UN Says Markets Crucial to Climate Pact

By Michael Casey

BANGKOK, Thailand -
Back in the late 1990s, Henry Derwent had the unenviable job of selling a British government proposal that markets be used to reduce greenhouse gas emissions.

The idea was to create a system in which energy-intensive companies would buy and sell pollution permits, giving them a financial incentive to cut their carbon dioxide emissions.

It was a tough sell. Environmentalists condemned it as morally reprehensible and business leaders said it was bad economics. Even an investment bank refused to take part because it would sully its reputation.

But these days, Derwent is feeling vindicated.

The British set up a carbon trading market in 2002, followed by the European Union in 2005. New Zealand's system is expected later this year. The United States plans a regional greenhouse gas initiative in the nine Northeast states by 2009, and Australia wants a national system by 2010. All global warming bills in the U.S. Congress include a federal cap-and-trade mechanism.

While many people still oppose emissions trading over concerns that it would allow companies to keep polluting, most environmentalists and European governments now view the practice as the easiest and most comprehensive way to regulate industrial emissions.

"You are using profit motive to achieve a public good, and this is just brilliant," Derwent, now head of the International Emissions Trading Association, said on the sidelines of this week's U.N. climate change conference in Thailand.

The carbon market is getting a boost in negotiations this week in Bangkok to piece together a new global warming pact aimed at keeping temperatures from rising so high they trigger an environmental disaster. Negotiators have until late 2009 to complete work on an agreement to take effect when the Kyoto Protocol runs out at the end of 2012.

Emissions trading is seen by many as the glue that will hold the system together by reducing greenhouse gas production while generating funds to develop clean technology and help poor countries adapt to environmental changes such as rising sea-levels.

"A functioning carbon market will be critical to a successful agreement," U.N. climate chief Yvo de Boer told The Associated Press ahead of the Bangkok meeting.

A carbon trading market - or "cap-and-trade" system - works much like any commodities market except that traders make their fees selling a ton of carbon dioxide instead of corn or copper.

Countries that agree to reduction targets are given permits for an amount of allowable carbon dioxide emissions, and the permits are passed onto businesses. Companies can choose to cut their emissions by retrofitting a factory and selling their permits for a profit - or continuing to pollute and buy additional units of carbon dioxide on the open market.

Under the 1997 Kyoto pact, countries also can earn credits by investing in environmentally friendly projects in developing countries.

A major attraction of carbon markets is their ability to generate money to be put toward cutting emissions and helping countries adapt to the effects of climate change.

The World Bank predicts that by 2030, it will cost between $28 billion and $67 billion annually to relocate villages, build sea walls and help farmers adapt to the worsening weather.

But carbon trading has plenty of critics, many of whom argue that it does little or nothing to actually cut greenhouse gases. The EU system, for example, has had a minimal impact on emissions in its first two years.

The system has also been criticized for leaving out sectors like transport and focusing on less profitable companies like cement or chemical producers that must cut output or make major investments to reduce emissions.

Other critics, like research fellows Benjamin Sovacool and Toby Carroll at the Lee Kuan Yew School of Public Policy in Singapore, say market solutions increase poor nations' dependence on the industrialized world for such things as clean technology, allow industries to keep polluting, and fail to change consumer consumption patterns.

"Until people consciously realize the situation that the world is in and change their own patterns of behavior, you can't change anything," Carroll said. "One of the reason carbon trading is so acceptable to the powers-that-be is that it doesn't substantially impact on existing operations."

Carroll and others argue that a more effective way to cut emissions would be a pollution tax.

While supporters agree that carbon markets alone cannot reduce emissions, they insist they can change behavior. They noted that the European system has resulted in a number of coal plants being mothballed and they predict they will spur investment in expensive but clean technologies like solar energy and carbon sequestration and storage in which carbon dioxide is stored underground.

"The point of the market is to find the most efficient way to reduce emissions," said Greenpeace's Bill Hare, who supports the market but admits he has concerns about the lack of regulations.

"The tighter the cap, the higher you will see carbon prices and the more incentive to switch to investments to lower emitting technology and practices," he said.

Also, carbon trading will generate money to meet funding needs of developing nations, proponents say.

"There is certainly reason to be optimistic," said Miles Austin, head of European regulatory affairs for the carbon trading firm EcoSecurities. But he also said much of the future growth depends on a new climate pact that includes binding emissions reduction targets.

"The growth will begin to tail off by the end of the year if there isn't increased clarity about what will happen post-2012," when the Kyoto protocol expires, he said.