NAIROBI—The carbon traders, brokers, and consultants, the companies seeking wealth transfers, the climate bureaucrats, and last, but not least, environmental lobbyists are crawling all over the UN's Gigiri complex on the outskirts of Nairobi. Several years ago, Clemson University economist Bruce Yandle predicted that a classic Baptist and Bootlegger climate coalition would emerge in the wake of the Kyoto Protocol. And so it has. The idea of a Baptist and Bootlegger coalition is that both Baptists and Bootleggers support blue laws forbidding the sale of liquor. The Baptists favor blue laws because they are against sin and the Bootleggers because it creates a profitable market for them.
The central focus of 12th Conference of the Parties of the UN Framework Convention on Climate Change is carbon markets and how to expand them. All of the sessions that I attended here featured at least some talk about carbon markets by prominent bureaucrats, industry lobbyists and the environmental lobbyists. And according to them, carbon markets will whiten your teeth and freshen your breath, put a sparkle in your eye, a spring in your step, slim you down and vastly improve your sex life. Or at least fatten their bottom lines by saving the planet.
One Green "Baptist," Matthias Duwe, from the Climate Action Network, explained his group's support for carbon markets by saying, "Environmental effectiveness is what counts. What we want is absolute reductions in emissions. Sending signals to business is secondary." In other words, they are against environmental sin and they think that carbon markets will help stamp out the sin of emitting noxious greenhouse gases. Right beside him on the panel sat an earnest climate Bootlegger, Kate Hampton, a policy advisor to a British merchant bank that has established the $1 billion Climate Change Capital fund that invests in carbon markets. She thinks there's plenty of money to be made if the politicians and bureaucrats set stringent limits on how much carbon companies can emit. Hampton aptly described the European Union's Emissions Trading Scheme (EU ETS) as a "policy-driven market."
And that's a pretty good description. After all, carbon trading came into existence solely as a result of the Kyoto Protocol. Carbon markets are created by imposing a cap on the emissions of greenhouse gases that are believed to contribute to recent global warming then allocating permits for the amount that can be emitted. A carbon market was selected as a way to manage carbon emissions instead of carbon taxes which Duwe pointed out the EU discussed for ten years and it got nowhere with them.
Carbon markets allow governments to set actual limits on emissions and then let the private sector figure out the most cost-effective ways to reduce emissions. This is done at the cost of some volatility—the price for emissions permits can go up and down steeply and quite rapidly. Carbon taxes, on the other hand, offer the possibility of a stable price, but at the cost of flexibility in figuring out the cheapest ways to cut emissions. Another downside for global warming activists like Duwe is that taxes do not specify actual reductions.
Although a climate Baptist, Duwe does appreciate that a carbon market sends the signal to business that "every unit of carbon dioxide that goes out the window is a unit that could be sold." In other words, if a company can reduce its emissions below its allocation, it can make money by selling its remaining allocation to another company. Of course, a company can also make windfall profits if the government allocates it more permits for emissions than it actually needs.
So are carbon markets here to stay? Here in Nairobi, climate Baptists and Bootleggers and their bureaucratic facilitators constantly repeat the mantra that no matter what, the European Union will have a carbon market after the Kyoto Protocol comes to an end in 2012. Really and truly it will, it will! To a cynic they begin to sound like they are whistling past the graveyard. In fact, activists began distributing a T-shirt today emblazoned with the slogan "Mind the Gap." The "gap" they fear is the one that might open up between 2012 when the Kyoto Protocol ends and whatever other climate treaty follows. Carbon investors and traders could fall into the "gap" never to emerge again, that is, they could lose faith that governments mean seriously to impose carbon limits and stop putting up money to abate carbon emissions. The "gap" is what carbon market advocates call the continuity problem.
Hampton pointed out that what happens after Kyoto matters because if emitters—especially big power and industrial companies–don't believe that carbon will have a price in the future, they will not invest in long term expensive low carbon infrastructure. According to Hampton, Germany is slated to replace 20 percent of its energy infrastructure by 2012. Power generators will not choose more costly lower carbon technologies unless they think that it will save them money in the long run. Hampton says, "It really is policy and regulation that drive investment. The lack of a long term carbon signal undermines business's ability make rational decisions on investment."
All of the climate coalition members were eager to explain the precipitous drop in carbon prices in the ETS in May as growing pains. It turns out that most European governments allocated more emission permits than there were actual emissions. When the actual level of emissions was verified in May and it turned out that companies emitted 66 million tons of carbon less than allowed in 2005. This provoked, as they say, a correction of about 50 percent. Of course, both the climate Baptists and Bootleggers are keen to get climate bureaucrats to more strongly restrict the number of permits that are issued in the future. That would give the climate Baptists lower emissions they want and the climate Bootleggers the higher prices they crave. A win/win for everyone, except for perhaps the hapless consumers who have to pay more for the energy and products they buy.
If Europe does go it alone with its carbon market, Europe's manufacturers will argue that they can't compete with foreign companies that don't have to pay for their carbon. Already the European Commission has convened a High Level Group to consider imposing border taxes to level the playing field. Hampton warned, "What signal does this send–that carbon markets are so onerous that you have to build a fortress around yourself." Nevertheless, she did note that such countervailing CO2 import tariffs could be compatible with World Trade Organization rules. She pointed out that after the United States banned ozone depleting chemicals in the 1970s, it began imposing tariffs on such imports and no one objected that it violated free trade rules.
All of the participants on the UN conference side panels are impatient to get the United States to join the carbon market. However, the World Resource Institute's Jonathan Pershing said, "I don't think that there will be a common integrated market in the next commitment period." The next commitment period means between 2012 and 2020.
On the other hand, Hampton declared, "This is the decade in which we will find out if the world is capable of setting and reaching goals that will keep the rise in average temperatures below 2 degrees Celsius." And if that happens, the planet may benefit, but the climate Baptists and Bootleggers certainly will.
Tomorrow—The 12th Conference of the Parties (COP-12) to the United Nations Framework Convention on Climate Change and 2nd Meeting of the Parties (MOP-2) to the Kyoto Protocol comes to an end. I will report whatever decisions the diplomats make and reactions by other participants to those decisions.
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.