007 World
Economic Forum in Davos, chief
executives of European and US
power and industrial companies said
that the US needs to lead the way in
setting up a global carbon emissions
trading regime.

Kevin Smith is researcher at Carbon
Trade Watch, co-author of Hoodwinked in
the Hothouse: the G8, Climate Change
and Free Market Environmentalism and
contributor to G8 Club Governance