A short history of carbon trading
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There have always been various options on the table to solve climate change – regulating oil and coal companies, massive government investment in renewable energy, supporting the re-localisation of community transport and food production, to name just a few. So why has climate change – what economist Nicholas Stern called “the greatest and widest-ranging market failure ever seen”[i] - come to be seen as a problem to be solved by free markets? In order to answer this question, we should ask a few others: Where did it come from? Who was driving its creation? And what were they trying to achieve?
The big idea
The idea that pollution should be turned into a commodity for buying and selling started to be theorised by economists in the late 1960s.[ii] But it was not until later that the idea began to gain serious ground. With the rising influence of hardcore market economists, "big government” and “regulation” became the enemies of the policymakers that worked under right-wing leaders like Margaret Thatcher and Ronald Reagan.
Waves of deregulation and privatisation swept the world, with leaders professing faith in the power of markets across the board. Free markets would create great wealth, 'trickling down' to make even the poorest of the poor richer. The profit motive would transform bloated, inefficient public companies into sleek, competitive enterprises. Market forces could even, if harnessed in the right way, be made to clean up our air. In the words of European group FERN, “pollution trading was seen as a way of making it as cost-effective as possible for businesses to comply with an emissions target set by the state."[iii]
The idea of compensating environmental damage in one place by protecting from environmental damage in another place (“offsetting”, as we'd call it now) began to be used in planning in the 1970s. Under some laws, if developers were tearing up wetlands, they could pay to conserve a tract of land elsewhere to make up for that damage.[iv] There were also some early experiments with trading pollution permits.[v]
But the first fully-fledged trading scheme for pollution was not set up until 1990, under George Bush Snr's government. It was a national U.S. market for sulfur dioxide permits. It is often pointed to as the big success of pollution trading – critics, however, maintain that direct government regulation of sulfur dioxide in other countries achieved the same result as the U.S. scheme, quicker and more effectively.[vi]
From the margins to centre stage at the U.N.
Meanwhile, the threat of climate disaster was becoming clear, and political pressure was was building to stop the massive amounts of carbon pollution being dumped into the atmosphere. In 1992, government representatives from around the world met in Rio de Janeiro, beginning negotiations for a new treaty on carbon pollution. In 1997, this new treaty was signed in Kyoto, with a new international market in carbon at its centre.
However, the Kyoto treaty wasn't always going to include market mechanisms – it came to include them after heavy pressure from U.S. negotiators.[vii] (One U.S. government after another has famously refused to sign the Kyoto treaty, of course – but that's another story!) Supporters of carbon trading – described by Graham Erion as 'typically a triumvirate of industry groups, neoliberal ideologues, and “free-market environmentalists”'[viii] - had won their most important victory yet. Lobby groups such as the the International Emissions Trading Association (IETA, set up in 1999) began to emerge to advance the cause of carbon trading in the halls of power. NGOs such as the Nature Conservancy worked to pioneer new carbon commodities, sometimes in partnership with private capital (the Nature Conservancy (in)famously worked with BP, PacificCorp and American Electric Power on the project now thought of as the first “REDD" initiative).
Larry Lohmann points to the close relationships between these NGOs, policymakers in the UN and elsewhere and corporate players, raising conflict of interest issues in the design of the carbon trading framework.[ix] He also argues that support for carbon trading by polluting industries was part of what amounted to a two-track strategy. He describes a kind of “good cop, bad cop” manoeuvre, where one part of industry played hardball by throwing climate science into doubt, and the other part – rather than denying the existence of climate change – worked to shape carbon markets in ways that would beef up their profit margins.[x]
Since 1997, carbon trading has lurched onward, plagued by uncertainty and controversy, yet maintaining its position as the dominant climate 'solution' on the table. "Offsetting” began to enter into public consciousness among consumers in countries like Australia and Britain – it became possible to pay money to fund tree planting projects to offset the "carbon footprint” of activities like air travel. In 2003 the Chicago Climate Exchange – similar to a stock exchange – began trading carbon commodities between voluntary participants, like Ford and Dupont. Companies “agreed to reduce their greenhouse gas emissions and traded the credits they earned for their success”- but it shut its doors in 2010.[xi] The NSW state government was in fact one of the earliest governments to set up a carbon trading scheme that required companies to participate by law (also in 2003.)[xii]
Cheerleaders for carbon trading got a major boost in 2005, when the European Union launched a legally binding carbon trading scheme. It has since been troubled by fraud and price collapses. On the east coast of the U.S. and Canada, several states banded together to form a market for pollution permits in 2008. New Zealand followed with a national scheme that came into effect in 2010, the same year that the city of Tokyo enacted its own scheme.[xiii] Despite the uncertainty hanging over the end of the Kyoto treaty, plenty of new national and regional trading schemes are on the table, including in the west of the U.S. and Canada, South Korea, China and India.[xiv] The global carbon market is currently worth around US$176 billion.[xv]
Throughout the rise of the carbon trade, it has been questioned and opposed by critics who support action to stop climate change. Social movements where carbon offset projects are carried out draw attention to the problems on the ground.[xvi] In Europe, groups such as Carbon Trade Watch are critical of the environmental ineffectiveness and injustices that come with handing the climate over to markets. Similarly in the US, the climate justice movement is critical of carbon trading – in one example, a coalition of groups has been working to oppose the “cap and trade” aspect of California's new global warming law. This resistance, the current mess that is the international climate negotiations, and global economic instability, together pose many questions for the future of the carbon market.