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Climate Change Casino: Carbon Trading Reborn in New-Generation Mega-Polluters

Climate change, the biggest threat to the planet, appears to be amplifying, as the “financialization of nature” through carbon markets resumes in earnest. The failure of the Kyoto Protocol’s emissions trading strategy in Europe may soon be forgotten once the emerging markets ramp up their investments, especially if carbon markets remain a central feature of a Paris COP21 agreement. If so, several that have begun the process – China, Brazil, India and South Africa – are likely to open the door to full-fledged markets, now that (since 2012) they no longer qualify for generating credits through UN’s offset scheme, the Clean Development Mechanism (CDM). The Kyoto Protocol had made provision for low-income countries to receive CDM funds for emissions reductions in specific projects, but the system was subject to repeated abuse. China is already far advanced, with seven metropolitan markets covering the major cities’ output, and a national market anticipated there in late 2016.

The world’s carbon markets

In Ufa, Russia, in July 2015, the Brazil-Russia-India-China-South Africa (BRICS) summit accomplished very little aside from codifying new financial institutions, especially a New Development Bank which is certain to amplify the BRICS’ greenhouse gas emissions. On climate change, according to the final declaration, there were only stock arguments: “We express our readiness to address climate change in a global context and at the national level and to achieve a comprehensive, effective and equitable agreement under the United Nations Framework Convention on Climate Change.”

The UNFCCC still strongly believes in carbon trading, and indeed its secretary Christiana Figueres came to the UN from the carbon markets.

Assuming a degree of state subsidization and increasingly stringent caps on greenhouse gas emissions, the Kyoto Protocol posited that market-centric strategies such as emissions trading schemes and offsets can allocate costs and benefits appropriately so as to shift the burden of mitigation and carbon sequestration most efficiently. Current advocates of emissions trading still insist that this strategy will be effective once the largest new emitters in the BRICS bloc are integrated in world carbon markets.

Critics, including the Pope, argue instead that, as the June 2015 Encylical puts it, “The strategy of buying and selling carbon credits can lead to a new form of speculation which would not help reduce the emission of polluting gases worldwide. This system seems to provide a quick and easy solution under the guise of a certain commitment to the environment, but in no way does it allow for the radical change which present circumstances require. Rather it may simply be a ploy which permits maintaining the excessive consumption of some countries and sectors.”

At the Paris summit of the UNFCCC, the COP21 is anticipated to remove the critical “Common but Differentiated Responsibility” clause that traditionally separated national units of analysis by per capita wealth. The COP21 appears to already have been forestalled in late 2014 by the climate agreement between Xi Jinping and Barack Obama, representing the two largest absolute GHG emitters: China and the US. That deal ensures world catastrophe, for in it China only begins to reduce emissions in 2030 and the US commitment (easily reversed by post-Obama presidents) is merely to reduce emissions by 15% from 1990 levels by 2025. Likewise in June 2015, the G7 leaders agreed to decarbonise their economies but only by 2100, raising the prospects of runaway climate change. The BRICS bloc’s role in forging inadequate global climate policy of this sort dates to the 2009 Copenhagen Accord at the COP15 when a side-deal between Obama and four of the five BRICS’ leaders derailed the much more ambitious UNFCCC.

The failure of the carbon markets to date, especially the 2008-14 price crash, which at one point reached 90% from peak to trough, does not prevent another major effort by states to subsidize the bankers’ solution to climate crisis. The indicators of this strategy’s durability already include commodification of nearly everything that can be seen as a carbon sink, especially forests but also agricultural land and even the ocean’s capacity to sequester carbon dioxide (CO2) for photosynthesis via algae. The financialization of nature is proceeding rapidly, bringing with it all manner of contradictions.

Due to internecine competition-in-laxity between climate negotiators influenced by national fossil fuel industries, the UN summits appear unable to either cap or regulate GHG pollution at its source, or jump-start the emissions trade in which so much hope is placed. European and United Nations turnover plummeted from a peak of US$140 billion in 2008 to US$130 billion in 2011, US$84 billion in 2012, and US$53 billion in 2013 even as new carbon markets began popping up.[1]1 But after dipping to below US$50 billion in 2014, volume on the global market is predicted by industry experts to recover to US$77 billion (worth 8 gigatonnes of CO2 equivalents) in 2015 thanks to higher European prices and increased US coverage of emissions, extending to transport fuels and natural gas.[2]2

However, geographically extreme uneven development characterizes the markets in part because of the different regulatory regimes. Since 2013 there have been new markets introduced in California, Kazakhstan, Mexico, Quebec, Korea and China, while Australia’s 2012 scheme was discontinued in 2014 due to the conservative government’s opposition. The price per tonne of carbon also differs markedly, with early 2015 rates still at best only a third of the 2006 European Union peak: California around US$12, Korea around US$9, Europe around US$7.3, China at US$3-7 in different cities, the US northeast Regional Greenhouse Gas Initiative’s voluntary scheme at US$5, New Zealand at US$4 and Kazakhstan at US$2. The market for CDMs collapsed nearly entirely to US$0.20/tonne.

These low prices indicate several problems.

* First, extremely large system gluts continue: 2 billion tonnes in the EU, for example, in spite of a new “Market Stability Reserve” backstopping plan that aimed to draw out 800 million tonnes.

* Second, the new markets suffer from such unfamiliarity with trading in such an ethereal product, emissions, that volume has slowed to a tiny fraction of what had been anticipated (such as in China and Korea).

* Third, fraud continues to be identified in various carbon markets. This is, increasingly, a debilitating problem in the timber and forest-related schemes that were meant to sequester large volumes of carbon.

* Fourth, resistance continues to rise to carbon trading and offsets in Latin America, Africa and Asia, where movements against reducing emissions from deforestation and forest degradation (REDD) are linking up.

An overriding danger has arisen that may cancel the deterrents to carbon trading: the international financial system has overextended itself yet again, perhaps most spectacularly with derivatives and other speculative instruments. It needs new outlets for funds. The rise of non-bank lenders doing “shadow banking,” for example, was by 2013 estimated to account for a quarter of assets in the world financial system, US$71 trillion, a rise of three times from a decade earlier, with China’s shadow assets increasing by 42% in 2012 alone. The Economist last year acknowledged that “potentially explosive” emerging-market shadow banking is huge, fast-growing in certain forms and little understood. As for the straight credit market, the main result of Quantitative Easing policies was renewed bubbling, with US$57 trillion in debt added to the global aggregate from 2007-14, of which US$25 trillion was state debt. By mid-2014 the total world debt of US$200 trillion had reached 286 percent of global GDP, an increase from 269% in late 2007.

Global financial regulation appears impossible given the prevailing balance of forces, witnessed in failures at the 2002 Monterrey and 2015 Addis Ababa Financing for Development initiatives and various G20 summits after 2008. As a result, the BRICS are especially important sites to track ebbs and flows of financial capital in relation to climate-related investments. In reality, in relation to both world financial markets and climate policy, the BRICS are not anti-imperialist but instead subimperialist.

The first-round routing of CDM funding went disproportionately to China, India, Brazil and South Africa from 2005 until 2012, but by then, the price of CDM credits had sunk so low there was little point in any case. Moreover, the other Kyoto offsetting mechanism, Joint Implementation, has over 90% of offsets issued by Russia and Ukraine with very limited transparency.

Similar problems of system integrity plague the carbon markets that have opened in China. At the Chinese Academy of Marxism, for example, Yu Bin’s essay on ‘Two forms of the New Imperialism,’ argues that along with intellectual property, the commodification of emissions is vital to understanding the way capital has emerged under conditions of global crisis. The US$4 trillion lost in the Chinese stock market speculative bubbling in June-July 2015 was one indication that there are no special protections offered by what is termed ‘socialism with Chinese characteristics’. The country’s financial opacity and favouritism present profound problems for carbon trading. As Reuters reported on July 1 2015,

‘China said last week it would need to invest 41 trillion yuan ($6.6 trillion) to meet its U.N. pledges. Some of that investment will be raised through the national carbon market, expected to cover around 3 billion tonnes of carbon emissions – about 30 percent of the annual total – by 2020. But liquidity on China’s seven pilots schemes has remained low, with just 28 million permits traded over two years, only about 2 percent of the permits handed out annually. Prices in five of the markets have fallen sharply, with the Shanghai market ending its compliance year on Tuesday at 15.5 yuan (US$2.6), down 38 percent from its launch. Permits in the biggest pilot exchange in Guangdong have dropped 73 percent to 16 yuan.’

Regardless of the reality of carbon trading contradictions, if policy continues to favour corporate strategies, an even greater speculative bubble in carbon finance can be anticipated in the next few years, as more BRICS establish carbon markets and offsets as strategies to deal with their prolific emissions. In South Africa, neither the 2011 National Climate Change Response White Paper nor a 2013 Treasury carbon tax proposal endorsed carbon trading. In part because of the oligopoly purchasing conditions anticipated as a result of two vast emitters far ahead of the others: the state electricity company Eskom and the former parastatal Sasol which squeezes coal and natural gas to make liquid petroleum at the world’s single largest emissions point source, at Secunda near Johannesburg. But by April 2014, carbon trading was back on the official policy agenda, thanks to the British High Commissioner whose consultants colluded with the Johannesburg Stock Exchange to issue celebratory statements about “market readiness.”

With all of South Africa’s carbon-intensive infrastructure under construction, the official Copenhagen voluntary promise by President Jacob Zuma – cutting GHG emissions to a “trajectory that peaks at 34% below a business as usual trajectory in 2020” – appear to be impossible to uphold, just four years after it was made. The state signalled its reluctance to impose limits on pollution in February 2015, when Environment Minister Edna Molewa gave Eskom, Sasol and other major polluters official permission to continue their current trajectories for another five years, ignoring Clean Air Act regulations on emissions of co-pollutants such as sulphur dioxide and nitrogen dioxide.

Other BRICS countries have similar power configurations, and in Russia’s case it led to a formal withdrawal from the Kyoto Protocol’s second commitment period (2012-2020) in spite of huge “hot air” benefits the country would have earned in carbon markets – for not emitting at 1990 levels – as a result of the industrial economy’s deindustrialization due to its exposure to world capitalism during the early 1990s. That economic crash cut Russian emissions far below 1990 Soviet Union levels during the first (2005-2012) commitment period. But given the 2008-13 crash of carbon markets, Moscow’s calculation shifted away from the Kyoto Protocol, so as to promote its own oil and gas industries without limitation.

The attraction of carbon trading in the new markets, no matter its failure in the old, is logical when seen within a triple context: a longer-term capitalist crisis which has raised financial sector power within an ever-more frenetic and geographically ambitious system; the financial markets’ sophistication in establishing new routes for capital across space, through time, and into non-market spheres; and the mainstream ideological orientation to solving every market-related problem with a market solution, which even advocates of a Post-Washington Consensus and Keynesian economic policies share. Interestingly, even Paul Krugman had second thoughts, for after reading formerly pro-trading environmental economist William Nordhaus’ Climate Casino, he remarked, “The message I took from this book was that direct action to regulate emissions from electricity generation would be a surprisingly good substitute for carbon pricing.” This U-turn is the hard-nosed realism needed in understanding how financial markets continue to over-extend geographically as investment portfolios diversify into distant, risky areas and sectors. Global and national financial governance prove inadequate, leading to bloated and then busted asset values ranging from subprime housing mortgages to illegitimate emissions credits.

No better examples can be found of the irrationality of capitalism’s spatio-temporal-ecological fix to climate crisis than a remark by Tory climate minister Greg Barker in 2010: “We want the City of London, with its unique expertise in innovative financial products, to lead the world and become the global hub for green growth finance. We need to put the sub-prime disaster behind us.” As BRICS are already demonstrating, though, new disasters await, for both overaccumulated capitalism in general and for what will be, for the next few years at least, under-accumulating carbon markets.

END NOTES

[1] Reuters, 2014, “Value of global CO2 market drops 38 percent in 2013,” 2 January, http://uk.reuters.com/article/2014/01/02/co2-market-global-idUKL6N0KC1UY20140102

[2] Ibid.

More articles by:

Patrick Bond (pbond@mail.ngo.za) is professor of political economy at the University of the Witwatersrand School of Governance in Johannesburg. He is co-editor (with Ana Garcia) of BRICS: An Anti-Capitalist Critique, published by Pluto (London), Haymarket (Chicago), Jacana (Joburg) and Aakar (Delhi).

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