It is being called “the green goldrush”. Billions of dollars of investment money is piling into the booming EU carbon trading market, which is expected to more than double to €22bn (£15bn) this year. And London, where 80% of the European trade is being conducted, is the new El Dorado. But is all this frenetic activity a business fix to save the planet, as the City would have people believe, or the destructive new face of international capitalism?
On the fringes of the talks on the future of the Kyoto Protocol taking place this week in Nairobi, Kenya, indigenous people and non-governmental groups have been telling delegates how the investments in developing countries’ “clean energy” projects – which are now fuelling world carbon markets – are exacting a terrible price, with communities being robbed of their land, and livelihoods damaged by projects such as hydro-electric dams and fast-growing tree plantations.
The projects, which are supposed to reduce greenhouse gases and contribute to sustainable development, are awarded certified emissions reductions (CERs), which can be used either by governments buying them to help meet Kyoto targets, or by companies surrendering them to help meet their allocations under the EU emissions trading scheme.
It is a new international market that is developing rapidly, but critics say it is encouraging destructive development and lining the pockets of the rich. “We are not only victims of climate change, we are now victims of the carbon market,” says Jocelyn Therese, a spokesperson for Coica, the coordinating body of indigenous organisations of the Amazon basin.
Moreover, the projects are doing little to help encourage sustainable development in poor countries, say critics as authoritative as the government’s climate economist, Sir Nicholas Stern, whose report last week changed many people’s understanding of the need to address climate change.
Deep within the Stern report on the economics of climate change is a stinging criticism of the UN’s Kyoto Protocol Clean Development Mechanism (CDM), which allows countries and businesses in the rich north to trade in carbon “credits” with the south. “The CDM in its current form is making only a small difference to investment in long-lived energy and transport infrastructure,” he said. “While a substantial international flow of funds is being generated through CDM, it falls significantly short of the scale and nature of incentives required to reduce future emissions in developing countries.”
One has only to look at where the money has gone up to now to see why. CDM projects are expected to secure 1.4 bn tonnes of CO2 emission reductions by the end of 2012, with 400 projects approved by the CDM’s executive board and 900 more in the pipeline. But according to the World Bank, only 10 % of CDM projects by volume in the 15 months to March this year involved energy efficiency, fuel switch, biomass or other renewables projects – areas that Stern says are critical to the long-term reduction of greenhouse gas emissions.
Almost 60% involved destroying the industrial gas HFC 23, a greenhouse gas nearly 12,000 times more destructive than CO2 but which costs as little as 75 US cents per tonne of CO2 equivalent to deliver – and can be traded for as much as 10 times that.
In their pursuit of cheap HFC credits in countries such as China and India, African countries have been almost entirely bypassed, despite the fact they have the most to lose through climate change. Ricardo Nogueira, investment adviser at Aim-listed Trading Emissions, says his company would like to invest in Africa, and is looking at a couple of prospective projects, mainly to siphon off methane from large landfill sites. “We feel we have a duty and obligation to make CDM work in Africa,” he says.
But there are huge barriers, including a shortage of large enough projects to justify the hefty transaction fees, and a critical lack of information to get projects through the CDM’s strict verification process. “It’s a fractured continent with many, many countries dividing up limited resources,” he says. “A lot haven’t got very far in developing their approval processes.”
The big problem with getting CDM projects approved is proving “additionality” – showing that the project would not have gone ahead without the carbon credit. Stern says the project-based nature of the CDM market “creates issues of moral hazard and gaming, where there are incentives to manipulate the system to increase the rewards received (or reduce the costs paid).” In other words, it can perpetuate a regime where the polluter wins.
Patrick McCully, of International Rivers Network, which has been monitoring the impact of CDM on global dam projects, says additionality is largely a joke: “We thought carbon credits would allow destructive projects to go forward that wouldn’t otherwise have been built. But we found the opposite. The carbon credits were going to projects that would have gone ahead anyway – they were the icing on the cake for developers.”
He says a fund run by the World Bank is seeking carbon credits to finish constructing a dam in Sierra Leone that had been 85% complete before it was abandoned during the civil war. How can that possibly be considered additional, asks McCully? He is also concerned that criticisms of CDM made by IRN have been ignored. “In every case they’ve been ignored. The comments go to the validators, who have a vested interest in the projects going forward,” he says.
This is a complaint heard frequently in India, the most enthusiastic player in the carbon market. Soumitra Ghosh, a researcher with a West Bengal NGO that has been investigating the trade, says India’s national CDM authority clears projects speedily, awarding credits to some of the most polluting companies in the country on the basis of claims that they are cleaning up their acts.
He says that, despite the CDM’s requirements for community consultation, affected communities have been kept in the dark. In one case, project design documents for four different Indian biomass power schemes repeated – even down to the spelling mistakes – allegedly favourable comments made by local village heads. “We’ve looked at 40 projects in various sectors,” says Ghosh. “All are violating laws, involved in land grabs, fleecing the local communities of their land by buying it cheap.”
For Larry Lohmann, author of Carbon Trading, carbon credits are just a new instrument for northern energy companies to exploit the developing world. “Added to classic local conflicts over extraction, pollution, and labour abuse are now, increasingly, local conflicts over “carbon offsets” – the projects that license and excuse the extraction, the pollution and the abuse,” he says.
Axel Michaelis, a member of the registration and issuance team advising the CDM executive board, accepts that many of the early projects approved for carbon credits were dodgy. “In the first six months it was like the wild west – everything was passed,” he says. In March this year, however, the CDM board set up his team as a second level of scrutiny, and he is convinced bogus projects are now being blocked.
He says transaction costs have fallen, sometimes by half, because there were more projects, bringing down the barriers for small renewables projects. And though the scheme is far from perfect, the CDM has actually succeeded in cutting emissions. “You can criticise the industrial gases projects, but they are reducing emissions and they aren’t having a negative impact on local communities,” he says. “Four years ago, no one was talking about HFCs.” Other CDM supporters say it has encouraged cuts in the easiest areas first – what are called “the low hanging fruit” – and that China has reinvested 80% of the money it makes from CDM projects into renewable energy projects.
Michael Grubb, visiting professor of climate change at Imperial College London and chief economist with the Carbon Trust, says it is ironic that CDM, which was established as the most cost-effective way to reduce global emissions, was being criticised for doing just that.
“CDM is funny hybrid between a market and a political construct,” he says. “It’s not a pure market by any stretch and there’s a lot of discretion being taken about where people want to spend money [in the developing world]. But it’s better than nothing and it’s something that can be improved.”
But critics say the CDM’s premise that carbon can be commodified is false, and that time, money and expertise are being wasted trying to perpetuate that fiction instead of making the structural changes and long-term investments that Stern says are needed to save the planet.
Lohmann points out there is already an international protocol to eradicate HFCs, but the fact that companies can make money out of HFCs through the carbon market means HFC production may be going up, and governments are unlikely to take action.
“There’s a fundamental contradiction in the CDM,” says Lohmann. “You either have cheap, meaningless, unverifiable projects or those that are verifiable and plausible where you need to invest too much money and take too much political risk. I don’t believe renewables will ever be supported by this carbon market.”
Â· Pollution as usual
To Norman Philip, CO2 is not some invisible gas melting distant glaciers. It’s something that rattles his windows and turns the sky red at night when the oil refinery in Grangemouth, Scotland, flares off its gases. As he points out: “When you’re living next to an oil refi nery, you can see emissions.”
And he is angry that while traders in the City strike it rich in the carbon market, there is pollution in Grangemouth.
Along with the CO2, Grangemouth is exposed to a chemical cocktail that includes benzene and sulphur dioxide. In August, benzene leaked out of a tank in Grangemouth harbour, and in 2000, BP was fined £1m after a huge explosion at the refinery.
Ironically, the new owner of Grangemouth refinery, Ineos Fluor, is one of the biggest winners in the carbon bonanza, having sold millions of CDM certifi cates by cleaning up HFCs in its Korean operations.
Philip and other activists have forged an alliance with a community in Brazil who are fighting an attempt by the World Bank to earn carbon credits through a huge expansion of a eucalyptus plantation. Environmental groups say that such projects are forcing peasants off land, poisoning agricultural land, and sucking water tables dry. So far, none has been approved by the CDM executive board, but they are being funded in the voluntary carbon off setting sector.
“Locally, people were horrified by the Brazilian experience,” says Philip. “And the people in Brazil were horrified by our experience as well.”
By Terry Slavin
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