Pay It Forward

What can carbon markets do for economic development?

NAIROBI—"Climate change is not just an environmental issue, as too many people still believe. It is an all-encompassing threat," declared UN Secretary-General Kofi Annan at the opening today of the so-called High Level Segment of the 12^th conference of the parties to the UN Framework Convention on Climate Change. During the High Level Segment, the world's environment ministers are scheduled to talk about advancing development goals in a sustainable way and about how to realize the full potential of market-based opportunities to combat climate change.

To address the threat of climate change, Annan added that "the primary responsibility for action rests with individual states—and, for now, that means those that have been largely responsible for the accumulation of carbon dioxide in the atmosphere. They must do more to bring their emissions down." He's talking about people living in Europe, the United States, Canada, Japan and Australia.

 

Annan declared that while climate change particularly menaced the poor living the developing nations, it also provided an opportunity for aiding their development. In particular he noted that the Kyoto Protocol's Clean Development Mechanism (CDM) in which countries and companies that are emitting CO2 in excess of their treaty allocations could finance projects in poor countries that reduced their emissions of CO2. For example, big CO2 emitters such as American Electric Power could finance the construction of a nuclear power plant in India in place of a coal-fired plant that the Indians would otherwise build. AEP would earn offsetting carbon credits and the Indians would get clean electric power.

 

But there are other ways to possibly offset CO2 emissions. The panelists in climate and forests session strongly advocated for including forests as a way to offset carbon emissions. They claimed that protecting forests and encouraging the planting of new forests could offset as much as 20 percent of global CO2 emissions. Forests act as sinks for CO2, that is, they absorb CO2 from the atmosphere as they grow. Furthermore, deforestation itself releases CO2 into the atmosphere. One estimate suggests that burning forests in Malayasia and Indonesia to clear land for palm oil plantations in 1997-98 released in the atmosphere the equivalent of 40 percent of all fossil fuel carbon emissions globally. One panelist Ian Swingland, founder of the Sustainable Forestry Management consultancy, calculates that at $20 per ton that one hectare would earn between $4000 and $10,000 in carbon sequestration services. And this does not take into account values such as preserving biodiversity and watersheds.

 

In comparison, a typical hectare of forest cleared for pasture earns between $200 and $500 annually. Swingland noted that the annual rate of deforestation was 12 million hectares per year. So he calculated that it would take $48 billion per year to protect 12 million hectares at $4000 per hectare. In comparison the Global Environment Fund is $800 million, only half which was spent on biodiversity protection. I asked Swingland later why pay $4000 when the marginal cost implied by his pasture example would be $500 per hectare? This would mean that it would take $6 billion per year to protect 12 million hectares of forest. He replied that he was just trying to give a sense of the magnitude of the problem—as GEF spending shows there is nowhere near $6 billion for preventing deforestation.  

 

Swingland did point out one the perversities of the Kyoto Protocol. Rich countries that have commitments to cut their emissions can count their forests as sinks and get credit for offsetting CO2 emissions. However, poor countries have no incentives not to cut their forests. Thus the incentives under the Kyoto Protocol are to conserve temperate forests in rich countries while destroying tropical forests in poor countries.

 

In the original negotiations for the Kyoto Protocol, forests were left out as CO2 offsets because of problems with figuring out how much carbon they actually sequestered. In addition, there is the problem of making sure that governments don't take money to leave their forests standing and then cut their trees anyway. Anders Wijkman, a Swedish Member of the European Parliament, argued that "as long as standing forests have no value, it will be difficult to reverse the trend toward deforestation." He dismissed CDM as an effective mechanism for generating enough funds for deforestation avoidance and afforestation projects. He estimated that the CDM would produce at maximum $2 t0 $3 billion for carbon offset projects per year.

 

While leaders like Kenyan Environment Minister Kivutha Kibwana may be sincere when they express fear that poor nations will "bear the brunt of nature's wrath," they also are very eager to get their hands on funds that they believe will generated when rich countries impose limits on CO2 emissions on themselves and begin trading emissions permits. Those markets will channel funds into clean development projects in poor countries as a way to offset CO2 emissions at home. Kofi Annan predicted that "international carbon finance flows to developing countries could reach $100 billion per year." Is this plausible? Currently, total overseas development aid amounts to $80 billion per year.

 

Although the new funds would be devoted to projects to offset CO2 emissions, the experience of foreign aid over the past 50 years is sobering. During that period rich countries have spent more than $2.3 trillion dollars on aid and due largely the kleptocrats that have run many of the world's poorest countries, their people are poorer than ever. Unless that changes, pouring money into Africa and other developing countries to offset carbon emissions will produce neither development nor actual reductions in carbon emissions.

How to get carbon markets to operate more effectively was addressed by another panel today sponsored by the International Emissions Trading Association. Pete Carl, the director general of the European Commission's Environment Directorate, argued that "all advanced countries have to go for a 30 percent reduction in emissions by 2020" after the Kyoto Protocol commitments ended in 2012. Jonathan Pershing from the World Resources Institute pointed out that nine northeastern states in the US had signed a compact in which they pledged to reduce their greenhouse gas emissions by 10 percent below their 1990 levels by 2020. And California promised to cut them back to 1990 levels by 2020. Talking with him later, Pershing said that there was no chance that the US would agree to Carl's proposed goal of a 30 percent reduction by 2020.

 

Brice Lalonde, former French environment minister, declared that the ultimate goal is that "anybody who takes carbon from the earth's crust has to pay to put it back."  He also suggested that Europe should impose a border tax on goods coming from countries that do not limit their carbon emissions. We'll see how this brave talk stands up in the face of the fact that last month most European countries issued far more carbon emissions permits than there were actual emissions. As was pointed out, if governments don't create a shortage in emissions permits, there will be no market for them. No carbon markets mean no billions for development projects.

 

Tomorrow, I may look in on sessions updating the state of play in Europe's Emissions Trading Scheme and see what the World Bank has to say about sustainable development in a carbon-constrained world.

 

Disclosure: I gratefully acknowledge that the International Policy Network in Britain is paying my expenses to cover the conference in Nairobi. Here’s what the folks at Exxonsecrets say about IPN and here’s what they say about me.

 

Ronald Bailey is Reason's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.