Carbon Fiddles While the Planet Burns

By David Levy.

A milestone on the road to catastrophic climate change was reached last Thursday, May 9th, when the Mauna Loa research center in Hawaii recorded atmospheric CO2 levels above 400 parts per million (ppm) for the first time. The level during pre-industrial times was around 280 ppm, and has been rising at an accelerating pace due to burning fossil fuels and clearing forests. For the last 400,000 years or so, CO2 levels have fluctuated between about 180 ppm, at the depths of ice ages, and 280 ppm during relatively short warm periods, or interglacials (see graphic). The last time CO2 levels reached 400 ppm was at least 3 million years ago, a much warmer world where sea levels were 60-80 feet higher.

Despite more than 20 years of accumulating evidence concerning the serious consequences of rising levels of CO2 and other greenhouse gases on the global climate, including rising sea levels, extreme temperatures, and more frequent floods and droughts, the organizational response has been dismally inadequate. Carbon markets have been widely embraced by many policymakers, academics, businesses, and even environmentalists as a way to put a price on carbon emissions, but these markets have clearly failed to address the issue. Carbon markets are complex political and legal constructions crafted to serve the interests of many actors, but they were deliberately designed not to disrupt our carbon intense economy and lifestyles.

Many have attributed the failure to address climate change to the vested interests and political power of the fossil fuel industry as well as the inertia of our complex fossil-fuel based society, with interlocking technologies, infrastructure, lifestyles, and corporate assets and competencies (See my earlier work on this here and here, and a recent introduction to an Organization Studies special issue on Climate Change and the Emergence of New Organizational Landscapes). Bill McKibben has written alarmingly about the 2795 Gigatons “of carbon already contained in the proven coal and oil and gas reserves of the fossil-fuel companies, and the countries (think Venezuela or Kuwait) that act like fossil-fuel companies. In short, it’s the fossil fuel we’re currently planning to burn.” This amount is five times more than we can realistically burn and hope to stay within the 2 degrees Celsius warming target, but McKibben points out that it is “economically above ground”, because it’s already figured into corporate share prices, credit ratings, and national budgets.

The 400 ppm threshold was reached just a few weeks after the European Union failed to agree on a plan to prop up the European Trading System (ETS), the world’s largest cap-and-trade market, prompting the price to collapse to under $4/ton. The recession and ensuing austerity has cut the EU’s appetite for subsidies for clean energy and shifted priorities. In the US, plans for a national cap-and-trade system failed in the Senate in 2010. Theda Skocpol, a political scientist at Harvard (fondly known here as UMass on the Charles) has recently attributed this failure to the collapse of political will after the recession, the resurgence of fossil fuel industry and Tea Party opposition to climate opposition, and strategic miscalculation by environmental groups who ignored the grassroots to focus their efforts on Washington DC elites.

In a similar vein, my own academic work has built on the work of Niccolò Machiavelli and Antonio Gramsci and developed the concept of strategic power’, the ability to study a political arena and deploy resources in a way that integrates economic, cultural, and political forces to create real change. Unfortunately, groups funded by the fossil fuel industry, the Koch brothers, and other conservative billionaires have successfully exerted strategic power, exploiting the recession to lobby politicians, and organize and train anti-climate activists. Perhaps their biggest success has been to weave climate change into broader cultural-political themes dominant in the US, such as individualism and consumerism, fears of unemployment, suspicion of government and foreigners, hostility to taxes, and antagonism toward scientific, political, and financial elites (see my related 2009 blog piece).

Many of those concerned about climate change supported the development of carbon markets for strategic reasons, because they saw that carbon taxes and direct regulations were considered politically impossible. Drs. Peter Newell and Matthew Paterson, for example, in their 2010 book Climate Capitalism (see my review here), grudgingly embraced carbon markets, despite acknowledging their many flaws. They bring a political economy perspective to climate change; if we are to address climate change in a meaningful way within the necessary timescale, carbon capitalism is the only game in town that can galvanize a powerful network of actors with the potential to take serious action. They stress that carbon capitalism offers the opportunity to successfully mobilize the resources, energy, and political support of key sectors of business and finance, as well as policymakers. Carbon markets offer strategic flexibility for manufacturers, new market opportunities for traders and financial firms, and a source of capital for developing countries. A few key players, such as Cantor Fitzgerald and Deutsche Bank, were central figures in forging the carbon markets, and not surprisingly, they shaped the rules and processes to suit their capabilities and interests. Carbon markets are therefore political and institutional constructs, relying on a vast legal and accounting infrastructure to commoditize carbon: to establish property rights, count and certify tradable units, and to enable exchange across different jurisdictions and gases.

Dr. Janelle Knox-Hayes at Georgia Tech has spent the last couple of years studying the nascent carbon markets. The picture that emerges from her work is that these financial institutions are involved precisely because they see the opportunity to apply their financial expertise and institutional capacity to a new market. So these actors created carbon markets that look a lot like the markets for other financial instruments and commodities, complete with futures, options, and other derivatives. This is unsurprising, given what we know about how organizations build new institutions by adapting existing templates. These are the very same players who brought us sub-prime mortgages, collateralized debt obligations, credit default swaps, and value-at-risk models. These were attractive because plain-vanilla mortgages had become simple commodities with very low profit margins, while the complexity of new derivatives enabled these companies to charge high fees for specialized products and the associated proprietary expertise and valuation techniques. The financial firms thus have a vested interest in market instruments that are complex, opaque, volatile, and hard to value. So there are legitimate grounds for concern that carbon markets were not designed to provide the clear and simple price signals needed to stimulate a broad transition to a low-carbon economy.

“Carbon markets have lost us more than 15 years in the battle against climate change”, according to Dr. Steffen Böhm in a recent piece in the Guardian. He points to three systemic failures that have plagued carbon markets. First, the Clean Development Mechanism that generates a high proportion of globally traded credits is so flawed that many, if not most, CDM projects do not pass the “additionality” test of reducing emissions relative to a hypothetical business-as-usual baseline, and certainly don’t reduce emissions in any absolute sense. Second, carbon markets are beset by corruption and lack of independent oversight. Third, they can promote environmentally questionable practices, such as burning rice husks to generate ‘renewable’ power and carbon credits, instead of their traditional use as fertilizer – therefore increasing the use of energy intense chemical fertilizers.

Carbon markets were not primarily designed to solve the climate crisis, but rather to gain political support from business, policymakers and civil society actors in a grandcarbon compromise. Competitiveness concerns led policymakers to design carbon markets to be sufficiently flexible and with sufficient credits that carbon prices would not impinge too much on corporate product strategies. Policymakers could claim to be addressing the issue without affecting core business strategies. The (failed) proposals for federal cap-and-trade in the US, as well as the RGGI system that (barely) functions in 10 northeastern states, were designed to keep carbon prices well below the $30/ton level, a price that roughly translates into an increase of 30c/gallon of gasoline, and about 2.1c/kWh of electricity. Prices in the RGGI market have recently been under $3/ton of CO2. While some point to the low price as an optimistic sign that carbon emissions are in fact lower than expected, the emission reductions are only a temporary result of the recession. If business is to commit large scale resources to long-term investments in carbon reduction, then the carbon price signal has to be strong, consistent, and predictable. Markets are not magic mechanisms that solve all problems, but political and institutional constructions that serve particular interests. As atmospheric carbon surges past 400 ppm, it’s clear that carbon markets have failed us, and a new strategy is needed.

6 thoughts on “Carbon Fiddles While the Planet Burns

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  5. Thanks David for posting the links.

    On the point about carbon markets being weak and designed to be flexible for business, I don’t particularly disagree. But the problem of weakness and the question of the policy instrument are not to my mind that closely connected. and we need to be clear what the target of any critique is.

    Specifically, I don’t see the weakness of targets in say the EU ETS or RGGI (the former at least didn’t look weak to many people prior to the recession) as being connected to whether we ended up with carbon markets or a carbon tax (and there are only egs of reasonably strong carbon taxes in existence – British Columbia and Sweden) or regulatory policies as the EPA is in the process of developing (and for a good counter-example, so is Canada, but unbelievably weak and slow in coming, and sure to be very flexible for business), but just being a problem of the weakness of ambition in climate policy per se.

    But I would maintain that at least for a good chunk of industry, the advantages they see in carbon markets as opposed to another policy regime mean that there are more pressure points to up the ante. And their countercyclical effect in recessions seems to me to be one such point.

    Electricity companies aren’t getting their profits from being the main sector that has reduced emissions within the EU ETS (prior to the recession at least), has been able to pass the costs onto consumers and then pocketed EUA sales, when the EUA price is only $4 and emissions are flat. Hence Eurelectric lobbied for backloading.

    The financiers are the obvious gainers from carbon markets, and they’re struggling (no need for sympathy, but definitely a need for tactical nous) with such a low price because who wants to hedge their EUA risks in that situation? So CMIA and IETA argued for backloading.

    And on Business Europe who did lobby against backloading, many of the member companies attacked BE for going all tea party. I can’t see that sort of opening for pressure to up the ambition of policy in a recession coming from any other policy design.

    In other words, the principal focus of our critique and associated activism should be on the ambition of the policy, not sticking all the blame on the policy design itself.

  6. My colleague Matthew Paterson at U. of Ottawa pointed me to a couple of pieces he has written recently in defense of carbon markets, based on their political attractiveness.

    Mat does agree with a key piece of my post, in his words “But of course carbon markets are artifices in the extreme. Perhaps no markets are “natural” in the sense that Adam Smith understood them (as the reflection of the “natural propensity to barter and truck”) but carbon markets more than perhaps any other arise not out of a “spontaneous” formation amongst buyers and sellers, but as a specific regulatory intervention designed to reduce GHG emissions. The official economic rationale is that if they work properly they do so at the lowest overall cost to society.

    But this means that first and foremost, carbon markets are means, not ends. They are there to help achieve GHG reductions, anything else is secondary. They may in fact be useless at doing this, in which case they should be abandoned (as many critics of carbon markets argue powerfully”

    I’d only add that as political constructions, carbon markets were designed to be weak and flexible to suit the interests of a coalition of actors, from states to financial firms, but they were not designed to instigate dramatic reductions in GHG emissions.

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