Don’t Think That Cap-and-Trade Is Over
Profiteering, tax fraud, theft and dubious claims of emissions reductions are just some of the problems plaguing carbon trading
By JAMES KANTER | The New York Times | April 11, 2010
Steam and smoke rose from a steelworks plant in Port Talbot, Wales, in March. Matt Cardy/Getty Images
That litany of woes has helped prompt many commentators to proclaim that carbon trading is imminently headed for the scrap heap of history.
Such predictions are almost certainly wrong. Carbon trading, also known as cap and trade, is on the cusp of generating mammoth amounts of money for governments — money that could start flowing just in time to help nations emerge from the worst financial crisis in a generation.
The prospect of those earnings is one of the key reasons that nations are determined to stick by carbon trading, despite the setbacks and scandals.
Such revenues also help to explain why Australia, Japan and the United States are still exploring how soon they can set up such a system.
Under carbon trading, companies exceeding a “cap” on their emissions must purchase additional permits to pollute more. Companies that pollute less can “trade” or sell their surplus permits.
So far, governments in the European Union, which has operated the world’s largest mandatory system since 2005, have repeatedly overestimated the amount of gases that companies emit. That has undermined the creation of an effective cap on pollution.
E.U. governments have also given away most permits, rather than making companies buy them. That has allowed some of the bloc’s dirtiest industries, like coal-fired power utilities and cement manufacturers, to rake in billions of euros in windfall profits from a system that was originally meant to penalize them.
There have been other hiccups. Last year, swindlers took advantage of the system by stealing money that they should have paid in value-added tax to governments on transactions in carbon markets. Lost revenues amounted to about €5 billion, or $6.7 billion, according to Europol.
In other cases, rogue traders have resold expired permits while lax regulators have approved bogus carbon-reduction projects and cyberthieves have used fake e-mail messages to steal permits and sell them on electronic trading markets.
Defenders of carbon trading say that the European Union had to give away excessive numbers of permits at the start of the system, and keep it loosely regulated, in order to make it acceptable to powerful industry lobbies, which would have otherwise resisted any form of climate control.
Defenders of the system also acknowledge that, like the leaders of the European Union, President Barack Obama would probably have to agree to give away the majority of permits during the first few years of any U.S. carbon trading system because of similar pressure from industrial lobbies in Washington.
Now the European Union is tightening the cap and is obliging companies to start buying far larger numbers of permits.
According to an internal working paper released with little fanfare last week by the European Commission, E.U. member states stand to make €26 billion annually by 2020 through regular sales, or “auctions,” of emissions permits.
The paper said E.U. governments could begin earning as much as €928 million a year starting in 2012 by auctioning permits to airlines, which will become the next companies to join the system.
The paper noted that Germany had already auctioned some permits, in 2009, earning about €230 million that it allocated to development programs.
The potential sums are so substantial that sales of emissions permits could be one of the ways governments balance their books in the aftermath of the largest budgetary deterioration the Union has experienced. Such revenues could play a similar role in the United States, the paper said.
Under legislation before Congress that would create a U.S. version of cap and trade — although it is highly unlikely to be passed into law in its current form — the U.S. government would earn a minimum of about $8 billion each year through 2020, the paper said.
In Europe, the first major auctions will probably be held in 2011.
Electric utilities in Western Europe are expected to have to buy a majority of the permits they need, and those sales could generate as much as €13 billion a year for governments, said Abyd Karmali, the global head of carbon markets for Bank of America Merrill Lynch.
But companies that manufacture steel, cement and glass can still argue that they need all their permits for free to counter international competition. That made it too early to estimate the value to E.U. governments of sales of permits to those industries, said Mr. Karmali.
In the European Union, nations must use all the revenues earned from selling permits to the aviation sector for investments in climate and energy.
Some of that money is expected to be used by governments to make good on a promise to give $10 billion to developing countries to help them begin tackling climate change between now and 2013, and to contribute to a similar fund, which is supposed to be worth $100 billion by 2020, that would help nations most vulnerable to the effects of global warming.
But nations need use only half the revenues from selling permits to the power and industrial sectors for those kinds of climate-related projects, leaving plenty of money for other purposes — and that means carbon trading should soon look like manna from heaven for cash-strapped treasuries.
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