Carbon trading and net zero carbon

With energy use and carbon emissions falling due to the Coronavirus crisis, carbon markets, based on the trading of carbon credits, have also been hit. Sometimes seem as a key way to reduce greenhouse gas emissions, carbon markets are sensitive to energy demand changes, with, in this case, there being an over-supply of carbon credits, so that their tradable value falls. That may change, when and if the Covid 19 crisis is resolved, but it does raise issues concerning the viability of carbon trading and the role of carbon markets in attaining net zero carbon.  

Putting a price on emissions has been seen as a key way to make generation companies avoid dirty energy sources and invest instead in clean energy options. Direct carbon taxes are one approach, but there has also been enthusiasm for ‘cap and trade’ systems based on tradable carbon credits. For example, financial speculators see carbon markets as a possibly lucrative new growth area.  However, so far, although it may have made some traders rich, the carbon trading approach has not been spectacularly successful in carbon saving terms. The EU Emissions Trading System (EU-ETS) and the wider carbon credit trading system that emerged from the Clean Development Mechanism (CDM), have had limited impacts on emission reduction, given that attempts to impose tighter national emission caps to increase the value of carbon credits have been fought off politically by countries still reliant on coal.  

In theory, if the caps were tightened, then the carbon trading system might start to work more effectively. The same would happen if a high carbon tax was applied - pricing fossil energy projects out of the market. However, although carbon taxes and /or tighter caps may penalise fossil fuel use, they can also be socially regressive- the extra cost may just be passed on by generators to consumers, and will hit those least able to pay the hardest.

There are also issues as to what happens to the income from carbon taxes. Like most taxes, it just disappears into national treasuries, adding to the citizens tax burden, for, apparently, no obvious gain. There maybe actually be emission saving gains due to the schemes, but if that could be made more explicit, by ‘hypothecated’ taxation, with the income specifically targeted on renewable energy development or energy saving, the tax might be better received. However, governments hate hypothecation, since it reduces their freedom of action.

Carbon trading also has issues. It is based on what, in effect, is a virtual market for carbon credits, and that may not always be well linked with what is actually happening on the ground. Once you create an abstract intermediary credit, like money, it can take on a life of it own, opening up the possibility of speculation against future trades and future carbon values. In theory it is all meant to relate back to actual carbon saving projects, but the connection can become tenuous, and can even become corrupted. For example, accreditation of claimed emission avoidance can be difficult, and can be disproportionately costly and time consuming for small projects in remote locations. So it may not be done, or at least not be independently checked on site regularly, with projects just being deemed to be delivering based on (paper) compliance reports. There have been anecdotal accounts of projects that were accredited on paper which didn’t actually exist, or were not running as claimed. That may be just hearsay, but, given that large sums of money are involved, there is an obvious need for careful policing - but that just make the whole process slower, more costly and more bureaucratic.

It gets worse. Carbon trading and, also carbon taxes, are sometimes seen as helping to meet net zero carbon targets, as now adopted by the UK and some other countries.  The ‘net zero’ formulation does not usually specify how emissions are avoided, so in principle any project will be acceptable if it can claim to avoid CO2 production. That can include carbon offset and carbon removal projects, as well as renewable energy and energy efficiency projects. However, some argue that this mixes up basically conflicting policy approaches- decarbonisation, by emission mitigation at source, for example by switching to renewables, and compensatory post-fossil generation CO2 clean up, for example by Carbon Capture and Storage and Negative Emission Technology.  Some see the latter as a speculative and sometimes unreliable approach. A study from Lancaster University focused on the problems of Negative Emission Technologies (NETS) for carbon removal from the atmosphere. In his summary of it in Carbon Brief, Prof Duncan McLaren says that ‘Net-zero plans that rely on promises of future carbon removal – instead of reducing emissions now – are, therefore, placing a risky bet. If the technologies anticipated to remove huge quantities of carbon in the 2040s and 2050s fail to work as expected – or lead to rebounds in emissions from land-use change, for example – then it might not be practical to compensate for the cumulative emissions from mitigation foregone between now and then’.

He looked instead to a ‘formal separation of negative emissions targets and accounting for emissions reduction, rather than combining them in a single “net-zero” goal’. That would avoid the risk of carbon removal undermining the expansion of mitigation: carbon removal would be additional rather than a rival, although he says that we may need both: ‘Even if emissions were brought to net-zero by 2050, the world would likely still need to achieve “net-negative” emissions for a period, to reduce atmospheric CO2 concentrations back to safer levels. At least some countries and sectors will need to go “beyond net-zero”.’

Similar views on carbon removal have emerged in the USA. The approach proposed in the US Green New Deal promoted by Presidential hopeful Bernie Sanders, specifically excluded Carbon Capture and Storage, as well, in some variants, as market-based cap and trade approaches, in favour of government-led regulatory and intervention approaches. However, others, usually further to the right politically, see it differently. Even given their usual hostility to taxes, some on the right may seem carbon taxes, or at least carbon trading, as being preferable to state socialism! 

Back in the UK, the Conservative government is also still keen on emission trading. The Department for Business, Energy and Industrial Strategy (BEIS) is evidently planning for the future of carbon pricing post full Brexit with the UK no longer participating in the EU Emissions Trading System. It seems that they envisage replacing emissions trading in the UK with a fixed rate tax, called the Carbon Emissions Tax.  But we don’t know yet….and with the  Coronavirus dominating the agenda we may not find out for a while: climate policy in the UK and elsewhere may stay on hold while we fight the virus, with the COP 26 climate summit postponed until next year.