A Critical Conversation on Climate Change ... - Green Choices

48 development dialogue september 2006 – carbon tradingIn this situation, it makes sense for bothcompany A and company B to buy creditsfrom abroad rather than make reductionsthemselves. Company A saves usd 5,000 bybuying credits from projects abroad ratherthan cutting its own emissions. CompanyB meanwhile saves usd 55,000. The totalsaving for the domestic private sector isusd 60,000.Other names for project-based credit tradinginclude ‘baseline-and-credit’ tradingand ‘offset’ trading.Hybrid trading systemsSome pollution trading systems use emissionstrading only. Hybrid systems use bothemissions trading and ‘offset’ trading, andtry to make ‘allowances’ exchangeable forproject-based ‘credits’.The US sulphur dioxide market uses emissionstrading only. But both the KyotoProtocol and the EU Emissions TradingSystem mix ‘cap-and-trade’ allowancesand project-based credits, and try to makethem mutually exchangeable.Such systems are enormously complex.Not only is it difficult to try to createcredible ‘credits’ and make them equivalentto ‘allow ances’. Mixing the two alsochanges the economics.For example, imagine that company A andcompany B above are allowed three optionsin any combination: cutting their ownemissions, trading allowances with eachother, or buying credits from abroad.For company B, the best option would be,again, to buy usd 20,000 worth of creditsabroad rather than spend usd 75,000 to reduceits own emissions.For company A, the best option would beto cut its own emissions by 10,000 tonnes– but only if it could find a buyer whowould pay usd 10 per tonne for the 5,000allowances it would have to spare. Insteadof having to pay usd 20,000 for carboncredits from abroad, it wouldn’t have tospend anything.Unfortunately for company A, it can’t findany such buyer. If company B can save usd5,000 by going abroad for credits, it won’tbuy company A’s spare allowances. Butcompany B is the only other firm in theemissions trading scheme. So without companyB as a buyer, it’s not worthwhile forcompany A to make any cuts at all, and ittoo will wind up buying credits overseas.As Michael Zammit Cutajar, the former executive secretary of theUNFCCC, has stressed, this approach was ‘made in the USA’. 67 Thepollution-trading mechanisms that formed the core of the KyotoProtocol were of a type proposed by North American economists inthe 1960s; 68 put into practice in US markets for lead, nitrogen oxidesand sulphur dioxide and other pollutants beginning in the 1970s and1980s; 69 and successfully pressed on the UN by the US government, advisedby US economists, US NGOs and US business, in the 1990s. 70What is the Kyoto Protocol exactly?The Protocol was adopted in 1997 at one of the annual conferencesof the parties to the 1992 United Nations Framework Convention on