Video: How to clean up the carbon market

Jane Burston, Head of the Centre for Carbon Measurement, National Physical Laboratory (NPL), says people tend to mean two things when they talk about the carbon markets.

There are Emissions Trading Schemes, where governments set a limit on the total amount of emissions from a set of industries. And then there are offsetting mechanisms, where people pay others in developing countries to reduce their emissions. In this video, Burston talks about the challenges of cleaning up the carbon market and shares some possible solutions.

Watch the video above for the full interview, or read key quotes below.

On Schemes that backfire

Both offsetting and Trading Emissions Schemes have come in for criticism, and their reputations have not been helped by high profile examples of schemes that backfire. Coldplay offset their second album by planting mango trees in India, and then all the mango trees died (which isn’t good for the atmosphere). The Vatican also fell victim to a scam offsetting scheme, when they bought credits from a Hungarian forest that was later proved not to exist.

Another challenge of the carbon markets is additionality – when developers have to prove that an offset project is truly above and beyond what would normally happen. One particularly bad example was with the reductions of HFC-23, a heavily polluting gas that is about 10,000 times as bad as carbon dioxide once it is in the atmosphere.

Companies were getting paid to reduce HFC-23, but it was found there were existing processes and efficiencies in place that meant they would have already been making those reductions, and ought not to have been paid an awful lot of extra money through the carbon markets. So those credits now have to be removed from the system, and they have represented half of all offsets sold to date.

On Cleaning up the carbon market

The concept of Carbon Markets 2.0 is the idea that we need to move on: we need carbon pricing globally and we need to make sure that new Emissions Trading Schemes work better. My first recommendation is to fix the European Emissions Trading Scheme. The recession meant that emissions dipped below the cap that was set by the Scheme. So there’s now a two billion tonne allowance oversupply in the market which has sent carbon prices very low. It’s a problem that Europe really has to fix. We need to make sure that those credits are removed from the system after 2020, so that they don’t affect the 2030 goals to cut emissions and limit climate change.

Secondly, leaders in other countries can learn from the mistakes that Europe and the US have made. We need to get accurate baselines from the start, and proper monitoring, reporting and verification processes. We need to make sure that the Emissions Trading Scheme doesn’t overlap with other schemes – for example on energy efficiency – that might affect the carbon price within the Emissions Trading Scheme.

One of the things that governments can learn from Europe is the benefit of a recession proof flexible cap, to mitigate against times when emissions might reduce more than expected. Governments can set a floor and ceiling price on the allowance: a floor price so credits don’t go too low during a recession, and a ceiling price so that if the carbon price gets too high, governments can introduce a cap. That kind of policy will give businesses the price certainty they need, and catalyse more investment in the long term.

My third recommendation is that governments need to think about how to build mechanisms that can incorporate emissions trading in sectors that aren’t currently covered. There is vast potential to do more in the non-heavy industrial sectors – forestry, agriculture and transport – that are not well catered for by the carbon markets.

On Challenges and Solutions

A key challenge for Emissions Trading is to make sure that emissions don’t leak to other countries. The way you do that is to analyse which sectors within the scheme might be subject to international competition, where they are and where their international competitors don’t have a price on carbon that they have to pay. You need to avoid overcharging for the allowances, so that custom or the company itself doesn’t move elsewhere and then you fail in reducing emissions overall.

One solution is to allocate free allowances to the companies that are subject to international competition. But it’s vital to make sure free allowances are not over allocated, as that can lead problems and windfall profits for the companies that sell them. Governments must make sure that they accurately understand exactly how far companies are subject to international competition, and set allowances in the right place.

Another challenge with carbon offsetting is the lack of buyers. The two main sets of buyers are heavy industries, because they are regulated through governments and Emissions Trading Schemes. With no international agreements, both these markets has seen their credit dry up. So while there’s still lots of supply, there’s little demand and prices are at an all-time low.

The carbon market also needs to widen its reach to include more genuinely developing countries. Out of all of the offsets that have been developed to date, more than 90% are from just four countries – Brazil, Mexico, China and India. Africa has had less than two per cent of the offset credits generated. So we need to make sure that more of the offsetting money is going to where it’s really needed. Like it or not, the Carbon Market 2.0 is here to stay. We need to learn from the past and make future schemes work as best they can.

Author: Jane Burston, Head, Centre for Carbon Measurement

Image: The sunset is seen behind Isla refinery in Willemstad on the island of Curacao in this picture taken June 16, 2008. REUTERS/Jorge Silva