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The Lively Debate Over Whether Cap-And-Trade Really Does Much To Fight Global Warming

Publication Date: 
December 03, 2008
Discover Magazine
Jennifer Barone

Professors David Victor and Michael Wara are quoted in Discover Magazine in an article discussing the shortcomings of cap-and-trade to fight global warming:

Josh Margolis keeps a grueling schedule, brokering deals between buyers and sellers and forecasting how government actions could affect his clients. But his obsession is not stocks, or bonds, or oil futures. As co-CEO of the San Francisco–based company CantorCO2e, Margolis is part of an exploding branch of finance in a new commodity: carbon.

Mainstream financial institutions including Merrill Lynch, J.P. Morgan, Deutsche Bank, and Goldman Sachs are joining the booming carbon market, which continues even through the current economic jitters. According to the World Bank, global trades in this market in 2007 were valued at more than $64 billion, more than doubling since 2006. Skip Willis, president and CEO of Carbon Capital Management, a Toronto-based “carbon monetization” corporation, predicts that by the end of 2008 the global carbon trading system will have topped $100 billion. “This is a market that barely existed five years ago,” Willis says.


... Michael Wara, a Stanford Law School professor and a researcher at the Stanford Program on Energy and Sustainable Development, acknowledges that there is reason for concern when emitters are doing their own carbon accounting. “Enron is always a specter in the background,” he says, referring to the accounting scandals that sank the giant energy-trading company in 2001.


Stanford’s Wara and his colleague David Victor recently investigated a group of offsets offered under the Kyoto Protocol’s Clean Development Mechanism (CDM), which can be purchased for compliance with the E.U. trading scheme. “The basic idea of the CDM is that you cut emissions in a place like China in lieu of reducing them in Europe,” Wara says. “So we need to be certain that we’re really cutting in China. Otherwise the whole goal is undermined.” For instance, power from a new Chinese wind farm or hydroelectric plant might displace electricity that would otherwise come from carbon-spewing fossil fuels. If the developers of these projects can show that these renewable energy sources would never have been built without offset money, then the carbon emissions saved by the new plants can be sold as offsets.

In their study, though, Wara and Victor found indications that offset funding is flowing to projects that would probably have been built anyway. “We can show that essentially every major wind and hydro project in China is claiming credit for CDM offsets,” Wara says. “We know that China has been building about 10 gigawatts of hydropower every year for a long time. Last year, suddenly all of that development was claimed as carbon credits. Is it really the case that none of those projects would have been built without offset money? These offsets are being sold to the United States and Europe, and if they’re not real reductions, we have a big problem.”

Another popular type of offset demonstrates a different kind of problem with the carbon market. HFC-23, an industrial greenhouse gas thousands of times more potent than carbon dioxide, is produced as a by-product in the manufacture of refrigerant, and a number of major offset projects capture and destroy HFC-23, doing a huge service to the climate. But Wara discovered that offset sales from destruction of the gas were far more lucrative than the sale of the refrigerant responsible for creating the pollutant in the first place, giving factories a perverse incentive to produce as much waste as possible and then create projects that sell offsets to destroy it.

Both Wara and Lohmann say that a cap-and-trade program that excludes offsets would probably be more effective at reducing emissions. “When you have offsets in a cap-and-trade system,” Wara says, “it’s like not being able to tell counterfeit money from real money.” Lohmann notes that the acid rain program so often cited by carbon market proponents as a success story did not allow offsets.


As for Wara, the shortcomings of current carbon markets are not enough to dissuade him from his belief that laws governing greenhouse gas emissions should be enacted as soon as possible. “We’re going to stumble, and we need to be prepared for that,” he says, “but my criterion is, what can we do now? Even if we don’t get it right the first time, we need to learn by doing. This is the problem of the century.”