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June 19 (Bloomberg) — The market for trading rights to spew carbon dioxide, created by the 1997 Kyoto Protocol to reduce global warming, is under attack by developing countries and environmentalists as negotiators hammer out a sequel treaty.
Investors who trade pollution permits are fighting proposals to limit or kill a United Nations program that lets European companies offset requirements to cut emissions by bankrolling low-carbon projects in emerging economies. The process creates allowances that the World Bank says accounted for 26 percent of the $126 billion of credits that traded in the carbon market in 2008.
China and Mexico want wealthier governments to subsidize clean-up projects directly, with the Chinese saying investments from Western companies should “not be used to offset” their own cuts. Greenpeace International says the UN system delays rich nations’ response to greenhouse gasses. Their approaches would reduce the private sector’s role in, and potential profits from, the global-warming fight. Ending offsets would limit trading to permits that European Union governments issue under a related regime that makes up 73 percent of the market.
“There is a growing fear that the whole low-carbon investment scene is being positioned toward the public sector,” said Henry Derwent, president of the Geneva-based International Emissions Trading Association. “The public sector has no more than a tiny percentage of the money needed to solve the climate problem,” said Derwent, Tony Blair’s climate adviser when he was U.K. prime minister.
Trading Lobby
The lobby — which includes Goldman Sachs Group Inc., Morgan Stanley, Barclays Plc, JPMorgan Chase & Co. and 168 other firms — argues that climate change can’t be solved without a profit-driven market. The organization and its members haven’t disclosed how much they earned from trading carbon permits.
While the total amount of CO2 permits traded doubled last year, the market remains tiny compared with worldwide oil futures, where as much money changes hands in less than two days. New Carbon Finance, a London-based investment adviser that tracks the market, predicts the CO2 market will reach $3 trillion by 2020.
The Paris-based International Energy Agency says the world faces flooding, droughts and food shortages unless it spends at least an additional $4.2 trillion by 2030 to reduce power-plant emissions and boost energy efficiency.
Biggest Polluters
Limits on heat-trapping gases in the Kyoto Protocol expire in 2012 and a 180-nation summit to work out a new accord is scheduled for this December in Copenhagen. The U.S., which supports carbon trading under President Barack Obama after refusing to join the 1997 treaty, and China are key to the new agreement because they are the world’s biggest polluters.
The Kyoto treaty produced overlapping EU and UN carbon- trading systems that constitute almost the entire market, save small programs in the U.S., Australia and elsewhere, some of them voluntary.
The EU program, aimed at cutting CO2 output by at least 20 percent from 1990 levels by 2020, limits pollution by issuing permits that allow a company to emit one metric ton of emissions. More certificates can be purchased on an exchange. Companies, which initially received most permits free, started paying for increasing numbers of them last year.
Obama has called Europe’s four-year-old cap-and-trade system a model for the U.S.
Waxman’s Bill
Democrats in the U.S. Congress are working on a climate- protection bill that would allow American emitters to use emerging-market and domestic offsets for potentially all of the carbon cuts required through 2025, according to New Carbon Finance. The bill, sponsored by Representatives Henry Waxman of California and Edward Markey of Massachusetts, reflects input from Richard L. Sandor, chairman and chief executive officer of Climate Exchange Plc, which owns the world’s biggest CO2 exchange in London.
“Market forces will be incredibly effective” in reducing greenhouse gasses, said Sandor, 67, in a May 22 interview on Bloomberg Television. “We’re going to see a worldwide market, and carbon will unambiguously will be the largest non-financial commodity in the world,” he said, predicting trades eventually will total $10 trillion a year.
The UN allows utilities and factories to exceed their EU limits by paying for low-pollution projects in emerging countries. Known as the Clean Development Mechanism, the program creates credits that are bought and sold by investors, mostly in the EU and Japan.
Five Months’ Worth
GDF Suez agreed to help fund two hydroelectric facilities in China last year. In return, the Paris-based water and energy company is to get credits for 1.6 million metric tons of emissions in the EU, enough to last almost five months.
The UN’s Certified Emissions Reductions credits for December delivery rose 2.3 percent to 11.28 ($15.72) at 3 p.m. on London’s European Climate Exchange. The EU’s CO2 permits gained 3.7 percent to 13.36 euros. Both contracts are down about 17 percent this year, while the Reuters/Jeffries CRB Index of commodity prices is up 12 percent.
The number of credits created through projects in the UN program fell 30 percent last year, and the total amount financed under it dropped 12 percent to $6.5 billion, the World Bank said last month.
That UN initiative was hurt by the global recession and “lingering questions” about whether the EU will continue to recognize UN offset credits after 2012, the World Bank said.
‘No Certainty’
“We have no certainty,” said Antoine van Innis, a Bangkok-based emission trader for GDF Suez, in an interview in Barcelona. GDF Suez, the world’s second-biggest utility, wants assurances that the EU will honor the credits after 2012 before it buys any for later than that, he said.
EU companies can use UN-certified credits to offset their required cuts by as much as 50 percent. That leeway would be reduced to 10 percent or even eliminated under proposals submitted by UN nations for consideration in Copenhagen.
The sponsors of the proposals, spelled out in a so-called negotiating text drafted by a UN subcommittee, aren’t identified. Chinese negotiators opposed offsets in a statement last month without mentioning the UN program.
Spending to reduce emissions in poorer nations “shall not be used to offset the quantified emission reduction targets of developed countries,” the Chinese statement said.
Direct Payments
Poorer nations are proposing that industrial countries pay directly for projects to bury heat-trapping gases and limit emissions, said Yvo de Boer, executive secretary for the UN Framework Convention on Climate Change, in an interview from Bonn. China’s statement repeated calls for developed nations to pay up to 1 percent of their gross domestic product to help emerging nations.
“There’s a risk the market falls victim” because any direct assistance could replace private-sector investments, de Boer said.
The EU believes developing nations should start paying for their own reductions, said Yvon Slingenberg, head of the European Commission’s emissions trading unit, at the Carbon Expo conference in Barcelona last month.
Greenpeace wants to speed up the West’s reaction to global warming by limiting how much companies can use offsets to reduce mandatory emissions cuts.
“The world should not rely on offsets” alone, said Joris Thijssen, a climate campaigner for Greenpeace in Amsterdam, in a phone interview. “We need to stop building coal-fired power stations” in industrialized nations, rather than allowing them to thrive through emissions trading, he said.
Bridging the Gap
Derwent points to World Bank figures showing that spending on CO2 reductions goes further in emerging markets because energy networks there are being built and upgraded.
Mexico is trying to bridge the gap by proposing that all countries contribute as much as $10 billion a year to a fund that would finance low-carbon projects, including mass transit improvements and energy-efficiency initiatives, potentially bypassing carbon markets.
“Developing nations want more direct control,” said Milo Sjardin, head of North American research at New Carbon Finance.
For carbon investors, the “worst case scenario” would be richer nations making direct payments to poorer countries and industry-based emissions trading in developing nations being largely controlled by national governments rather than a single regulator, said Dirk Forrister, who helped advise former U.S. President Bill Clinton on climate change.
Trading of emerging-market credits “needs to be built on a private-sector model,” said Forrister, now managing director of Natsource LLC, a New York company that makes money creating, buying and selling pollution rights.
To contact the reporter on this story: Mathew Carr in Barcelona via London at [email protected]
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