Scale and scope
The global carbon market is the most recent and perhaps the most glamorous ‘poster-child’ of globalization ever. Within a decade it has grown from relative obscurity to an estimated US$180-200 billion in value by the end of this year. The traded volume of carbon dioxide is expected to be in excess of 11 billion metric tons this year, despite not achieving full recovery from the economic recession. Further the market is projected to grow by one-third this year. This is all the more remarkable, as it follows a compounded annual rate of growth of 90 per cent for the period 2005 to 2009.
As previously discussed, the bulk of the global carbon market is centred on the segment dealing with trades in carbon dioxide emissions allowances and permits. The European Union (EU) Emissions Trading Scheme (ETS) is the largest, accounting for about two-thirds of the volume. The US ten-state regional cap-and-trade programme for power plants, which I have previously classed as ‘voluntary’ because there are no federally mandated emissions controls, is projected to reach a value of US$2.2 billion and an approximate volume of one billion metric tons of carbon dioxide this year. This clearly suggests that if the United States establishes its own mandatory cap-and-trade system similar to the EU’s, the global carbon market could reach unimaginable heights. The second and much smaller segment of the market deals with projects that generate carbon offsets (including forest carbon) under the Clean Development Mechanism (CDM) and the Joint Implementation (JI) has also grown spectacularly.
Further growth of the global carbon market is being hampered by the halting recovery from the economic recession and the failure to have reached an international agreement at the recent Copenhagen Climate Summit. Clearly therefore, the future growth of the global carbon market is heavily dependent on 1) a replacement of the Kyoto Protocol 2) full economic recovery and 3) the US adoption of a national cap-and-trade system to regulate its emissions of carbon dioxide..
Market power, technology
As the highly favoured poster-child of globalization, the global carbon market is portrayed as one of two fundamental solutions for coping with the global climate problem. The other is technological innovation. The forces of technological innovation are correctly centred on developing cost-effective alternative energy systems to reduce global dependence on fossil fuels. As I have repeatedly stated, the de-carbonization of global production processes and consumption patterns is a necessary, if not sufficient condition, for removing the pressing danger of global warming and climate change.
Other efforts at technological innovation, however, range from the very grandiose to modest ones. Examples of the former include plans, which many consider as far too risky, for example, climatic and geographic re-engineering on a planetary scale. Examples of the latter include innovations in traded instruments on climate exchanges, as well as improvements in the science and practice of monitoring, independent reporting, and verification (MRV) of carbon projects.
Market power fostered by the rise and spread of the global carbon market is expected to provide the incentives required for the necessary technological innovation. It is indeed the main driver of change and development in the age of globalization. In other words, as a rule technical innovation is not expected to occur (except incidentally) in a spontaneous manner as the product of the pure search for knowledge or scientific inquiry for inquiry sake. It is driven by the search for ways to make profit out of introducing new goods and services or from improving on techniques for delivering existing ones.
The carbon price
From the neoliberal perspective of globalization, the carbon price, when established in efficient competitive markets, delivers four uniquely unparallel benefits. First, it allows consumers of goods and services to be aware of the true environmental cost entailed in their availability for consumption. Second, it allows producers to be aware of the environmental cost their activity is putting on society. In this way they can take this into account in much the same way as other cost items in determining what, when, and how much to produce. Third, it guides investors and provides incentives for technological innovation, as it makes clear the financial benefits from doing this. And, finally, it encapsulates all these properties in a single number (the price), thus providing the information needed for rational decision.
Of course these price benefits will only be secured if markets are competitive and efficient. Indeed, if the market were rigged in any way, whether through fraud, corruption, insider trading, monopoly, information withholding or other such illegal actions, these benefits would not be realized.
Greed, however, more often than not motivates players in major markets, leading to market failure. To prevent this from occurring requires strict regimes of oversight and regulation so as to ensure neither illegalities nor excessively risky behaviour occurs. Unfortunately, as I shall reveal in later columns, the spectacular rise of the global carbon market has been accompanied by the equally spectacular rise of market depredations and deformations. It will be left for readers to judge whether these have reached a stage where market failure is compounding the threat of global warming and climate change and not reducing it.
Such an outcome would not be unique to the global carbon market. The previous poster-child of globalization has been the financial and credit market. Tellingly that too was riddled with market abuses, which recently led to the near-collapse of the global financial system and the worst economic recession since the Great Depression of the 1930s.
In the coming weeks I shall argue that just as the world has come to realize at the heart of the recent financial collapse was the toxic private household mortgage – backed securities of the US, there is a real danger of its later repeat in the growth of toxic carbon offsets and fraudulent carbon dioxide emissions permits and allowances, which are now flooding into the poorly regulated and weakly supervised global carbon exchanges.
