Thursday, December 10, 2009

Cap and Fraud

A central proposal at the Copenhagen summit is that the world needs a market for CO2 and that this market should be a primary mechanism for lowering emissions. The so called “cap and trade” system works the same way as the trade in stocks. National governments provide permits to organizations to emit C02 within certain limits. Ideally, the organizations buy these permits at an agreed price. The volume of permits issued reflects the amount of carbon that country will emit in a particular time period. If a company or organization emits less than the volume they are permitted, then they can trade their “spare” permits to those who know they will emit more than their permitted limit. As the number of permits declines over time, reflecting the desire of governments to meet their emissions targets, then the value of the “spare” permits rises, thus placing a high price on CO2. Once the price gets to a certain point, organizations will find ways of lowering emissions rather than buying an expensive “spare” permit on the open market. That is the theory.

Its not worked yet. The European Union has had cap and trade in some form or other since 2005. Initially, many permits were issues gratis to organizations so that the scheme could be “kick-started”, something Obama has been forced to do in his legislation now before the Senate. Only two EU countries can be seen to have lowered emissions as a result of the cap and trade system – the UK and Germany – and emissions overall in the EU have risen since cap and trade began.

Now it is clear that there are other problems. A press release from the European police force Europol states that a fraud afflicting the EU's Emissions Trading Scheme operated over the past 18 months, has resulted in the loss of approximately €5 billion euros ($7.7 billion) from several national tax accounts. It is estimated that, in some countries, up to 90% of the whole market volume was caused by fraudulent activities. This comes on top of arrests earlier this year of a number of individuals charges with fraud over wind-farm subsidies. It looks like organized crime is now a major beneficiary of climate change mitigation policy.

In 2008, cap and trade mechanisms world-wide involved the movement of some $127 billion and, if the Copenhagen summit agrees to a world-wide cap and trade market, this sum could rise to $700 billion by 2017 and to $1 trillion by 2020, according to Goldman Sachs. There could also be a thriving derivates market operating in CO2.

Some countries, including Britain, are also looking at personal carbon limits which could then be traded. Using a carbon credit card, individuals could use their credits to buy gasoline or other goods deemed to be the carbon zone – energy for example. If they needed to “top up their carbon credit card” they would either have to arrange a transfer from someone else or purchase carbon offsets to top up their card. When first discussed two years ago, this idea was the subject of much derision. Now its a serious conversation.

Market mechanisms or CO2 emissions reduction are a centrepiece of the agreement under discussion at Copenhagen. Let us hope they are involving Europol and Interpol in this important discussion.

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