"Mommy, where do carbon offsets come from?"
"Well, you see sweetheart, when a major polluter and a consultant love money very, very much, they express that love in a special way. Nine months later, the consultant produces an extremely large paper packet."
In theory, carbon taxes and carbon trading yield similar results.(Carbon taxes raise the price of fossil fuels by taxing it. Permits raise the price of fossil fuels by requiring people to buy permits for each unit burned) So why do so many people who support carbon taxes oppose carbon trading? Because in practice they differ catastrophically, something we have good reasons to expect.
The real world record of carbon trading includes:
Extensive use of sequestration offsets.
This means you can claim to remove carbon from the atmosphere and sell the credit to allow someone to burn carbon elsewhere. What’s wrong with this? After all, it does not matter to the atmosphere where the carbon reduction comes from.
While in principle there are many forms of carbon sequestration, in practice most carbon sequestration credits take two forms: carbon plantations and coal sequestration.
No one really know how much carbon is sequestered by planting cheap, fast-growing trees in carbon plantations. We do know that a great deal of it is absorbed by soil, which may release greenhouse gases as temperatures rise. We know that tilling such plantations releases old carbon imbedded in soil structure. We know that stable ecosystems upon which local inhabitants depend are often declared degraded lands and replaced by such carbon plantations. We know machinery, fertilizers, and pesticides for such plantations consume fossil fuel energy. We know carbon fixation rates vary tremendously within the same species of plant, depending on micro-climate, soil, pests, and other variables, so we don’t know the difference between these plantations and whatever they displace. And we know carbon plantations are often victim of forest fires or other ways of ending plant lifespan — including harvesting once credit for the sequestration has been sufficiently laundered. So not only is forestry based carbon sequestration highly uncertain, there is good reason to believe in many cases it is a net emitter.
Coal sequestration has a different problem; coal is the enemy of the human race even when "carbon neutral." Mountaintops are blown up to harvest coal, towns undermined. Coal mining and processing poisons lakes and streams, and the poisons released during burning acidify and putrefy rivers more.
Project-based credits in nations without national emission limits.
Since there is no objective baseline against which to measure emission reductions, the credit is granted based on a consultant’s assertion that life without a certain investment will pollute more than life with it. The jargon for this is "additionality" — saving more carbon than a business-as-usual scenario.
As you can imagine, this opens creative vistas. For example, a widely hated pig-iron manufacturer in Minas Gerais,
Project-based credits subvert the entire advantage normally claimed for market means over regulation — namely, feedback. How do you know a project will reduce emissions? Some bureaucrat evaluates the paperwork and says so. How do you know after the fact that the project has reduced emissions? Another bureaucrat evaluates the claim. At no point does a market provide micro-information, comparable to sales figures telling a store owner she has mispriced an item. Feedback comes through political means, or (as happened recently) through the collapse of the entire carbon market.
Project-based credits boast neither market-style feedback nor the standardization and economies of scale of a public works or true regulatory approach. It’s the worst of both worlds.
Nor is it getting better. Until recently, Clean Development Mechanism (CDM) was the main form of project based credit, which is at least reviewed by a CDM Executive Board. However, Joint Implementation — an alternative process applying mainly to former Soviet states — will shortly be subject to direct approval by host countries. A national government can sign a piece of paper and watch its local industry get money from abroad.
Under this brand of folly, large polluters are granted a princely share of available permits at no cost! Even better, they are often granted more permits than required for their standard emissions, leaving them surplus permits to sell — without needing to make a single emission cut.
Polluters find ways to manipulate permit markets to continue to burn fossil fuels rather than leave them in ground. Huge secondary and tertiary markets in permits — middlemen, and middlemen’s middlemen — make this kind of gaming much simpler than it would be with a straightforward carbon tax system.
I’ve had people use my own argument against carbon taxes in support of emissions trading. If carbon use does not respond well to price signals, isn’t trading a reasonable alternative? At any rate, shouldn’t we use both? But any argument against carbon taxes applies to emission trading as well. Tradable carbon permits are carbon taxes — only blindfolded, handcuffed, and with their shoelaces tied together.
Since carbon taxes and emission trading are theoretically similar, a computer-based econometric simulation might predict similar results. But politically, gaming a carbon tax is more difficult.
Take "grandfathering." You could hand over a portion of carbon-tax revenue to major polluters, just as we currently gift them with carbon permits. But the outcry from a tax giveaway would be much greater. Electric utility customers who don’t pay much attention when someone hands their power supplier something fuzzy and abstract like permits would have a different reaction on seeing billion-dollar cash grants. The obvious reaction would be: "Skip the middleman; give me my share directly."
Similarly, paying for phony project credits directly out of rich nation carbon-tax revenues would attract more rich world attention than when large corporations pay the bill (while actually benefiting from the fraud by gaining cheap carbon credits).
Note the objection is to carbon trading separate from trading in actual carbon. Carbon permits, auctioned off to carbon producers and importers, with the price built into subsequent trading in fossil fuels (along the lines of the Sky Trust proposal), is not something I would object to — as a supplement to public works and regulation — in the abstract. Now I spend time in the abstract myself; it is a beautiful place with breathtaking scenery. But none of us live there.
The world we live in includes politics. The opportunity to slip large corporate gifts into the system unnoticed, because there is no explicit cash cost, is overwhelming. (Look at how the McCain-Lieberman bill uses "Sky Trust" rhetoric to promulgate a Kyoto-style cap-and-trade system.) With carbon taxes, any giveaways are obvious and explicitly priced; permitting does not offer comparable transparency. Carbon taxes do not offer as many opportunities to use political judo, to turn your own strengths against the goal of limiting carbon emissions.
If you want to learn more about this subject, there are a couple of books online in PDF form I highly recommend:
Carbon Trading: a critical conversation on climate change, privatization, and power (large PDF), editor and main author Larry Lohman.
Trouble in the Air: Global Warming and the Privatised Atmosphere (very large PDF), edited by Patrick Bond and Rehana Dada.