What goes up must come down – Carbon trading, industrial subsidies and capital market governance

7/30/2019 What goes up must come down Carbon trading, industrial subsidies and capital market governance

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no. 61 | september 2012

What Next Volume IIIClimate, Development and Equity


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What goes up must comedown Carbon trading,industrial subsidiesand capital marketgovernance

Oscar Reyes

When nancial ervice prodct are advertied in the UK, a govern-

ment health warning provided by the Financial Service Athority

(FSA) ie a reminder that [t]he vale o invetment may all a well

a rie Bt eller are oten not o catio when it come to oer-

ing carbon credit, prompting the FSA to ie a actheet with the

trapline: Find ot why yo hold be wary abot inveting in the

carbon credit market (Financial Service Athority 2011) It draw at-tention to ncrplo alepeople who call ot o the ble, oering

carbon credit a the new big thing in commodity trading, claiming

that a indtrie now have to oet their emiion and govern-

ment i ocing on green development thi i an ever growing

market

The rpriing thing abot the warning i not o mch that it draw

attention to carbon rad (which ha been prevalent in recent

year), bt that the langage choen by the radter cloely ech-

oe many o the claim made by the government, binee,non-governmental organiation and academic that have pro-

moted carbon trading (Deloitte, 2010; Chan, 2010) The idea

behind the cheme i that a market i created to pt a price

on carbon, which i a way to internalie the economic cot

o climate change onto company balance heet A limit

on greenhoe ga emiion grow, prred on by inter-

nationally binding emiion limit, the pply o carbon

hold become carcer, phing price p The reltant

carbon price will act a an incentive or binee to

invet in cleaner technology Mot invetment bank and

carbon market pecialit held omething akin to thi a-

mption, a can be ee in Figre 1, which illtrate their

orecat or the tre price o carbon


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186 Development Dialogue September 2012 | What Next Volume III | Climate, Development and Equity

It ha not worked thi way in practice, however The optimitic orecat

in Figre 1 were made in mid to late 2009, jt month ater the carbon

price had halved (rom a peak o 31) Since then, it ha crahed again,

with permit rom the Eropean Union Emiion Trading Sytem (EU

ETS), which accont or over 80 per cent o the global market, alling

below 650 each Thi led a enior climate change advior to Shell oil

company to warn o a vicio downward piral, while the CEO o

German tility EON, one o the larget player in the cheme, wa even

more blnt: The ETS i bt, it dead, he aid, adding that it gave no

ignal or low-carbon invetment (Krkowka 2012)

How cold the theorit and market practitioner have got it o wrong?

In ggeting that a carbon price hold incentivie clean invetment,

and that a market i the mot efcient mean to allocate that pr ice, pro-ponent o carbon trading have ollowed a narrowly economitic view

o the climate change problem, taking little accont o the complexitie

o commodity-ormation, or the reglar trmping o environmental

goal by competition and trade policy in the allocation and rle-etting

arond carbon allowance

Thi article oer a dierent accont, arging that the collape in car-

bon price i ymptomatic o deeper aw in the attempt to commodiy

carbon a a oltion to climate change The rt two ection look at

the two main type o carbon trading - cap and trade and oetting

An otline o the perormance o the EU ETS, the larget cap and

trade market, how that the cheme ha ailed to place any meaningl

2005 2006 2008 2009 2010 2012 2013 2015 2016 2017 2019 2020 2021

45

16,1 /t

30,4 /t

42 /t

33,6 /t

25,3 /t

19,2 /t

18,4 /t15,5 /t

13,3 /t

40

35

30

25

20

15

10

5

0

EUA spot Bluenext Mean Mean + standard deviation Mean standard deviation

Figure 1. Trend oprice orecasts or

European emissionallowances.

(Prada, Barbris and

Tignol, 2010: 35).


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limit on emiion, intead generating a rpl o permit to pollte

that ha collaped the carbon price The vat majority o carbon permit

have been handed ot or ree, with companie paing on the cota thogh they had paid or them The combined prot rom thi ac-

conting trick, pl the ale o rpl permit, mean that the ETS ha

mainly erved a a bidy cheme or indtry and the power ector

The econd part then look at the Clean Development Mechanim

(CDM), the world larget oetting cheme, which wa created by the

1997 Kyoto Protocol Carbon oet are created when a company p-

poedly remove or redce greenhoe ga emiion It receive credit

or thi activity, which can be old to pollter who want permiion to

pollte more One activity i intended to compenate or the other, bt

the bai pon which credit are created i a conteractal that i nearly

impoible to meare: Oet are an imaginary commodity created by

dedcting what yo hope happen rom what yo ge wold have hap-

pened (Welch, 2007) Moreover, the invetment ncertainty rronding

carbon price ha contribted to the act that carbon credit rarely drive

invetment, bt generally bidie project that wold have happened re-

gardle Economie o cale, moreover, have tended to concentrate thee

project arond a handl o heavy indtrie and, increaingly, arond

ntainable orm o power generation throwing a lieline to oilel inratrctre in both developed and developing contrie

The third ection look at how carbon i traded Althogh price have

declined, market volme are growing modetly a a relt o increaed

hedging againt other commoditie and nancial peclation The

emergence o an increaingly complex trading inratrctre i the tre

governance challenge that carbon market poe: concentrating power in

the hand o a mall nmber o nancial ector actor and nancialied

tilitie, while bordinating invetment deciion on clean development

to trategie that remain baed on oil el extraction and trading

The orth, and nal, ection o the article briey ketche an alterna-

tive ramework that cold tand in place o the varying objective o

carbon trading

Cap and trade: the EU Emissions Trading System

Under cap and trade cheme, government or intergovernmental bod-

ie et an overall legal limit on emiion in a certain time period (a

cap) and then grant indtrie a certain nmber o licene to pollte(carbon permit or emiion allowance) Companie that do not

meet their cap can by permit rom other that have a rpl (a

trade) The idea i that a carcity o permit to pollte hold encorage

The vast majority ocarbon permits havebeen handed out or

ree, with companiespassing on the costsas though they hadpaid or them. The

combined protsrom this accounting

trick, plus the sales osurplus permits, mean

that the EmissionsTrading System hasmainly served as a

subsidy scheme orindustry and the

power sector.


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For six o the seven

years in which theEU ETS has beenin operation, the

number o allowancescirculating has

exceeded the cap.In other words, the

cap did not capanything and the price

collapsed.

their price to rie; and the relting additional cot to indtry and

power prodcer hold then encorage them to pollte le

The Eropean Union Emiion Trading Sytem (EU ETS) i by ar the

larget ch cheme, acconting or 81 per cent o the global carbon

market, and covering almot hal o the EU CO emiion (Kooy

and Gigon, 2012: 17)1 It et an overall legal limit on the CO emi-

ion o over 11,000 power tation, actorie and renerie, and ince

Janary 2012 ha alo inclded CO emiion rom ight between

Eropean contrie, a well a into and ot o the EU Each intallation

covered by the cheme receive or ree, or by, permit to pollte

called Eropean Union Allowance (EUA)

For ix o the even year in which the EU ETS ha been in opera-

tion, the nmber o allowance circlating ha exceeded the cap The

rt phae o the cheme, which ran rom 2005 to 2007, aw too many

permit handed ot, with an overall rpl o abot 4 per cent o the

total emiion covered by the cheme2 In other word, the cap did not

cap anything and the price collaped

A imilar problem i being repeated in the econd phae o the cheme

(2008-2012), a the combined eect o the economic downtrn and gen-ero proviion or the prchae o oet Althogh the abolte gre

how EU emiion declining by 8 per cent ince 2005, according to the

Eropean Commiion it reqire a coniderable leap o aith to claim

thi decline a being caed by the cheme (Eropean Commiion 2011)

In part, the all i part o a trend toward indtrial otorcing otide o

Erope Thi pre-date emiion trading and i driven mainly by labor

market actor and trade policy (Peter et al, 2011: 3, 5)

It alo reect alling prodction a a relt o the Eropean Union

economic difcltie ince 2008 Allocation nder the ETS were madeon the amption that Eropean economie wold keep growing Bt

a receion ollowed by economic tagnation ha redced otpt and

power conmption, leaving companie with a rpl o permit Since

thee were mainly given ot or ree, the net eect i directly oppoite

to the cheme theoretical intention: pollter can delay taking action

by cahing in nwanted permit, while the over-pply mean that the

price ignal that i meant to aect change ha been netered

1 The EU ETS covers 30 countries: the 27 members o the European Union, plusNorway, Iceland and Lichtenstein. Negotiations are underway or Switzerland to jointhe scheme (European Council, 2010). The scheme includes most o the largest single,static emissions sources, including power and heat generation, oil reneries, iron andsteel, pulp and paper, cement, lime and glass production.

2 The 2005-2007 surplus ran to 267 MtCO2e (Megatonnes Carbon Dioxide Equivalent,the internationally recognised measure o greenhouse gas emissions).


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The latet data, or 2011, clearly bear thi ot Emiion or ector

covered by the cheme dropped by 24 per cent over the year, which

the Eropean Commiion heralded a a good relt [which] howthat the ETS i delivering cot-eective emiion redction (Lewi

and Chetney, 2012) For that claim to be tre, however, it wold need

to etablih both that companie involved in the cheme were bying

permit to cover a hortall, and that the cot o thee permit wa -

ciently high to aect operational and, ltimately, invetment deciion

The ame Commiion gre reveal a 900 million rpl in permit

(o ar) in the econd phae o the ETS, which mean that a ignicant

qantity o permit will be carr ied over into the pot-2013 period

Meanwhile, carbon price collaped to their lowet-ever level in 2011,

ending the year at arond 8 per tonne Invetor were blnt in their

aement: The EU ETS wa expected to pport emiion redction

by catalying innovation and driving invetment in low carbon ol-

tion Thi i not happening (Mrray, 2012)3

The inclion o carbon oet in the EU ETS (and almot all other

exiting or planned cheme) ha componded thee problem While cap

and trade in theory limit the availability o polltion permit to trading

between pollter, oet project are a licene to print new, even cheaperand le reglated one I all o the oet credit legally available or e

in the econd phae o the EU ETS were taken p, thee wold more

than cancel ot any cap on emiion (National Adit Ofce, 2009: 19)

In practice, the cheme ha a rpl o carbon permit even withot the

e o oet, o many companie will bank credit or e at a later date,

meaning that no dometic redction will be needed ntil at leat 2018

(Morri, 2011: 16) Mot o thee oet are ed by larger intallation,

three-qarter o which actally had a rpl o permit to tart with

(Elworth, Worthington, Bick and Craton, 2011; Trotignon, 2011) Withprice lmping, there ha even been a marked increae in the e o oet

de, in part, to the act that they remain cheaper than EUA, bt alo

reecting a rh to e credit rom controverial CDM indtrial ga

project, which the EU climate action commiioner, Connie Hedegaard,

admit have a total lack o environmental integrity (Carrington, 2010)

Thee will no longer be eligible or e in the EU cheme ater April 2013

Once the overpply o permit and the glt o oet credit are taken into

accont, Eropean Commiion gre gget that there cold be p to24 billion rpl emiion allowance in the cheme over the 2008-2020

period (Point Carbon 2012)

3 See Calel and Dechezlepretre (2012) or a statistical analysis backing up the claim thatEU ETS has ailed to induce shits to low-carbon technology.


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Polluter subsidies

The EU ETS ha alo acted a a bidy cheme or pollter, with the

allocation o permit to pollte more cloely reecting competition

policy than environmental concern

A two-tep proce ha een pollter benet in dierent way Energy-

intenive indtry ha rotinely been given extremely genero alloca-

tion o permit a trctral rpl o between 20 and 30 per cent, in

the cae o the teel ector The vale o thi over-allocation to indtry

in phae II o the ETS wa etimated (in 2010) at 65 billion, althogh

the evental gre i likely to be a bit lower, depending pon how

many o the rpl permit were actally old beore a rther collapein carbon price (Morri and Worthington, 2010: 26)

Thee nearned bidie or indtry have been achieved by etting

relatively more tringent cap in the power ector, on the amption

that it i not particlarly expoed to international competition and can

imply pa on the cot o allowance to electricity conmer In o

doing, the power ector win too and win big In paing throgh

to conmer the cot o allowance that were handed ot or ree, thetilitie companie gained an etimated 19 billion in windall prot

or phae I, and tand to gain an etimated 23 to 71 billion or phae II

o the ETS (althogh the collape o the carbon price may redce thee

gre below the 20 billion mark) (Ellerman, Convery and Perthi,

2010: 326; Point Carbon Adviory Service, 2008)4 Rle governing

the inclion o new entrant to the cheme alo relted in genero

award o ree certicate or hard lignite plant, which ha contribted

ignicantly to a dah or coal in German power prodction (Pahle,

Fan and Schill, 2011: 12)

4 See also Sijm, Neuho and Chen (2006) or evidence that electricity generatorswere able to generate windall prots by passing through opportunity costs. A recentassessment o the German electricity sector suggests that the ve largest companiesmay have beneted to the tune o 40 billion (Hermann et al., 2010).

Rules governing theinclusion o new

entrants to the schemealso resulted in generousaward o ree certicates

or hard lignite plants,which has contributedsignicantly to a dash

or coal in Germanpower production.

The Bechatw lignite-redpower station in Poland.

placidcasual(f

ickr)


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Depite repeated claim rom energy-intenive manactring ind-

trie that they cold not pa the cot o emiion allowance throgh

to prodct price, thi very ame trick ha alo helped manactringcompanie gain nearned prot rom the cheme Econometric analy-

i by CE Delt ond that oil el renerie and the iron and teel

ector rotinely paed on the entire notional cot o EUA which

they received or ree to conmer The windall prot received by

thee ector in the rt phae o the cheme were etimated at 14

billion (bringing the total bidy, inclding over-allocated permit, to

over 20 billion) (Bryn et al, 2010)

The third phae o the ETS will contine to ee ignicant bidie paid

to indtry, depite the actioning o permit in the power ector Indtry

lobbying ha relted in over three-qarter o manactring receiving

ree permit, which cold yield at leat 7 billion in windall revene

annally Energy companie ccelly lobbied or an etimated 48 bil-

lion in bidie, motly or carbon captre and torage (CCS, a cover or

new coal plant) In addition, the Eropean Commiion i reviewing tate

aid rle with a view to granting direct nancial bidie to companie

claiming that the ETS damage their competitivene (Reye, 2012)

Carbon osets: The Clean Development MechanismCarbon oetting i baed on emiion-aving project that are cre-

ated to compenate or contined polltion in indtrialied contr ie

A een above, oetting ally rn in parallel with cap and trade

cheme and generate credit that allow companie to pollte above

the et limit By ar the larget oet cheme i the Clean Development

Mechanim, which wa etablihed to give rich contrie exibility

in delivering their emiion redction obligation nder the Kyoto

Protocol The CDM ha over 4,000 project regitered to date, with a

imilar nmber awaiting approval (UNEP Rioe, 2012)

The global carbon market wa worth us$176 billion in 2011, althogh

the dicrepancy between thi headline market vale and Clean Devel-

opment Mechanim nancial ow ha contined to increae (Kooy

and Gigon, 2012)5 In 2011, the primary trade in CDM oet wa

worth us$09 billion, it lowet level ince the Kyoto Protocol entered

into orce in 2005 (ee Figre 2)6

5 The headline gure calculates the Gross Nominal Value (GNV) o carbon derivatives,

which account or approximately 85 per cent o all trades, at the price that theyare expected to be worth on their maturity date and assuming the contracts are allullled. This is likely to be an overestimate.

6 The primary market refects the overall value o credits at the point o their initial sale.It may be that this gure is higher than the actual sales, though, because it includesoptions or the sale o credits that may or may not materialise in uture.


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Figure 2. The rise and all o the CDM. Value o primary markettransactions, 2005-2011. Data source: World Bank.

In term o geographical cope, over 75 per cent o regitered CDM

project are in jt or contrie, with 48 per cent in China and 20

per cent in India Meared by the nmber o credit ied, China i

even more dominant, acconting or 64 per cent o the market (UNEP

Rioe, 2012) By contrat, the 48 leat developed contrie accont

or jt 1 per cent o project and 06 per cent o credit ied; while

b-Saharan Arica (exclding Soth Arica) hot 1 per cent o project

and accont or 15 per cent o credit ied (hal o which went toproject in Nigeria)

The main explanation or thee diparitie i economic The larg-

et global invetor direct their eort to the mot protable project

Economie o cale invariably point to the larger project, and ince

oet repreent avoided emiion, thee involve heavy indtrie or

power ector project in contrie where grid energy already regiter

ignicant greenhoe ga emiion Sch project opportnitie rarely

exit in b-Saharan Arica and LDC, which i not dirty enogh ordoe not conme enogh to compete ccelly within the CDM

When exception exit, a in Nigeria, thee generally relate to oil el

extraction

2005 2006 2007

2008 2009 2010

2011

Primary CDM market

US$(billions)

0

1

23

4

5

6

7

8


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Case study: Carbon credits ordestructive gas faring in Nigeria

There can be ew clearer example o the pervere incentive that

the CDM pt in place than the ga tiliation project in the Niger

Delta Thee inclde Kwale, a ite rn by the Nigerian Agip Oil

Company, which expect to receive arond us$180 million in oet

credit by the end o 2016, and the Pan Ocean Ga Utilization Project,

the larget regitered CDM project in Arica, which anticipate over

us$300 million in credit by 2020 Shell and Chevron crrently have

imilar project nder development

The Niger Delta project are baed arond claim to redce ga aring,an activity that ha already been jdged to be illegal by the Nigerian

High Cort Thi mean that carbon credit will reward companie or

their ailre to abide by the law Frthermore, while the project claim a

redction in ga aring, cloer analyi gget that they mainly proce

liqeed natral ga (LNG) and other gae that were not aociated

with crde oil prodction in the rt place (Ooka, 2009: 92)

Sch project rik reinorcing oil el dependency at both end o the

CDM pipe: the Nigerian Agip Oil company i co-owned by Eni, the

Italian tate oil company, which ell credit back to Eni renerie in Italy

The main byer o carbon credit rom the Pan Ocean project i Vatten-

all, one o the larget operator o coal-red power plant in Erope

The impossibility o additionality

Oetting cont claimed redction in emiion in developing contrie

a part o the actal ct promied by rich, indtrialied contrie amethod that ret on a awed additionality concept A baeline amp-

tion i made abot what the tre wold have held withot the project,

the CDM i amed to have altered that tre, and credit are awarded

a a relt Proving ch claim i virtally impoible, with the CDM

proce encoraging technical expert to ndertake a relentle earch

or ar-etched eqivalence among the mot ditant activitie (Lohmann,

2009b: 181) In reality, ch complex procee a methane redction, oret

carbon eqetration and conteractal hit in grid-connected energy

prodction cannot be compared and the ytem i eaily maniplated

Project are aeed ing the CDM additionality tool, which reqire

them to pa either a barrier analyi to identiy actor that might oth-

erwie prevent the project rom taking place (ch a a lack o in-contry


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experience with a particlar technology, or ncertainty rronding

electricity tari), or an invetment analyi to how that the project i

not nancially viable withot CDM revene Thi tool wa introdcedto improve the objectivity o additionality teting, bt it actally rea-

rm the impoibility o adeqately aeing project developer claim

It i generally poible to ininate rik that reglation may change

in tre, while claim that project deploy technologie that are not

common practice within a contry have been hown to be highly mal-

leable Either way, a Haya point ot, it i ar eaier to how that barrier

exit than to prove that thee are likely to have prevented the project

rom going orward withot the CDM, and the barrier analyi tet the

ormer claim rather than the latter (Haya, 2010: 34)

There i no way to etablih caality between barrier and additional-

ity, in other word, althogh there i coniderable reaon to believe that

thee are not actor determining invetment deciion To cite only the

mot obvio example, almot a third o hydroelectric dam applying

or CDM credit were already completed at the time o regitration and

almot all hydro project were already nder contrction while CDM

credit were being applied or (Haya, 2007: 3)

Invetment analyi i conidered to have the higher potential or beingaccrate (Haya, 2010: 33) The baic premie i that an accrate ae-

ment can be made o the predicted cot and revene accring rom

a project, etablihing a ingle benchmark gre that repreent the

prot that invetor can expect to receive in retrn or their project

nding In the cae o a wind arm, or example, thi wold inclde

otgoing rom the cot o manactre, land prchae, operation and

maintenance, taxe, and the cot o ervicing the interet on loan taken

ot againt the bilding cot I a project i not a nancially attrac-

tive propect or invetor once thee cot are et againt the expected

revene rom the ale o power, then it may be conidered eligible orCDM credit to help it to overcome thi hrdle Thi i ally dened

in term o an anticipated internal rate o retrn (IRR)

It i impoible to accrately determine a ingle benchmark, however,

ince there i alway a range o plaible conteractal amption

A one leading textbook on corporate nance warn: Do not trt

anyone who claim to know what retrn invetor expect (Brealey and

Myer, 2003:160, citing Haya, 2010: 45)7 Project developer have ex-

ibility in how they tate a broad range o variable, inclding the coto borrowing money (related both to the perceived creditworthine o

the company rnning the project and the contry rik), the percentage

7 In practice, as Haya convincingly shows, ew projects even achieve the stableassumptions set out in the ideal case above.


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o money borrowed, the anticipated rate o depreciation in the vale o

the aet and it implication or tax rate, how long the plant will rn

or, how oten it will be generating electricity at ll capacity (the plantload actor), variability in renewable tari, and o on Even in the bet

cae cenario, ch a a wind project plant with contractally agreed

bild cot and a long-term power prchae agreement in place, there

i a hge variability in potential invetment retrn In act, the range o

legitimate amption that can be loaded into the invetment analyi i

alway greater than the dierence that carbon credit are likely to make

to the invetment deciion It i an open ecret that thee analye are

ndamentally maniplable, a carbon market participant will admit

in ngarded moment In India, or example, a groping o invetor,

verier, project developer and even the Chair o the national CDM

athority conceded to US conlate ofcial that all Indian project ail

to meet the additionality in invetment criteria and none hold qaliy

or carbon credit (US Conlate Mmbai, 2008)

CDM reorm: better governance, same problems

Once thi memo wa revealed by WikiLeak, proponent o the CDM

were qick to claim that improvement in governance have already

improved the mechanim integrity, with rther reorm till to ollow

on completion o a high-level Policy Dialoge8

There are certainly plenty o governance ailing that need addreing9

Revolving door between Deignated National Athoritie (local regla-

tor in the hot contry), Deignated Operational Entitie (DOE, adit-

ing rm accredited by the Exective Board to ae whether project

meet the reqired tandard to be regitered) and project developer have

led to conict o interet (Newell, 2012; Newell and Phillip, 2011) The

oligarchy o large DOE that do mot o the validation reqired to reg-

iter project, and verication reqired prior to credit being ied, haa poor record The three main rm have all previoly been pended

or ctting corner in their work, inclding ailing to aign adeqately

trained ta, condct independent review and engage in internal adit,

and or veriying project depite dobt whether they were additional

(Schapiro, 2010) The act that thee DOE are paid by project participant

themelve pt a downward prere on tandard

Local takeholder conltation are oten rdimentary, poorly adver-

tied and inacceible, and take place ater the project i already nder

way or, in a nmber o reported cae, did not happen at all (CIELand Earthjtice, 2011; Newell and Phillip, 2011) Local participant

8 http://www.cdmpolicydialogue.org/

9 The ollowing section draws on orthcoming mapping and assessment o CDMgovernance, conducted jointly with Payal Parekh.

In India a grouping o

investors, veriers,project developers and

even the Chair o thenational CDM authority

conceded to US consulateocials that all Indian

projects ail to meetthe additionality in

investment criteria andnone should qualiy or

carbon credits.


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comment are generally obervational, with little evidence that they

have aected how project are implemented There i not even any

legal proviion to withdraw project i hman right abe and localpolltion impact are proven, a in the notorio cae o a palm oil plan-

tation in Hondra, which wa regitered depite the reported mrder

o 23 local armer who tr ied to recover land that they aid wa illegally

old to the project owner (Nelen, 2011)

The CDM Exective Board i bject to political conict o inter-

et, with board member (who ofcially erve in a peronal capacity)

imltaneoly working a climate negotiator and repreentative o

national DNA (taked with encoraging new CDM project within

contrie or prchaing credit) Statitical analyi ha hown that a

project chance o approval increae i there i a board member rom

the hot contry (Fle, Michaelowa and Michaelowa, 2008)

Some o thee ailing may be addreed by the Policy Dialoge, al-

thogh it hold not atomatically be amed that the relt will im-

prove the overall governance o the cheme The crrent arrangement

exit, in large part, becae the reglator and negotiator who created

and manage the CDM have a veted interet in encoraging ever more

project to pa throgh it pipeline Project developer and other bi-ne lobbyit are now advocating reorm ch a the at-track ap-

proval o certain project type that wold lead to even ewer check on

the environmental integrity or ocial impact o project

The oc on improving governance, moreover, doe nothing to addre

the central problem with oetting, a can be een clearly i we retrn

to the example o India non-additional project Since 2008, when

the WikiLeak memo wa written, the market ndamental nderpin-

ning the CDM have deteriorated: carbon credit price have collaped,

tre price projection have been revied harply downward, and theexperience o thi downtrn ha encoraged invetor to be more ca-

tio making it even le likely that CDM revene determine invet-

ment deciion (Kooy and Gigon, 2012) Any invetor who backed a

project today on the grond that the CDM revene wa the key to it

viability wold qickly nd themelve ot o bine

Mobilising nance, perverse incentives and subsidies

The ignicance o thi lack o additionality really come to the ore when

claim that the CDM traner technology, or i a mean to leverage evenlarger m rom the private ector, are aeed Once it i ndertood

that the CDM i motly bidiing exiting plan, rather than driving new

invetment, it cannot accrately be aid to drive technology traner either

althogh attempt to tdy the cheme eect in thi area identiy an


14/26


important exception In 2008, the United Nation Framework Convention

on Climate Change oght to meare the extent o CDM-related tran-

er by looking at how many companie reported the e o eqipmentor knowledge not previoly available in the hot contry or the CDM

project (UNFCCC Regitration and Iance Unit, 2008) Indtrial ga

project came ot particlarly well in thi tdy However, it ha been clearly

hown that, in the cae o the detrction o HFC-23 (a potent greenhoe

ga ed a a rerigerant), a traightorward pre-exiting technology wa

tranerred in a maively inefcient manner, potentially generating 4,6

billion (us$6,3 billion) in oet credit or intalling lter in 17 indtrial

ite at a cot to the companie o le than 100 million (us$138 million)

(Wara, 2007) The overall relt, moreover, wa that the CDM created a

pervere incentive to increae the prodction o HFC-23 in order to gain

more oet credit (Schneider, 2011)More generally, the CDM ha alo

been ond to have provided incentive to retard the proce o creating

developing contrie policy in order to preerve credit eligibility (Drieen

and Popp, 2010)

Likewie, claim that the CDM ha leveraged large invetment in clean

technology all at the hrdle o awed and impoible additionality A

2011 World Bank report to the G20 on Mobilizing Climate Finance

claimed that oet market throgh the Clean Development Mecha-nim have relted in us$27 billion in ow to developing contrie in

the pat 9 year, catalying low carbon invetment o us$100 billion

(World Bank, 2011: 6) In act, the us$27 billion gre i the vale o

tranaction in the primary CDM market between 2002 and 2010

the etimated vale that the credit will achieve when they are rt

old (World Bank, 2011: 26) In the abence o additionality, thi i not

money mobilied by the CDM bt repreent, rather, the cale o the

potential bidie that the CDM i oering to companie to do what,

in all likelihood, mot wold have done anyway

The impreive-onding us$100 billion gre i ed to jtiy call to

cale p carbon market Yet a cloer look how thi to be mirepre-

ented The Bank goe on to explain that, a the blk o tranaction are

orward prchae agreement with payment on delivery, actal nancial

ow throgh the CDM have actally been lower, abot $54 billion

throgh 2010 (World Bank, 2011, 27)

Trading carbon

To rther nravel thee gre, it i worth looking a little more cloelyat how carbon i actally traded The carbon market ha both a primary

and a econdary market Primary reer to the rt time that a permit or

credit i old Mot primary credit (pCER), or example, are old in ad-

vance o actally being ied Thi i called orward elling, and typically

Once it is understoodthat the CDM is mostlysubsidising existing

plans, rather thandriving new investment,it cannot accurately besaid to drive technologytranser.


15/26


involve the project developer igning an Emiion Redction Prchae

Agreement with a company, government or development bank The rt

ale o the CER can typically involve a contract that agree a xed priceor a pecied nmber o credit, which are expected to be delivered by

a certain date For the eller, the advantage i that p-ront capital i made

available, rather than the eller having to wait ntil ater the project i p

and rnning to gain the carbon revene

Thi type o arrangement ha increaingly become a loing propoition

or byer, however A carbon price have declined, byer are nding

themelve locked into prchaing oet at a rate way above their vale

in the crrent market In repone, many byer are now eeking to

renegotiate or dmp thee contract by whatever mean poible Thi

practice ha been enabled by the act that, otide o HFC or N2O

project, mot CDM project have delivered ewer credit than initially

pecied, or have ond that credit iance i lower than initially

expected providing legal mean or byer to break contract and

nd credit at a cheaper rate elewhere, or renegotiate xed-price into

oating-price contract (Kooy and Gigon, 2012: 51)

Where thi i not poible, the byer have reorted to other mean The

World Bank report that Some large byer alo reportedly ed theirize and contractal poition to impoe ERPA renegotiation Having

hired the Deignated Operational Entity (DOE) themelve, thee byer

threatened to delay verication or cancel the DOE contract Alternatively,

by being the ole CDM ocal point in certain project, they renegotiated

contract baed on the act that the project CER wold only be tran-

erred pon their ole reqet, th leaving eller with no choice other

than to accept new contractal term (Kooy and Gigon, 2012: 54)

New contract are being negotiated with increaingly exible term, mean-

while The majority o pCER are now old a option, meaning that thebyer prchae the option to by the credit at an agreed price at a later

date Thi traner rik rom the byer to the eller, making it even le

likely that any invetor wold take a chance on a CDM project i it were

not merely bidiing exiting activitie (Kooy and Gigon, 2012: 49)

At the ame time, there have been ignicant change in who i trading

carbon ince the tart o the cheme The CDM market wa pioneered

by the World Bank and government prchaer, with ew private inve-

tor taking an interet ntil ater Ria ratied the Kyoto Protocol in2004, which broght that agreement into orce (Alberola and Stephan,

2012: 9) The rt private ector involvement came rom botiqe carbon

pecialit, ch a EcoSecritie, which had advied government on how


16/26


REDD+ pt a cah vale on oret on the amption that thi will relt in their

preervation and, in trn, a carbon aving1 The cheme ha been widely criticied,

however, on the grond that it wold mainly benet corporate invetor bt damage

the livelihood and threaten the cltre o indigeno people and other oret-

dependent commnitie (Hall and Zacne, 2010) Alternative approache to addreingdeoretation emphaie improving oret governance, in particlar by pporting the

territorial right o indigeno people and oret commnitie Thee are ometime

cat a a replacement or REDD+, and in other cae a a radical reorm o the cr-

rent REDD+ ramework (Boa, 2011; Rainoret Fondation, 2012)

The cope o the REDD+ propoal nder the UNFCCC ha already raied environ-

mental concern, ince the propoal ollow the Food and Agricltre Organiation

practice o dening oret o broadly a to inclde plantation (UNFCCC, 2010)

There i alo a rik that baeline or acconting avoided deoretation cold be et o

high that payment will be triggered or increae in deoretation, a wa the cae withthe aghip bilateral REDD agreement between Norway and Gyana (Lang, 2009)

Early experience o REDD project in Indoneia, meanwhile, have hown thee

to be concentrated on abandoned logging conceion and national park, a long

way rom the deoretation rontier In a context where the tate claim ownerhip

o the majority o oreted land, treating the 50-70 million oret commnitie

and indigeno people a illegal qatter, the implementation o thee cheme

i exacerbating land conict (Fried, 2012)

One o the mot contentio debate on REDD+ relate to how it will be nded

The debate centre on whether pblic or private orce will be prevalent, and

the extent to which it will generate carbon credit, and it i beet by lack o clarity

Althogh mot REDD nding to date ha been provided by the Norwegian ov-

ereign wealth nd (the contry oil revene), the jmp-tarting o a oret carbon

market remain an important element in REDD+ readine activitie (Horner,

1 REDD+ reers to proposals under the UNFCCC that go beyond REDD in making broader proposalsor the Conservation o orest carbon stocks; Sustainable management o orest; [and] Enhancement oorest carbon stocks (UNFCCC, 2011). REDD+ reers to UNFCCC-related proposals and REDD reers

to national and bilateral schemes and pilots that are not necessarily linked to the multilateral climatenegotiations.

Reducing Emissions rom Deorestationand Forest Degradation (REDD)


17/26


2011) Thi i reected in the deign o pilot project already nder way For ex-

ample, the Intitte or Global Environmental Strategie ha created a REDD+databae with detail o 25 project (a o September 2011) Twenty-one o thee

conider the generation o carbon credit a integral to the project nancing,

three are conidering elling oet at a later date i a oret carbon market

emerge, and only one had not yet conidered oetting (IGES, 2011)

In common with the CDM, the complex acconting procedre involved in

commodiying oret tend to divert reorce rom oretry initiative to carbon

conting Initial etimate and comparion with the CDM wold gget

that 30 per cent or le o the cot o a REDD credit wold nd it way to

the project itel, while a little a 3 per cent may nd it way to the prodcer(Carbon Retirement, 2009: 7; Mnden Project, 2011: 8) The ret o the vale

wold be aborbed by taxe, conltancy and brokerage ee and adminitra-

tion cot Underpinning thi trctre i the likely emergence o monopony

power an imbalanced market with many eller bt ew byer trengthen-

ing the hand o nancial intermediarie, while enring that ew benet ow

to the prodcer o REDD project, the commnitie that live within them or

the contrie where they are located (Mnden Project, 2011: 11) In a igni-

cant, market-baed critiqe o REDD propoal, the Mnden Project alo point

ot that oret carbon commoditie are o poorly dened a to be nacceptablyriky a a bai or trading (2011: 4)

With carbon market beet by a maive overpply, REDD i not crrently

an attractive propoition or the majority o private carbon market invetor,

a a relt o which bilateral and mltilateral pblic nding i taking the lead

in timlating new invetment and carbon acconting methodologie Aide

rom the Norwegian contribtion, which accont or two-third o all money

pledged to REDD-dedicated climate nd, the major donor contrie are A-

tralia, the United State and Germany Atralia and Germany have ollowed the

Norwegian model in creating bilateral nd, while the larget mltilateral nd notably the Foret Invetment Program are coordinated by the World Bank

(Caravani, Nakhooda and Schalatek, 2011) A the market develop, it i likely that

pblic invetment in thi phere will ollow the broader trend in development

and climate nance toward pooled pblic-private nd, hielding them rom

pblic crtiny (Bracking, 2012)

The role o capital market, meanwhile, i ar rom retricted to carbon trad-

ing with ome invetor and conervation NGO now propoing new nancial

intrment, notably oret bond, that eek to diveriy the orce o revenebeyond carbon or ecoytem ervice credit (Cranord, Parker and Trivedi, 2011)


18/26


While ch propoal may tackle ome o the acconting ncertaintie poed by

oetting, they do nothing to addre the ndamental problem o the nanciali-ation o tropical oret, ch a the ailre o REDD+ to addre the real driver

o deoretation (or example, large-cale monocltre plantation, indtrial-cale

cattle ranching, mining and oil extraction) or the threat that REDD+ poe to the

territorial right and cltre o indigeno people and oret commnitie

Boas, Hallie (ed) (2011), No REDD papers volume 1,Portland: No REDD Platorm. http://climatevoices.les.

wordpress.com/2011/11/noreddpapers_download.pdBracking, Sarah (2012), How do Investors ValueEnvironmental Harm/Care? Private Equity Funds,Development Finance Institutions and the PartialFinancialization o Nature-based Industries,Development and Change, Vol. 43, No. 1: 271-93.

Caravani, Alice, Smita Nakhooda and LianeSchalatek (2011), REDD-plus Finance, Washington DC:Heinrich Bll Stitung North America and OverseasDevelopment Institute. http://www.odi.org.uk/resources/docs/7472.pd

Carbon Retirement (2009), The eciency ocarbon ofsetting through the Clean Development

Mechanism, London: Carbon Retirement.

Cranord, Matthew, Charlie Parker and MandarTrivedi (2011), Understanding Forest Bonds, Oxord:Global Canopy Programme. http://www.globalcanopy.org/sites/deault/les/UnderstandingForestBonds_0.pd

Fried, Stephanie (2012), Osets in the Contexto Forest Crime, Carbon Crime and Corruption:A workshop or regulators and law enorcement,

Friends o the Earth USA, Berkeley, 4 April.

Hall, Ronnie and Joseph Zacune (2010), REDD: therealities in black and white, Amsterdam: Friendso the Earth International. http://www.oei.org/en/resources/publications/pds/2010/redd-the-realities-in-black-and-white

Horner, Kate (2011), State o the orest carbon market:A critical perspective, Washington DC, Friends o theEarth USA. http://libcloud.s3.amazonaws.com/93/a1/9/872/State_o_the_orest_carbon_market_a_critical_perspective_2011.pd

Institute or Global Environmental Strategies (2011),REDD+ Database. http://redd-database.iges.or.jp/

redd/Lang, Chris (2009), Guyana could be paid orincreasing deorestation: Jagdeo, REDD Monitor, 24November. http://www.redd-monitor.org/2009/11/24/guyana-could-be-paid-or-increasing-deorestation-jagdeo/Lang

Munden Project (2011), REDD and Forest Carbon:Market-Based Critique and Recommendations, NewYork: Munden Project. http://www.redd-monitor.org/wordpress/wp-content/uploads/2011/03/Munden-Project-2011-REDD-AND-FOREST-CARBON-A-Critique-by-the-Market.pd

Rainorest Foundation UK et al. (2012), Civil SocietySubmission to the AWG-LCA, Views on modalitiesand procedures or nancing results-based actions

and considering activities related to decision 1/C.P.16,

paragraphs 68, 69, 70 and 72. http://www.ern.org/sites/ern.org/les/Civil%20Society%20LCA%20REDD%2B%20submission.pd

United Nations Framework Convention on ClimateChange (2010), Ad Hoc Working Group on Long-term Cooperative Action under the Conventionnegotiating text note by the secretariat, FCCC/

AWGLCA/2010/14. http://unccc.int/resource/docs/2010/awglca12/eng/14.pd

United Nations Framework Convention on ClimateChange (2011), Outcome o the work o the Ad HocWorking Group on long-term Cooperative Actionunder the Convention. http://unccc.int/les/meetings/cop_16/application/pd/cop16_lca.pd

Reerences


19/26


to et p Deignated National Athoritie (DNA) in the rt place Their

main interet wa in developing project, in order to then reell the relt-

ing credit to other nancial peclator and to EU-baed companie

Ater the primary carbon market peaked in 2007, however, many o the

initial peclator were over-expoed to project that had not delivered

credit, or holding o credit whoe vale had declined a the nancial

crii kicked in Thi led to a wave o merger and retrctring, which

inclded invetment bank taking a greater take For example, Eco-

Secritie (the larget project developer and one o the world larget

byer o CER) wa taken over by JP Morgan in 2009: while the

project developer OneCarbon wa acqired by Orbeo, a joint ventre

between Socit Gnrale and the chemical giant, Rhodia, in the ame

year (Alberola and Stephan, 2012: 9)

With thee new invetor came new carbon credit prchaing trategie,

a Alberola and Stephan point ot:

Since 2008, ome invetor have preerred to prchae carbon credit

portolio, containing a complete range o already prchaed credit,

rather than nance new CDM/JI project, a proce that can take p

to three year ntil delivery (2012: 9)

Thee portolio are arranged in a growing nmber o carbon nd

private, pblic and a mix o the two (Alberola and Stephan, 2012:14) The

private ector hare o the carbon market contine to grow, however,

alongide a hit in invetment pattern Government eeking oet to

meet their Kyoto target and companie looking or compliance with

the ETS have motly contracted fcient credit or thee prpoe,

while the majority o trade now relate to hedging or the prit o

peclative gain (Alberola and Stephan, 2012: 15) A broader range o

invetment trategie ha developed too, with a growth in direct eqitytake taken in the companie (pecial prpoe vehicle) that are oten

et p a the legal entity managing project

CER/EUA wap are alo becoming increaingly common Under ch

deal, companie agree to a tre exchange o EUA (the ETS permit)

and lower-priced econdary CER (CDM credit) The amption

with ch deal i that ince thee prodct are nctionally the ame or

compliance with ETS target, there i prot to be made rom peclat-

ing on the dierence between the traded price o the two commodi-tie (Erex, 2008: 4)


20/26


In the EU market, trading ha alo become more concentrated in the

hand o a mall nmber o large nancial rm and energy compa-

nie, which rapidly expanded their market poition and inence in2011, amidt a re-ale o carbon aet a price collaped (Kooy and

Gigon, 2012: 34)

The larger energy companie have developed their own trading divi-

ion to hedge and peclate on EUA and CER Thi reect the

broader nancialiation o the energy ector, in which the leading com-

panie derive an increaing proportion o their prot rom nancial

peclation on the relative price o oil el commoditie (Kooy

and Gigon, 2012: 38) The introdction o carbon into thi mix help

energy companie to hedge the rik thee companie take when pr-

chaing energy tre, althogh it doe nothing to timlate a hit

toward renewable

Sch trategie are part o a broader trend toward more complex carbon

market trading trategie Wherea the theory o carbon trading preent

a ytem o exchange between two pollter to optimie the cot o

meeting emiion redction target, in practice the majority o the

market in operate in the ollowing way Speclator eek to prot rom

arbitrage opportnitie (analying and betting on price dierential), awell a on the bai o tatitical algorithm and model orecating how

carbon relate to the relative cot o coal and ga; oil, ga, coal, power

and weather derivative; crrency trading; and meta-analye o analyt

own expectation (Kooy and Gigon, 2012: 34; Karmali, 2008, 4)

Mot o what i traded i permit and credit, or the option to by thee

at a pecied point in the tre, which doe not yet exit (Kooy and

Gigon, 2012: 34)10

The development o ever more complex trading and peclative trate-

gie i the tre governance challenge poed by the carbon market, whichconcentrate power in the hand o a ew large nancial and energy cor-

poration It i conitent with the broader giant bow-tie trctre o

interwoven nancialied interet, where mot capital ow throgh a

tightly-knit core o intittion that traddle the nancial ector a well

a companie operating in the real economy, ch a power prodc-

er, which alo make invetment deciion baed on complex hedging

trategie and peclative gaming (Vitali, Glattelder, and Battiton, 2011)

The carbon market prodce knowledge (and ignorance) that reinorc-e thi nancialied power trctre (Lohmann, 2008) By abtracting

carbon a a tradable commodity, it rame climate change a a problem

10 Eighty-eight per cent o EUAs are transacted as utures, o which 10 per cent (andrising) are options trades.

In the EU market, tradinghas also become more

concentrated in thehands o a small number

o large nancial rms

and energy companies,which rapidly expandedtheir market positionsand infuence in 2011,

amidst a re-sale ocarbon assets as prices

collapsed.


21/26


o cot adjtment that can be managed by a market that i amed to

allocate good efciently, rather than a a hitorically embedded problem

o the dominant oil el-baed development model A thi marketha grown, it ha etablihed a whole new inratrctre and market or

nancial derivative prodct baed on validating, veriying, acconting,

rik-aement, tre-modelling and commodity hedging that hit

the rame o deciion-making abot whether and where emiion re-

dction take place into the hand o analyt whoe interet are prot

maximiation, not environmental protection or ocial well-being

Community Disempowerment Mechanism orCommodity Development Machine?

The reraming o climate change a a nancial market problem i alo

proondly diempowering or the commnitie mot aected by the

extreme o weather, ood rik and poor harvet that it cae, althogh

not or the reaon (a i ometime ggeted) that they lack acce to

carbon market No matter o capacity bilding i going to redre the

power imbalance that i introdced once addreing climate change i

redced to a qetion o nancial ow that pa throgh capital market

The developing carbon market inratrctre, moreover, render policy-

maker increaingly dea to the demand o commnitie, except inoara reitance i regitered a dirptive to market development At the

ame time, ocial and environmental vale are redced to nancial

tatement o the ocial cot o carbon or natral capital acconting

Yet thi redction o vale to price can erve to ndermine the cae or

addreing climate change, a George Monbiot point ot:

Sbject the natral world to cot-benet analyi and accontant

and tatitician will decide which part o it we can do withot All

that now need to be done to demontrate that an ecoytem canbe jnked i to how that the money to be made rom trahing it

exceed the money to be made rom preerving it (Monbiot, 2010)

Althogh pricing i not the ame a commodiying, in a neoliberal

ideological and intittional context, the one ha tended to lead to the

other, with carbon the rt o everal ecological commoditie nder

contrction The market that emerge within thi ramework are et p

to rationalie contined environmental detrction A hown above, the

overpply o carbon permit and credit ha provided indtrial bidie

or pollter, and ha ailed to incentivie cleaner invetment However,the developing vale o thi market lie in the prodction o new po-

ibilitie or commodity hedging and peclative portolio invetment

which are, in trn, held mainly by the nancial and power companie that

are at the ame time the main invetor in oil el and the indtrie

The reraming oclimate change

as a nancialmarket problem

is also prooundlydisempowering or

the communities mostaected by the extremes

o weather, food risksand poor harvests thatit causes, although not

or the reason (as is

sometimes suggested)that they lack access to

carbon markets.


22/26


reliant pon them Since thoe conventional, oil el-baed invetment

ar exceed the cale o carbon and other environmental niche market,

they alo tend to bordinate invetment deciion made in them Thatltimately aect not only private ector nance, bt alo the pblic

climate nance which, a we have een, i increaingly paing throgh

mixed nd trctred in which pblic money i deployed in accord-

ance with private capital market invetment trategie

One nal governance challenge relate to how carbon market growth i

reported, in particlar when thi i related to claim that the market mobi-

lie nance or cleaner development The World Bank State and Trend

o the Carbon Market report, the leading orce o global market data,

ha rotinely maximied the perception o a healthy market in contrat

to the detail o how thi ha been achieved In 2010, it trmpeted carbon

market growth in the EU, depite the act that a ignicant proportion o

thi increae wa the relt o radlent trading In 2012, the majority o

the carbon market growth reported by the Bank had to do with change

in how it report the gre which now captre a greater proportion

o tre option trade, even thogh the athor admit that a btantial

proportion o thee will not be exercied (Kooy and Gigon, 2012: 49)

The majority o trading, a thee report make clear, i not to comply with

Kyoto or ETS reqirement bt relate to hedging, portolio adjtment,prot taking, and arbitrage (Kooy and Gigon, 2012: 18)

Can carbon trading be xed?

One o the mot common repone to the clear evidence that car-

bon trading i not working i to gget xe that wold improve the

working o the ytem: changing rle on the banking o permit;

introdcing price oor and ceiling to control volatility; expanding

global carbon market to increae liqidity; and o on

What thee propoal have in common i an implicit amption that

carbon trading ail becae the rle have been deigned inadeqately

or have been badly applied Althogh intance o ch ailing certainly

exit, they bring no cloer to ndertanding why the ytem ha

mired o pectaclarly They dont, or example, anwer the qetion

o why o many corporation and tate phed or the inclion o

large volme o oet in carbon market, or addre actal carbon

market invetment trategie

Many carbon market reorm propoal, meanwhile, actally advocate ex-panion o carbon market and the relaxation o check on environmen-

tal integrity For example, propoed change ch a ectoral crediting,

the inclion o new ector in the Clean Development Mechanim, and

the generation o carbon credit aociated with Nationally Appropriate


23/26


Mitigation Action, wold primarily erve to increae the volme o

carbon trading11 Sch propoal are not being driven by conideration

o environmental integrity, bt by nancial interet The drive to ex-pand carbon market i being accompanied by the development o more

complex carbon prodct, deploying a variety o derivative and hedge

nd techniqe

Looked at more holitically, it i clear that the carbon market will con-

tine to be prone to over-allocation, ditribtion o allowance and

rle on crediting that act a bidie or pollter The pply o carbon

i niqely at the mercy o the political pen where it wa conceived,

ince the act o allocating permit (or determining qantitie available

or actioning) i the relt o a political deciion, rather than omething

that i indexed to a real-world prodct (Gallagher, 2009: 2) The political

determinant on pply make the EU carbon market particlarly prone

to lobbying inence either throgh direct lobbying by Brel-baed

aociation, or by lobbying national government to act on behal o

certain indtrie in EU procee Sch lobbying aect not imply the

rle governing how the market operate, bt the pply o permit and

credit In the cae o international oet, government are both ppli-

er and er o credit, contribting to ignicant conict o interet

(Lohmann, 2011)

The combination o thee actor with the difclty oidentiying clear price driver or carbon market (becae the nderlying

aet i ndamentally ntable) make or arbitrary volatility, while the

bordination o carbon to oil el hedging and invetment prioritie

et their alleged environmental prpoe on it head (Gallagher, 2009, 2;

Lohmann, 2009a: 2830) The concentration o power in the hand o

a handl o nancial and corporate actor, and the tranormation o

the deciion-making ramework that carbon trading enable, are the tre

governance challenge that carbon trading poe

In eeking way orward, we need to look beyond carbon trading andlook again at the natre o the problem being addreed Tackling

climate change reqire, rt and oremot, a rapid phaing ot o oil

el e No ingle alternative will fce to achieve thi There i no

evidence that a complex ocial and economic problem o thi cale

can be eectively tackled by indirect economic incentive o the ort

oered by carbon trading, till le by an invetment trctre that con-

centrate power in the hand o a ew large nancial actor whoe main

interet lie in the contined extraction and trade in oil el

A planned tranition away rom oil el, and the ntainable ind-

trial and agricltral practice that they enable, reqire a broad range o

approache that hit money in dierent direction, while alo limiting

11 For more on sectoral carbon markets, see Reyes (2011).


24/26


the role o nance a the principal determinant o deciion-making

In the EU thi wold inclde meare to hit bidie away rom

oil el prodction; a reaement o energy demand and efciency,inclding demand-ide management meare; and the expanion o

vario orm o conventional reglation, inclding the adoption o

non-tradable otpt limit on greenhoe ga emiion

Thee goal cannot be achieved withot pblic invetment, ince the

reearch and development cot aociated with large-cale tranorma-

tive technologie tend to reqire a greater invetment rik than private

capital i willing to bear However, pblic invetment itel i not a

fcient remedy, epecially within the crrent intittional ramework,

where pblic ownerhip generally take the orm o preerred-bid con-

tracting with private entitie, and control remain naccontable and

within private hand

More broadly, the natre o exiting pblic intittion need to be re-

examined, particlarly in the energy ector, where within the EU pri-

vatiation ha led to a conolidation, with control now in the hand o

a mall nmber o private and pblic companie ch a EDF, owned

by the French tate, and Vattenall, owned by the Swedih government

Thee tate companie are trctred a commercial enterprie, whoevale i increaingly provided by nancial peclation, aording little

cope or pblic inence in avor o a tainable and jt energy

prodction model For ch reaon, any increae in pblic nance to

change the energy ytem hold be accompanied by democratiing the

governance o the expenditre

On a global cale, meanwhile, EU contrie and corporation which

have done mot to contribte to accelerating climate change have

hge reponibilitie or the retittion and repayment o a climate

debt Thi implie not merely a commitment to pblic nance orcommnity-controlled project in the global Soth, bt adjtment in

trade rle to avor the patent-ree exchange o intellectal property

right to low carbon technologie; and a more robt ramework o

international corporate law to tackle the impnity o large corpora-

tion in repect o hman right abe and environmental degradation

In the cae o oret and land e, or example, a jt and tainable

approach wold tart with recognition o the exiting land tenre y-

tem o Indigeno People and oret-dependent commnitie, and the

promotion o tainable local arming and people ood overeigntyover and above the interet o indtrialied agricltre

Ultimately, however, there are no hort ct that bypa the difclt

work o political organiing and intittional change, and no policy or

market xe that obviate the need or moving beyond oil el


25/26


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