It is being called "the green goldrush." Billions of dollars in investment money are piling into the booming EU carbon trading market, which is expected to more than double to 22 billion euros (US$28.2 billion) this year. And London, where 80 percent of the European trade is being conducted, is the new El Dorado. But is all this frenetic activity a business fix to save the planet or the destructive new face of international capitalism?
On the fringes of the talks on the future of the Kyoto Protocol taking place this week in Nairobi, Kenya, indigenous people and non-governmental groups have been telling delegates how investments in developing countries' "clean energy" projects -- which are now fueling world carbon markets -- are exacting a terrible price, with communities being robbed of their land and livelihoods damaged by projects such as hydroelectric dams and the creation of fast-growing tree plantations.
The projects, which are supposed to reduce greenhouse gases and contribute to sustainable development, are awarded certified emissions reductions (CERs), which can be used either by governments buying them to help meet Kyoto targets, or by companies surrendering them to help meet their allocations under the EU emissions trading scheme.
It is a new international market that is developing rapidly, but critics say it is encouraging destructive development and lining the pockets of the rich.
"We are not only victims of climate change, we are now victims of the carbon market," said Jocelyn Therese, a spokesperson for Coica, the coordinating body of indigenous organizations of the Amazon basin.
Moreover, the projects are doing little to help encourage sustainable development in poor countries, say critics as authoritative as the government's climate economist, Sir Nicholas Stern, whose report last week changed many people's understanding of the need to address climate change.
Required incentives
Deep within the Stern report on the economics of climate change is a stinging criticism of the UN's Kyoto Protocol Clean Development Mechanism (CDM), which allows countries and businesses in the rich north to trade in carbon "credits" with the south.
"The CDM in its current form is making only a small difference to investment in long-lived energy and transport infrastructure," Stern said.
"While a substantial international flow of funds is being generated through CDM, it falls significantly short of the scale and nature of incentives required to reduce future emissions in developing countries," he said.
One has only to look at where the money has gone up to now to see why. CDM projects are expected to secure 1.4 billion tonnes of carbon dioxide emission reductions by the end of 2012, with 400 projects approved by the CDM's executive board and 900 more in the pipeline. But according to the World Bank, only 10 percent of CDM projects by volume in the 15 months to March this year involved energy efficiency, fuel switch, biomass or other renewables projects -- areas that Stern says are critical to the long-term reduction of greenhouse gas emissions.
Almost 60 percent involved destroying the industrial gas HFC 23, a greenhouse gas nearly 12,000 times more destructive than carbon dioxide but which costs as little as US$0.75 per tonne of carbon dioxide equivalent to deliver -- and can be traded for as much as 10 times that.
In their pursuit of cheap HFC credits in countries such as China and India, African countries have been almost entirely bypassed, despite the fact they have the most to lose through climate change.
Ricardo Nogueira, investment adviser at Trading Emissions, says his company would like to invest in Africa, and is looking at a couple of prospective projects, mainly to siphon off methane from large landfill sites.
"We feel we have a duty and obligation to make CDM work in Africa," he said.
But there are huge barriers, including a shortage of large enough projects to justify the hefty transaction fees, and a critical lack of information to get projects through the CDM's strict verification process.
"It's a fractured continent with many, many countries dividing up limited resources," he said. "A lot haven't got very far in developing their approval processes."
The big problem with getting CDM projects approved is proving "additionality" -- showing that the project would not have gone ahead without the carbon credit.
Stern says the project-based nature of the CDM market "creates issues of moral hazard and gaming, where there are incentives to manipulate the system to increase the rewards received [or reduce the costs paid]."
In other words, it can perpetuate a regime where the polluter wins.
Patrick McCully, of International Rivers Network (IRN), which has been monitoring the impact of CDM on global dam projects, says additionality is largely a joke.
"We thought carbon credits would allow destructive projects to go forward that wouldn't otherwise have been built. But we found the opposite. The carbon credits were going to projects that would have gone ahead anyway -- they were the icing on the cake for developers," he said.
Vested interest
He says a fund run by the World Bank is seeking carbon credits to finish constructing a dam in Sierra Leone that had been 85 percent complete before it was abandoned during the civil war. How can that possibly be considered additional, McCully asks? He is also concerned that criticisms of CDM made by IRN have been ignored.
"In every case they've been ignored. The comments go to the validators, who have a vested interest in the projects going forward," he said.
This is a complaint heard frequently in India, the most enthusiastic player in the carbon market. Soumitra Ghosh, a researcher with a West Bengal NGO that has been investigating the trade, says India's national CDM authority clears projects speedily, awarding credits to some of the most polluting companies in the country on the basis of claims that they are cleaning up their acts.
He says that despite the CDM's requirements for consultations with the community, affected communities have been kept in the dark. In one case, project design documents for four different Indian biomass power schemes repeated -- even down to the spelling mistakes -- allegedly favorable comments made by local village heads.
"We've looked at 40 projects in various sectors," Ghosh said. "All are violating laws, involved in land grabs, fleecing the local communities of their land by buying it cheap."
For Larry Lohmann, author of Carbon Trading, carbon credits are just a new instrument for northern energy companies to exploit the developing world.
"Added to classic local conflicts over extraction, pollution and labor abuse are now, increasingly, local conflicts over `carbon offsets' -- the projects that license and excuse the extraction, the pollution and the abuse," he said.
Axel Michaelis, a member of the registration and issuance team advising the CDM executive board, accepts that many of the early projects approved for carbon credits were dodgy.
"In the first six months it was like the wild west -- everything was passed," he said.
In March this year, however, the CDM board set up his team as a second level of scrutiny, and he is convinced bogus projects are now being blocked.
He says transaction costs have fallen, sometimes by half, because there were more projects, bringing down the barriers for small renewables projects. And though the scheme is far from perfect, the CDM has actually succeeded in cutting emissions.
"You can criticize the industrial gases projects, but they are reducing emissions and they aren't having a negative impact on local communities," he said. "Four years ago, no one was talking about HFC."
Other CDM supporters say it has encouraged cuts in the easiest areas first -- what are called "the low hanging fruit" -- and that China has reinvested 80 percent of the money it makes from CDM projects into renewable energy projects.
Michael Grubb, visiting professor of climate change at Imperial College London and chief economist with the Carbon Trust, says it is ironic that CDM, which was established as the most cost-effective way to reduce global emissions, was being criticized for doing just that.
Long-term investments
"CDM is a funny hybrid between a market and a political construct," Grubb said.
"It's not a pure market by any stretch and there's a lot of discretion being taken about where people want to spend money [in the developing world]. But it's better than nothing and it's something that can be improved," he said.
But critics say the CDM's premise that carbon can be commodified is false, and that time, money and expertise are being wasted trying to perpetuate that fiction instead of making the structural changes and long-term investments that Stern says are needed to save the planet.
Lohmann points out there is already an international protocol to eradicate HFCs, but the fact that companies can make money out of HFCs through the carbon market means HFC production may be going up, and governments are unlikely to take action.
"There's a fundamental contradiction in the CDM," Lohmann said. "You either have cheap, meaningless, unverifiable projects or those that are verifiable and plausible where you need to invest too much money and take too much political risk. I don't believe renewables will ever be supported by this carbon market."
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