Emissions trading: can it stop global warming?

By Ben Courtice

Many critics of market-based pollution reduction mechanisms such as emissions trading focus their criticism on the negative social outcomes whereby companies pass on all their emissions costs to the consumer, or the various loopholes and scams by which they get around seriously implementing emissions reductions. Carbon offsets are mostly used as a kind of accounting trick to pretend that using fossil fuels is OK, and passing costs on to consumers means that the companies that have profited from polluting practices in the past can continue to operate by passing on as much as possible the costs of cleaning up to people who have not profited and may even have suffered the adverse effects of the pollution.

All this is worthy of criticism and does much to make emissions trading schemes ineffectual and unfair. But a more fundamental question needs to be asked: even if safeguards are put in place to avoid the pitfalls and ameliorate the inequitable social outcomes – can emissions trading actually steer industry to a carbon-neutral future and avert a global warming catastrophe? Is it up to the job?

The current debate around the recommendations of the Garnaut report centres on differences like whether fuel should be included or not (with social justice being a key concern)and whether companies should be allocated initial carbon credits based on their past use, or if they should be forced to buy their emissions permits in an auction.

What isn’t discussed is whether emissions trading can actually turn around a large and powerful fossil-fuel based industrialized economy to abandon fossil fuels. An emissions trading scheme that would avert global warming must cut back greenhouse gas emissions by the necessary amount, and in the appropriate time frame, while allowing the necessities of our life and culture to continue to be produced in some form.

This pressure is what makes it very difficult to imagine any market-based mechanism being up to the job. To seriously avert environmental catastrophe, we must reduce not just emissions, but the amount of greenhouse gases already in the air, and quickly so that dangerous tipping points are not reached which will create a cascading series of feedbacks that make climate change ever deeper and irreversible.

Renowned US climate scientist James Hansen, pointing to the current melting of Arctic sea ice, argues that there is already too much CO2 in the air at around 385 parts per million. He suggests that we must reduce this to not much more than 300 parts per million. To achieve this would mean not just ending emissions, but projects such as widespread reforestation to draw down carbon and store it in ecosystems by “biosequestration”.

Biosequestration methods are often seen as a perfect opportunity for carbon offsets in a carbon trading system where companies earn credits to continue other polluting practices by simultaneously investing in these offsetting projects. But this assumes that the other polluting practices are affordable in some quantity. In the case of climate change, this is not true.

An example cited in Sharon Beder’s book “Environmental Principles & Policies” (UNSW, 2006) is the contrast between the German and US programs to eradicate acid rain. The German scheme aimed to reduce sulphur dioxide emissions by 90% between 1983 and 1998. The US scheme, on the other hand, only aimed for 50% reduction by 2010. Beder writes, “in the USA there was much greater scope for power stations to find cheaper ways to reduce their emissions than in Germany, where every power station would have little choice but to retrofit their plants with flue-gas desulphurization and selective catalytic reduction for nitrogen oxides – which meant there was no scope for trading… The Germans therefore decided against an emissions trading programme and achieved their goal using legislation. In other words, the more rigorous the emission reduction required the more likely it is to require state-of-the-art technology to be achieved and the less scope there is to find cheap solutions and sell excess allowances or reduction credits.”

What this means is that emissions trading schemes are only likely to function where they are to achieve relatively minor, and slow, reductions. Of course, the general consensus of government is that this is all that is acceptable because anything more threatens the profitability of the giant coal and mining companies that call the shots in Australia. For the rest of us, this raises the question of whether those companies (and the energy, oil, car and similar industries) can be tolerated in their present form and ownership.

The second reason why emissions trading is ineffective relates to how we replace our current fossil-fuel burning essential industries such as power. The scale and speed of building needed to replace vital power supply with renewable energy must be fast and big enough to save the planet, yet without reducing everyone’s living standards to that of a third-world country as this would provoke too much (quite understandable) community resistance.

Traditionally, such big projects have been achieved by government. In Australia, the rail, telecommunications, the Snowy Hydro power scheme and other projects have been undertaken by government because no private industry was large enough to do so. It’s not just the amount of capital required, which can be loaned, but fundamentally the rate of return. Compared to the vast investment in such huge schemes, private investors cannot expect to see a return on their investment for many years. Shareholders do not tolerate this sort of delay: the modern financial markets have multitudes of much, much quicker options to increase one’s capital, and investments will find other areas that show immediate profits.

These fundamental problems with market mechanisms need to inform debate. Many activists are rightly skeptical when the government announces a new coal-fired power station in the same week that the Garnaut report is released, and when companies declare they will pass on all their carbon trading losses to consumers. But we need to look deeper into these mystical market mechanisms and recognize them for the mirage that they are.