EcoCafe

Tonight, I watched a good BBC-documentary called “Carbon Hunters“. It basically is about the business of carbon credits, and focusses on the new breed of entrepreneurs called carbon hunters. Carbon hunters search for opportunities to reduce greenhouse gas emissions that result in carbon credits, which can be sold to fund reduction projects. The central theme of the program is the question whether carbon credit trading really helps the environment, or not.

The principle of the “Cap and Trade” system is simple and is described clearly in the trailer above. But I do not fully agree with the conclusion: “in theory, this reduces the overall amount of carbon in the air“. What Cap and Trade does, – in theory – is merely allocating emission reductions to the cheapest and thus best possible place . It puts a price on carbon, but the system does not necessarily lower the total amount of greenhouse gasses. When the cap is set too high, the price of carbon will be zero.

Let’s extend the example in the trailer: factory A can reduce its carbon emissions at a cost of 15 euro per ton reduction and factory B can do the same at a cost of 20 euro per ton reduction. Government regulations say both factories have to reduce their emissions by five ton. If both factories reduce their emissions with five tons, the total cost would be 5 x 15 euro + 5 x 20 euro = 175 euro. An emission trading scheme would allow factory A to reduce its emissions by 10 ton and selling 5 carbon credits to factory B. In this case, the total cost would only be 10 x 15 euro = 150 euro. Cap and Trade thus allows the market to reduce the emissions in the most efficient way possible.

Although the system is perfect in theory, the practice shows to be less rosy. Factories in the west can offset their emissions by buying credits from countries like India or China under the Clean Development Mechanism scheme (CDM). The logic is the same: if it is cheaper to reduce emissions in rural India, a factory in the US or Europe can pay for it and let its own emissions as they were. But in practice, the emission reductions in China or India would often also have taken place without the carbon credits. The principle of additionality is not respected, that means that the carbon credits do not originate from additional emission reductions, but from reductions that would have taken place anyway. This is nothing more than selling and buying hot air.

In my opinion, Cap and Trade is well suited to establish emission reductions, if the cap is set low enough. But eventually, every country should take part in it to avoid growing emissions in countries that do not participate. Better regulation is essential to protect the principle of additionality. Nevertheless, it is a good thing that Europe has taken action. And as one of the carbon hunters states in the program: “there is no problem in getting rich and saving the planet”.