Harper’s takes aim at the carbon market, and misses the mark
While the sophistication news coverage of carbon markets has increased steadily over the years, name-calling and reductive syllogisms still abound. Reporters are hungry to say something bad about the carbon market, and hungrier still to conflate the badness of carbon markets with the badness of Wall Street. The line of attack goes like this—Wall Street is bad. The carbon markets are increasingly mediated by Wall Street. Therefore, carbon markets are bad. For examples see here and here.
Mark Schapiro’s cover story in February’s Harper’s is a recent and particularly egregious example. This article starts by chanting through the names of major investment banks involved in the carbon market as though the presence of these names alone proved malfeasance.
From the article:
“Carbon trading is now the fastest-growing market commodities market on earth. Since 2005, when major-greenhouse-gas polluters among the Kyoto signatories were issued caps on their emissions and permitted to buy credits to meet those caps, there have been more than $300 billion worth of carbon transactions. Major financial institutions such as Goldman Sachs, Barclays, and Citibank now host carbon-trading desks in London; traders who once speculated on oil and gas are betting on the most insidious side effects of fossil-fuel based economy.”
However, just mention of the involvement of Wall Street firms and a growing market is not sufficient to prove that there are problems. Moreover, the problems discussed in the article are only for EU-ETS offsets, which are less than 6% of the total market value. Even if one makes the unlikely claim that the purpose of the above paragraph is not to vilify the markets, but merely to provide context for a later discussion, the above article has painted the whole market with the same, broad brush.
Moreover it is difficult, given the title of the article, “Carbon Trading for Dummies: How the Scam Works-Conning the Climate, Inside the carbon-trading shell game” to imagine that the author is not trying to vilify carbon markets simply for being markets.
Indeed, given the title of the article and the opening, I was surprised to read through to the second page and find out that the article had nothing to do with fraud, but with technical difficulties in monitoring and verification. Okay, I understand it is hard to come up with something less sexy-sounding than monitoring and verification to put on the front of a magazine. The chances of getting an average passerby to pick up a magazine stand that promises a scam expose, particularly in a time of abundant financial chicanery, are much greater then the chances of getting someone to buy a magazine that says ‘substantive issues with monitoring and verification.’ But the commonness of Harper’s motives is not an excuse for this misleading and sensational title.
The conflation of fraud with M&V issues is all the more frustrating because monitoring and verification is a complicated and important issue at the core of whether or not the carbon market will ever be able to serve as a means of reducing emissions. If a large enough percentage of total certified reductions are fraudulent, then the system does more environmental harm then good. If the market evolves to the point were a large number of derivatives are being written on fraudulent reductions, then a growing carbon markets will contribute to the risk and instability of an already risky and unstable financial system. So, strong monitoring and verification is the foundation of a good system.
The Harper’s article correctly hits on many of the problems with the system—the technical capacity in validation agencies is weak, their incentives are misaligned with the project developer, spot checks are mostly done at a desk-level vs. project-level, and the system is difficult to administer because of the large number of countries and technologies involved.
In order for carbon markets to have any real impact, or even for there to be an honest conversation about whether or not carbon markets can have real impact, these issues need to be brought into the light. Unfortunately, this seldom occurs. Public discussion and evaluation of these issues with the carbon market is often forgone in favor in favor of reductive, polarized and shrill debate on both sides.
It is important to remember that a market is man-made, and therefore problems in the market are man-made and fixable. The way the article is written, it makes it seems as though the problems are intrinsic to the market itself and could not be reformed or exercised.
“In fact, problems with turning carbon into a commodity begin at the very moment of conception. One-ton of carbon credit is not precisely reproducible like an ounce of gold or twenty-tons of pork bellies; each credit emerges from an entirely different conditions and components, whether the planting of eucalyptus trees, the capture of methane from pigs, and the substitution of wind power for coal. Each represents a promise of potentially varying longevity and effectiveness, to say nothing of trustworthiness. Each involves rewarding a promise that cannot be kept, and whose keeping cannot even be measured reliably. On paper, cap-and-trade is seductively elegant; but in practice, making good of its promises would require an enforcement structure that is hardly less onerous than the obvious (if painful) solution to climate change that cap-and-trade was designed to avoid: that is, a carbon tax.”
I agree with Schapiro in that one ton of carbon is not precisely analogous to one ton of gold. However, the market already recognizes that different types of carbon credits have greater or less value based on a number of factors including their perceived reliability, their perceived environmental and social benefit, and the regime that they are traded in. I happen to feel that the differentiation does not yet go far enough, but the market is as yet not mature. However, in this way carbon is somewhat analogous to oil, which is price depending on viscosity, volatility, toxicity, etc. Of course there are also material differences, but the point is that even more traditional commodities are not uniform in their pricing. But this is the only part of the above paragraph where I can come close to understanding Schapiro’s point.
First of all, a purchased ton of carbon is not a promise. In all cases, a tradable emissions credit represents a ton of carbon dioxide equivalent that has already been permanently reduced. The permanent reduction is a basic criterion that exists in all carbon trading regimes, and the permanence issue is the main reason why, to date, forestry has been kept out of compliance markets. Once a ton of carbon has been permanently reduced, its reduction is just as long-lived as any—i.e., forever. Yes, in order for the market to be effective the participants must know with reasonable certainty that that ton has, in fact, been reduced. However, Schapiro has grossly overstated the problem “each relies on a promise that cannot be kept, and whose keeping cannot be measured reliably” and it is strange that Schapiro would refer to all carbon credits in this way just a sentence behind saying they are not uniform. First, some offsets are difficult to measure reliably, but a great many others are validated through records of physical destruction of greenhouse gasses kept by continuous monitoring systems that are extremely reliable. Further, it is completely possible to have a carbon trading system that does not allow offsets. In this case, verification of reductions and emissions is once again done through continuous monitoring systems on large, point-source facilities. Again, this is very reliable. It maybe worthwhile to discuss which projects are acceptable for offsets, or even for that matter, whether or not offsets can reliably be included in an effective carbon trading system. However this article seems uninterested in that kind of discussion, probably because it’s not sensational, and it’s difficult to get your hands around. Nonetheless, the fact that the first major emissions trading system has allowed the emission of difficult to measure credits does not mean that this is an intrinsic property of all emissions trading systems.
Finally, at the end of the article, the author offers no viable alternative. The strangest component of the paragraph is the claim that, on paper, cap-and-trade is seductively elegant, but that in practice it requires the same regulatory structure as a carbon tax. The usual argument for a tax over cap-and-trade is that the cap-and-trade structure is complicated and a tax is simple. Here, Schapiro seems to assume the opposite. I agree with Schapiro that a tax and cap-and-trade, when put into effect, are equally complicated. However, what I don’t understand is the argument that the complex regulatory structure necessary for cap-and-trade is a bad idea. And if he is too is trying to say that a tax is better (though it is not at all clear to me what he is trying to say), then he appears not to realize that a tax will involve the same monitoring complications? Greenhouse gasses are emitted from almost machine in the economy, and from many life forms and natural formations in the ecosystem. In what dimension of space is coming up with a system that allows for continued economy growth while reducing emissions going to be simple? On what planet will it not have difficulties and pitfalls? If someone comes up with the simple, univariate solution to global warming, I will not be the first to say it is a good idea because too many people will beat me to the punch. But I have confidence that is not going to happen.
Discussion and serious treatment of monitoring and verification, equity, and economic components of solving the climate change problem are incredibly important in order for society to come up with a workable solution. Unfortunately Schapiro, like many other journalists covering the issue, seems to value sensationalism and senseless alarmism over real discussion. It should not be sufficient to say that markets are bad simply because they are markets, or that monitoring is bad simply because it is complicated and prone to error. If, in the future, reporters, market participants, environmentalists, and regulators do not do better it will be a loss for us all.
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