In November, a bunch of us from Carbon Credentials headed to the Frontline Club to watch a barbed documentary by investigative journalist Tom Heinemann exploring the dark side of European attempts to efficiently curb carbon emissions through harnessing the power of the market. The piece is leadingly titled ‘The Carbon Crooks’ and provokes the question: is it equally crooked for an institution to perform incompetently as a legislator as it is for criminals to exploit gaping loopholes in the legislation itself?
A primary purpose of the film was to highlight the stark flaws in the European Union Emissions Trading Scheme’s (EU ETS) framework and to explore not only their exploitation but also to question why they were not remedied sooner.
Firstly, the fact that transactions involving EU ETS credits were subject to a consumption tax exposed them to exploitation, namely the VAT carousel: a well appreciated method of defrauding a national treasury. This was enabled on a staggering scale by extremely lax registration rules in certain countries and the ability to shift a vast quantity (and so value) of credits across borders in an instant, rather than moving physical goods as is traditionally necessary for the scam.
Secondly, the security around accounts and transactions worth millions of Euros was so poor that the theft of credits, by way of hacking, was rife.
Billions lost, but who’s to blame?
It is inevitable that if a valid opportunity exists to engage in illicit revenue generating operations, criminal outfits will exploit them. Lo and behold many of the more nefarious organisations of our generation did exactly this.
What is difficult to reconcile is why this effect was not anticipated when the scheme was implemented, why it took €15 billion of illegal activity before significant action was taken (although some nations still apply VAT to carbon credit transactions) and, if each credit is digitally marked and tracked, why little of this criminality has been brought to trial. Representatives from Europol and the European Commission were reported to acknowledge they were able to locate missing credits and track their transaction history, however protested that they did not have the jurisdiction to prosecute.
Both Heinemann and the audience struggled to understand why national governments have taken so little interest in recouping these billions in fraudulent tax refunds and stolen credits, especially given a period of continent wide austerity measures. However, high profile arrests of Deutsche Bank employees in relation to carbon credit trading imply that the crimes were widespread and Heinemann was left with a wry smile when an audience member suggested that perhaps years of crises affecting the financial services, including subprime mortgages, Libor rate rigging and, most recently, rumblings of foreign exchange rate rigging and energy price fixing, have meant that governments cannot afford to have them publicly indicted again.
So, with few prosecutions, who can we label the crooks? The clandestine criminal organisations, the impotent legislating structures or, once again, the financial institutions?
A market to rule them all…
A parallel focus of the film explored the more general theme of using market mechanisms for curbing emissions. The EU ETS, a compliance market, suffered plummeting carbon credit prices, leaving emitters in the position where it “has never been cheaper to pollute”. This situation, where credits are almost insignificant in price, is the result of an oversupply of permits whose restriction was rejected by the EU Commission in the face of pronounced lobbying and a further failure to peg the supply of credits to production which fell significantly during the global financial crisis.
Whilst European Commissioner Connie Hedegaard rightly states that the EU ETS is “the most cost-efficient tool in EU climate politics”, poorly managed it is also likely one of the least effective. Indeed it is arguably worse than ineffective as it gives the perception that action is being taken despite no discernible gains being made, allowing policy makers to blindly reassure us that the powers of the market will prevail.
Those engaging in emissions trading, both mandated and voluntary, are given the option to avoid the issued allowance market in paying for a portion of their emissions and to instead finance reduced emissions through Clean Development Mechanisms (CDM). These are represented through credits known as Certified Emissions Reductions (CERs) approved by the UN and accredited by independent bodies which profess to represent real greenhouse gas emission reductions. These credits are intended to allow the twinning of industrial capital to pay for emissions reduction and a sustainable infrastructure trajectory in developing countries.
However, beyond the persistent problem of gross oversupply equally present in this subset of the EU ETS, the documentary explored the worth of these CDMs. Staggeringly, an independent report found that over half of projects ratified for CDM involvement did not meet UN standards, with credits being issued for projects that were already completed or not implemented. In this way, European emissions are decoupled from reduced emissions elsewhere and the carbon market is impotent once more.
Lastly, Heinemann set his sights on the validity of the voluntary carbon market that entices corporations or individuals to offset their emissions, focussing on projects that issue credits ratified on the basis of an economic concept of suppressed demand. These credits do not represent actual emissions but rather the removal of a behavioural preference for emissions in a population that is currently supressed. Individuals are surveyed for a behavioural preference which they cannot fulfil due to their immediate economic circumstances, however if circumstances were to change, individuals are assumed to act on this preference as they are no longer behaviourally ‘supressed’.
The Lifestraw, an ingenious tool for purifying drinking water, was taken as a case study. Individuals from Kenya were surveyed as to whether they would, given the economic power, boil water to purify it for drinking. Unsurprisingly, the vast majority said they would, indicating that there was a large ‘supressed demand’ for combustion and so greenhouse gas emission. A project that could provide clean drinking water would therefore, in theory, entirely remove this tendency towards additional emissions. Whilst this sounds to be an ideal twinning of humanitarian and environmental goals, there is little empirical evidence to encourage faith in the idea that a stated preference to a fantastical situation reveals real intent.
Theoretical issues aside, the efficacy of these credits as carbon reduction vehicles depends on how effective the Lifestraws really are at providing clean drinking water and so removing the stated preference. The technology is certainly effective in cleaning water however its use in day-to-day life was cast into doubt due to the frustratingly slow filtration rate. Individuals, including local political leaders, interviewed by the director stated that their use was very limited. This is in stark contrast to the results of the producer’s surveys, but without any primary evidence released to support this, little can be confirmed.
We can only wonder: is the consumer being hoodwinked by disingenuous promises of emissions reduction in order to fund humanitarian projects of limited use?
Problems aplenty, so where can we go from here?
The documentary resulted in a fiery and involving discussion that asked: what now? We were repeatedly shown the shortcomings of the current market based approach, perhaps a relic of ‘90s economic thought, and some of the actors involved at each stage. So if the system is patently broken, how can we fix it?
It is clear that past suggestions to broaden its scope by linking the EU ETS with its Australian equivalent are definitively the wrong solution and can only result in further dilution of carbon credits. Whilst a more networked global effort at greenhouse gas regulation is necessary to avoid the inevitable offshoring of pollution to ‘emissions havens’, the process of integrating disparate carbon markets can only be feasible when carbon prices are stabilised around the point that they encourage the use of cleaner, more expensive technologies or fuels.
Until then, CDMs, despite their flaws, may be used as a sort of ‘currency’ to intermediate between regions in place of wholesale integration. Above all, if we are still determined to place our faith in markets, what is required is strong leadership and regulation of the existing system, not a patchwork of ill-implemented schemes, flawed in their own right.
As an alternative, audience members proposed a retreat to command and control regulation of emissions, an idea given weight by leading climate scientist Jim Hansen (amongst others) last year. However, if the EU Commission have shown themselves unable to sensibly regulate the carbon market, it is difficult to imagine they will have the strength to mandate a necessarily severe price per unit emissions to promote a greener industry. Sadly, time marches on as we sit impotently by, unable to address the situation in the European Union, let alone the broader and more severe global emissions landscape.