How Green Capitalism has failed to reduce greenhouse gas emissions. Part two: Carbon Trading
Introduction
In part one we saw how states and multilateral organisations have gone about attempting to reduce greenhouse gas emissions with the aim of keeping global warming within 1.5 degrees of pre-industrial levels. These efforts have been based on the notion that the market needs to become incentivised to replace reliance on fossil fuels with renewable energy sources, and in terms of reducing emissions this approach has failed spectacularly. In part two of this series, we examine the underwhelming record of one of the main market mechanisms which major capitalist states have employed, i.e., carbon pricing. In part three we will look at the crazy world of carbon offsets.
The theory behind developing a market for pollution
“Cap and trade”, is a market mechanism primarily designed for the rich countries of the Global North, in order to help them decrease their carbon emissions. This involves quantifying the emissions that are caused by industrial activities, then setting an upper limit (cap) on all greenhouse gas (GHG) emissions, and finally incentivizing companies and entire industries to make decisions on how to meet their caps in the cheapest possible way.
Carbon emissions trading schemes are based on pollution credits issued by governments and then traded through an exchange. The price put on carbon is set by a traded market, similarly to how shares trade on a stock market. These emissions permits are issued on a yearly basis by a regulatory body, recognising that some pollution will take place and setting an ‘allowable’ level for a business.
The theory is that if a business invests in clean technology and does not use all of its permits, they sell them on the market, while businesses that pollute more than their allocated amount have to buy more permits. The total number of permits awarded to businesses falls each year, with the aim of gradually reducing pollution and improving the environment. According to the theory, the value of these credits increases over time as the space to pollute created by the credits shrinks relative to emissions.
According to Trade Unions for Energy Democracy TUED, as soon as the European Union fully rolled out its ‘Emissions Trading System’ (EU ETS), the world’s largest emissions trading market, in 2008, it was plagued by serious problems. In its early days, far too many permits were given out and power companies and energy intensive industries gained billions in windfall profit—profits that, as TUED researchers note “mostly turned into shareholder dividends, with little invested in new clean energy infrastructure.”
As far back as 2008, the Guardian noted that, “because …permits are given out free, but have an asset value, the companies with too many have effectively been handed a subsidy. The over-allocation could … send out the wrong message. About half the EU carbon dioxide emissions are captured in the ETS, but governments have so far been reluctant to tighten the [emissions] cap to squeeze the firms to reduce emissions. Most [of these firms] in the UK have effectively been given official permission not to reduce pollution for the next five years.”.
In her book The Value of a Whale researcher and activist Adrienne Buller notes that since the EU ETS began, profits that private polluters made from the mechanism have been estimated at EUR50 billion. According to Buller “rather than adhering to the ‘polluter pays’ principle that is meant to underlie and justify carbon pricing, in practice the world’s foremost carbon pricing scheme has inverted this logic, such that polluters frequently profit, rather than pay.”
In recent years the price of carbon on the EU ETS has started to rise. But the EU accounts for only 10% of the world greenhouse gases (GHGs). Moreover, within Europe the EU ETS covers roughly 45% of the EU’s economy, amounting to around 3% of the world’s GHGs. Only 26% of greenhouse gas emissions in Ireland are traded on ETS markets.
Although it has been 20 years since the 2005 launch of the EU ETS, and there are now other ETS systems operating around the world (mostly in rich countries), the vast majority of global emissions (76%) were still not priced at all in 2024, and the share of emissions that are priced highly enough to be potentially effective is below 1%. In the next part of this series we examine the ways in which pollution markets have created the opportunity for fraud and graft in the poorests parts of the world.