Carbon trading and market solutions

The threat of dangerous climate change is now widely acknowledged. So why won’t governments take serious action? Chris Breen examines the major proposed market solutions—and the alternatives.

ALMOST IMMEDIATELY after taking power, Kevin Rudd outsourced the development of global warming policy to professor Ross Garnaut. Garnaut delivered a draft report on 4 July, with the political aim of setting up an Emissions Trading Scheme (ETS) in Australia.

Ross Garnaut is a wealthy committed free market economist, banker and former Australian ambassador to China. He is also a former director of Ok Tedi mining and Lihir Gold, known climate vandals that were involved in the discharge of toxic tailings and a serious cyanide spill respectively. It is no wonder then that Garnaut’s suggestion is to tackle the problem of global warming through the market.

Garnaut’s draft report seems to have gone further than Rudd wanted in seeking emissions cuts and already there is an industry backlash. This has forced many green groups and unions into supporting the creation of an ETS, or another variety of market solution. Whilst it is important to support the better principles that Garnaut has highlighted (saying polluters should pay and affected regions like the Latrobe and Hunter Valleys should get assistance to make change) from the attacks coming from the conservatives, these principles are not unique to market schemes. The movement needs to see beyond Garnaut and the market and fight for real change, not for a “better form” of market solution which is incapable of delivering.

What is a “market solution”?

Cutting carbon emissions is a global task which exposes the inequalities and conflicts which exist between nations. Capitalism is a system of brutal competition. All companies, and the governments which represent them, fear that if they invest to reduce carbon emissions they will lose their competitive edge against overseas rivals who refuse to act on climate change.

If the logic of competition prevails dangerous climate change in inevitable. This logic is built into all market “solutions” to climate change-which is why they will not work.

Market-based ideas, primarily carbon trading, are being pushed by ruling classes around the world as the solution to global warming. In Australia, the Labor Party and various business interests favour variations on market-based solutions. They must be seen to be doing something, but refuse to bear the cost. Other sections of business, mostly the fossil fuel industries, have been behind climate denial and consistently opposed doing anything.

Market solutions seek to delay any real structural adjustment (such as massive investment in renewable energy). They look to shift the cost of making adjustment to the working class and if possible the third world (in Australia’s case it seeks agreements with countries like Papua New Guinea that it dominates economically, to offset Australian industry that refuses to change).

Carbon emissions trading

Emissions (or carbon) trading aims to use the lure of big profits to induce companies to change their practices and reduce emissions. It is supposed to work by putting a price on carbon emissions. A total cap is set for a country and then permits are either auctioned or given away. Companies that make cuts greater than the amount suggested by the permits they hold, can sell to companies unable to do so.

To work, the initial price for a unit of carbon must be high enough to discourage industries from paying to pollute.

While it is theoretically possible that an ETS could result in small emissions cuts if ordinary people can be forced to bear the cost, all the evidence to date is that an ETS will fail and emissions will keep rising.

US business interests pushed an ETS into the Kyoto Protocol (which US rulers later refused to sign in spite of having got their way). The ETS was modelled on the scheme to reduce emissions of sulphur dioxide (SO2-the cause of acid rain) in the US. The scheme is expected to have reduced SO2 emissions in the US by 35 per cent after 20 years (by 2010). Conversely, in Germany direct government regulation reduced SO2 emissions by 90 per cent between 1982 and 1998. Unlike SO2, CO2 emissions are built into the heart of the modern economy. In the US alone hundreds of thousands of sources would need to be monitored compared to thousands in the SO2 program.

In Europe, the first ETS collapsed because the price was too low and too many permits were released. Fraud and cheating are endemic to the system, and enforcement is almost non-existent.

Emissions kept rising as they had prior to the scheme. The European trading system-the pin-up scheme of the Kyoto protocol-has done nothing to cut emissions.

Part of the problem with implementing an ETS is the demands that businesses make limit any theoretical potential for emissions cuts. Leading businesses are already demanding that pollution permits be handed out for free.

In its submission to the draft Garnaut report, the Australian Aluminium Council claimed that free emissions permits were “essential” under any ETS because of Australia’s need to compete with other regions.

In response to Garnaut’s draft report, industry has already started making its ambit claims. Energy Supply Association chief executive Brad Page said, “The issue at stake here is the arbitrary destruction of shareholder wealth through a dramatic change in government policy”.

An article in The Age argued: “According to people close to the review, one option could be for Australia to adopt two sets of greenhouse targets: a lower set of emissions cuts to be achieved no matter what other countries do, and the tougher set of targets to kick in if an international deal can be struck.”

If Australian business can’t shift the cost of making cuts to other countries, it simply wont do what is required. This is a recipe for disaster, since the UN has shown an inability to achieve serious agreement on climate change. Since the Intergovernmental Panel on Climate Change (IPCC) was established in 1988 and the first Earth Summit in 1992, emissions have continued to rise rapidly.

As with other issues of global survival such as nuclear weapons and war, there is no international institution capable of over-riding competitive logic.


Where ETSs have been tried they have relied on the purchase of carbon “offsets” in the form of buying reforestation or renewable energy projects. Companies buy the rights to carbon sinks in order to continue pumping CO2 into the atmosphere. Offsets reduce pressure on companies to make any real structural change by encouraging the idea they can buy their way out of trouble (for relatively small amounts of money).

It is impossible to prove that a particular scheme wouldn’t otherwise have gone ahead without the purchase of offsets. And yet this “additionality” is what a carbon credit is supposed to mean. Indeed offsets have been allowed for already existing projects.

Under the Kyoto treaty there is something called the Clean Development Mechanism (CDM) that allows rich countries to meet their targets by funding “clean” energy projects in poor countries. The Sydney Morning Herald reported: “A working paper by two Stanford University of California academics examined more than 3000 projects applying for or granted up to $10 billion of credits from the CDM funds over the next four years, and found that most should not be considered for assistance. ‘They would be built anyway,’ said David Victor, a law professor.”

Carbon rationing

Some activists, like George Monbiot and the group Carbon Equity in Australia, believe it is possible to achieve a compromise with the free market. They propose a system of individual carbon rationing, working alongside an emissions trading scheme for industry. Carbon credits would be given to every individual or household. People who used less than their ration could sell the excess to others at “on the spot” prices. Every year household allowances would fall as part of the national transition.

This plan seems to both uphold egalitarian principals by allocating everybody the same right to pollute, and involve a form of rational planning by lowering allowances but it is flawed. It is based upon the myth that individuals have to share responsibility with industry even though individual consumers have no democratic say about how production is organised.

Carbon Equity is rightly sceptical of the ability of “simple price signals and market mechanisms” to “drive deep seated change”, but nonetheless carbon rationing involves simple price signals. It focuses on consumption rather than production-which constrains our ability to challenge the market.

A look at wealth in Australia puts paid to the notion that we all share equal responsibility to pay for the cost of dealing with the climate crisis. In 2007 Salary packages for executives jumped by 28 per cent to an average of more than $2.56 million a year. This equates to $49,231 a week-close to average yearly earnings for the wider workforce at $56,732.

Rationing does not acknowledge current inequality of both income and circumstance. People in outer suburbs need to drive more than those living in the inner city, but this is not through personal choice-it is caused by a lack of public transport, close shopping, schools and other facilities. Why should they pay more? People able to afford things like proper insulation or solar hot water would be better placed but the plan has no mechanism for making such necessities widespread.

It is also based on many of the same anti-working class measures as mainstream carbon trading. The rich could use their wealth to exceed their ration, while implicitly expecting working people and the poor to live more austere lifestyles. Thus it is not surprising that some Tories in Britain are now calling for the introduction of individual carbon rationing.

Finally this plan, like all other forms of carbon trading, is unnecessarily complex, and still won’t achieve the most important and simple things that we need to do: like phasing out coal in favour of renewables, or investing in public transport in preference to private cars.

Carbon Tax

A carbon tax is a simpler plan. It has been supported by groups as diverse as the Australian Manufacturing Workers Union, Greenpeace and the Insurance Australia Group. Some unions and green groups support a carbon tax because it appears to be based on the principle that polluting industries should pay and it seems that it will not deliver windfall profits to traders of carbon permits as the carbon trading in Europe did. Some businesses support it because they claim it provides more certainty over investment lifecycles than carbon trading proposals.

It may provide more certainty for industry, but because large corporations control industry, they could easily pass this cost onto individuals. There would be no incentive to cut emissions and our living standards would fall.

For any sections of the environment movement to support rising petrol and electricity prices is to cut themselves off from the working class, who must be part of the climate movement if it is to have the power to fight for real change.

A carbon tax is a simpler mechanism than carbon trading, but is still a price signal rather than a conscious decision about how production should be organised. The rising price of petrol has not led to emissions reductions. The demand for petrol is “inelastic”, which means that unless governments invest in expanding public transport people have to drive. Rising petrol prices have not built a single new piece of public transport infrastructure. Similarly a tax on coal-produced electricity would lead to higher prices, but this would not in itself build the renewable infrastructure we need.

A market for renewable energy?

Some analysts argue that profits can be made in renewable energy. This is based on some truth. Despite significant government stalling, there are over 40 wind-farms operating in Australia and one company, Solar Systems, is building a photovoltaic power station in Victoria.

However, only 8 per cent of Australia’s electricity comes from renewable energy, including seven per cent from hydro electricity. The fragility of the solar industry, which is up against decades of established and subsidised fossil fuel infrastructure, was made evident by the recent changes by Rudd government to the structure of the solar rebate. Replacing current fossil fuel infrastructure carries a cost high enough that all corporations and states are scared about being the first to take radical action. That’s why effective action is possible only by imposing a rational plan for production.

Real solutions are possible

Market solutions to global warming are being presented as the only possible course of action. This is an attempt to absolve governments and industry of real responsibility and limit the parameters of debate.

The biggest source of emissions worldwide is electricity generation.

The answer is renewable energy. The coal industry must be phased out, with a just transition for workers and their communities. Unions must be persuaded both of the need for the transition and of the need for the whole union movement to fight for retraining in unionised jobs at the same pay rates.

Beyond Zero Emissions has a detailed plan1 that could reduce Victoria’s emissions by 50 per cent within three years at a cost of $29 billion. This involves a transitional conversion of coal plants to natural gas plants while wind capability is simultaneously built. The plan includes realistic solutions for jobs, with workers involved in rehabilitating the mines and then staffing new power generators.

Energy efficiency during the transition will require the provision of insulation, solar hot water, and energy efficient appliances for every home. But these measures cannot be “consumer choices”, available only for those wealthy enough to afford them (see page 6). They will not work unless government forces industry to build energy-efficient schemes into housing and construction. Industry must be regulated with absolute emissions targets.

With the right government investment massive expansion of the public transport system could reduce most car use. Any remaining cars could be electric-powered. In the 1950s half of domestic freight was transported by rail. Now the figure is two per cent. This trend can be reversed, but like reducing car usage in Australia, it is a job only governments can achieve. Our cities have been designed around car usage, and any policies that penalise working class people living in suburban areas with no access to adequate public transport, must be vigorously opposed.

Putting pressure on governments to act

Despite these possibilities, our governments are planning for increasing emissions, not cuts.

In NSW the ALP state government is committed to privatisation of electricty despite popular opposition. Privatisation will make implementing solutions to climate change much harder.

In Victoria the ALP state government is building a desalination plant that will use 2 per cent of the state’s electricity each year and is proposing to spend $150 million of state and federal government money building a new coal fired electricity plant. If we switched to renewable energy we wouldn’t need to waste 116 gigalitres of drinking water to cool Latrobe Valley coal electricity generators each year and wouldn’t need the desalination plant.

Market based schemes are smoke and mirrors, that will see both emissions and profits untouched in any serious way.

All solutions that will actually work involve government intervention, regulation and planning.

We need enforceable cuts in emissions across industry. Companies which refuse to adapt should be nationalised. There should be prison sentences for CEO’s that break emissions laws. The knowing destruction of our planet is a crime.

How the environment movement responds to Garnaut will be the key to taking the movement forward. We need to build a movement to force our own government to build infrastucture and secure jobs. There is a growing global movement against climate change and every success will inspire action everywhere else.




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