Global Commons Project

A lively debate about cap and trade began in the kitchen this morning, where I was outnumbered by colleagues who argued that the Clean Development Mechanism (CDM) is irretrievably flawed. My reply, as ever: whether you like it or not, we’re going to have cap and trade, so we need a tight cap and well-regulated trade.

Cap and trade showed up throughout the COP today. Negotiators tried to reach agreement on whether or not to allow carbon capture and sequestration projects to qualify for CDM credits, with concerns over the uncertainty and risks of the novel technology set against the position that CCS is a necessary tool to reach deep reductions of greenhouse gas emissions. More on this next week, when a decision should be made.

In parallel sessions, expert panels sponsored by NGOs, international organizations, and governments (“side events”) presented analysis and policy recommendations on a range of subjects, including an excellent panel that concluded that the prospects for a US cap and trade program will remain with the state RGGI and Western Climate Initiative for the next year or two, and that the potential for linkage with the EU emissions trading system is good.

There is no doubt that there are problems with emissions trading and particularly with offset credits, the credits that are created outside the regulatory framework that applies to the developed countries. Launching a new policy instrument at such a large scale was bound to result in some rough patches, and problems like improving the sluggish project review process can be fixed relatively easily. Other problems aren’t so simple.

The most profoundly difficult issue is the requirement of additionality. As hard as it is to determine whether a project would have occurred without the financial incentive of CDM credits when the credits have never been available before, over time it becomes increasingly hard to demonstrate the counter-factual: that this project wouldn’t have existed but for the CDM. Some of the people in the kitchen this morning have demonstrated in their published work that, in fact, a large number of projects that were approved by the CDM were planned long before the CDM became available and thus were not additional. In their view, this is an insurmountable problem.

But these serious problems – underscored by a new, critical GAO report – haven’t slowed the development of carbon trading. The Kyoto Protocol parties have invested wealth and human resources in emissions trading, and they intend to continue both the EU-ETS and the CDM after 2012. California is in the process of adopting a cap and trade program of its own, intended to be part of the Western Climate Initiative, and the RGGI states have held their first auction of allowances.

We will have emissions trading programs, and that is why, in my view, it’s time to stop fighting against markets and to focus instead on how to make them effective. A question that has had too little study is which sectors of the economy should be excluded from cap and trade. Another, which has gained insufficient attention so far, is how to ensure that the enthusiasm for securitizing investment risk in the carbon markets doesn’t go the way of the mortgage markets. This is the time for financial regulators and environmental policy experts to collaborate on making carbon markets secure and effective.