December 23, 2009
A recent article [PDF] in the Wall Street Journal details one of the many problems facing the implementation of carbon markets: the political tampering of an artificial market. According to the story, Russia is demanding that it be able to retain its massive surplus of emissions permits after they expire in 2012. Yet, critics argue that if Russia were to off-load these credits on international carbon markets, it would lead to a collapse in the price of carbon.
Russia holds a surplus of carbon credits because of the collapse of its industrial base after the fall of the Soviet Union. In accordance with the Kyoto Protocol, Russia was obliged to maintain its carbon emissions output at 1990 levels. But with the economic collapse that ensued in the aftermath of the Soviet breakup, its emissions plummeted, and it easily exceeded its Kyoto targets, leaving it with a surplus of carbon allowances.
This massive surplus of allowances has many companies that have invested in the carbon market—and the countries that issued them—nervous: if Russia sold off its carbon allowances, the price of carbon, they say, would plummet. According to the WSJ, Russia holds a “surplus of carbon allowances equivalent to six gigatons of carbon dioxide, or roughly the same as China’s annual emissions.”
If the price of carbon were to collapse, it would “hurt efforts to green the world’s economy,” says the WSJ. “One principle behind promoting an international system of carbon credits—the currency for buying and selling the right to pollute—is that the price of carbon should be high enough to encourage investment in non fossil-fuel technology such as nuclear, wind and solar.”
Similar fears have been raised in regards to the United Nation’s proposed deforestation scheme, Reducing Emissions from Deforestation and Forest Degradation in Developing Countries (REDD). Environmental groups worry that a flood of deforestation credits [PDF] will depress the price of carbon credits and destabilize carbon markets.
What the so-called “Russian Problem” and the REDD dispute highlight is the political nature of the carbon market. Because the supply and demand of carbon is determined by government fiat, it puts all participants in the market at the mercy of political whims.
Furthermore, the environmental benefits of international carbon credits issued through the UN’s Clean Development Mechanism—one of the UN’s principal tools to reduce global emissions—are dubious. According to a recent report by the U.S. Government Accountability Office (GAO), “the effect of the CDM on international emissions is uncertain, largely because it is nearly impossible to determine the level of emissions that would have occurred in the absence of each offset project.”
“Because additionality is based on projections of what would have occurred in the absence of the CDM, which are necessarily hypothetical, it is impossible to know with certainty whether any given project is additional,” the report added.
Probe International’s Executive Director Patricia Adams argues that the carbon market distorts investment decisions and that it would be better if “governments scrapped subsidies to all forms of energy so the real market can determine the most economic and environmentally sound investments.” The ‘carbon credit market,’ “such as it is,” says Ms. Adams, “is prone to corruption, political tampering, and perverse results which, for example, promote investments in environmentally harmful operations like dams so investors can capture subsidies to reduce CO2.”
For more information on carbon credits, visit our interactive carbon credit database.
Categories: Carbon Credit Watch