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A trading system based on hot air

By Rahul Goswami

Smoke and mirrors defines the world's newest commodities trading system, one in which India is a pivotal participant. In the name of sustainable development, Indian industry is claiming revenue through Clean Development Mechanisms, a key device of the Kyoto Protocol. This reliance upon the market to clean up the mess represents an increasingly prevalent paradigm in India's response to climate change

We need to revisit, critically, the idea that any dialogue, discussion, agreement or process that has anything to do with the Kyoto Protocol is necessarily going to benefit developing India, and indeed the developing South. The laborious international palaver concerning climate change, the impenetrably dense thickets of national agencies and multilateral organisations, sundry United Nations bodies and all manner of private sector carpetbaggers exist, for the most part, to obscure one truth only: that is to ensure that very little changes for Globalisation Inc.

There are several ways of seeing the problem here, and it is a sign of our times that a view that should be Indian, Southern, is, in fact, scarcely so. For, just as the development dialogue has been appropriated by the opponents of people-centred and socially-just development, so has this debate been skewed by the imposition of a grammar that has no genesis in our communities.

Like all environmental issues, the climate crisis is a political issue too. Within a limited science, it revolves around both the overuse and the skewed use of the earth’s capacity to keep greenhouse gas proportions in the atmosphere within a certain range.

In the simplest of terms, the earth’s carbon dioxide dump is overflowing. Industrial societies have long been extracting and then transferring carbon from underground deposits of coal and oil to the air. As a result, the percentage of greenhouse gases in the atmosphere is increasing every year. That what we call the industrialised North has been using its share of resources (fossil fuels and otherwise) inequitably, and abusing the capacity of the earth to absorb such punishment, is well-known now, and the example of a country like the United States being responsible for a quarter of greenhouse gas emissions has become part of environmental catechism.

From a purely ecological economics point of view, it would appear that the commonsense solution is both to reduce use of the earth’s greenhouse gas dump overall and to divide up the dump more equitably. The 1997 Kyoto Protocol is alleged to tackle these twin objectives. It requires the industrialised North to start cutting emissions first -- to about 5% lower than 1990 levels by 2008-2012 -- while for the present leaving the South alone. (Shifts in the balance of global economic power and resource use have changed the landscape considerably since the Protocol was first drafted, but that polemic is outside the scope of this discussion.)

Among the Kyoto ‘mechanisms’, as they are called, that are designed to deliver these objectives is the Clean Development Mechanism (CDM), an aspect that I studied during the course of a Panos-directed and funded programme to examine the Protocol and energy policy in South Asia. In logic, the CDM is neither fish nor fowl, although neither the absence of definition nor clarity of purpose has prevented it from catalysing the creation of an entirely new commodity -- notional absence of carbon. I will return to this free market sophistry later.

This creation has arrived in India at a time when the stock markets are exuberant, when the popular belief in the country’s economic strength is at a high pitch, when corporate India is aggressively expansionist, and when concepts such as corporate social responsibility have become fodder for public relations mills. It is a fertile landscape for a concept that, in fact, seeks to establish a trading system based on hot air.  

In optimistic theory, the CDM is envisaged to function as follows:

  • A polluter country from the North (obliged to reduce its emissions in order to meet its targets) can rely on a project that takes place in a developing country (that has no target to reach) and claim the credit from doing so. For the polluter country, it would usually be cheaper to invest in the reduction of emissions in developing countries than by domestic action.
  • The process envisages the value of technology in reducing emissions, the value to the developing country of cleaner and newer technology, and the use of market forces to keep the costs of reducing emissions down. Enforceable targets are expected to help create “a lively and productive market” (a quote from one enthusiastic technology-transfer broker) in carbon reduction credits, or Certified Emissions Reductions (CERs) units.
  • This involves the original idea of using global governance negotiated in the final Kyoto Protocol texts along with market forces to reduce greenhouse gases (GHGs), which, after all, is a worldwide problem, while at the same time avoiding mere control and command to enforce compliance. Since markets are inclined to find the least-cost alternatives -- so the brokers, traders and multilateral funding institutions would have us believe -- the “market could take off and spiral the costs of emissions reductions downwards”.

There is a seductive déjà vu at work here, one that recalls the controversies of power sector deregulation. Consider this argument: “Central to the paradigm of power liberalisation is the belief that electricity should be treated as a private commodity rather than as a public service. Advocates suggest that it would create conditions for ‘self-regulating’ markets, which would automatically determine optimal supply-demand levels as well as optimal prices,” (Towards Equitable, Sustainable, and Democratic Electricity Policies; Transnational Institute briefing, 2002).

In the power sector, liberalisation (used interchangeably with ‘deregulation’) has resulted in the creation of electricity oligarchies, which tend to be dominated by powerful transnational corporations. Moreover, power liberalisation simply attempts to impose a market logic onto the centralised technical structure of the electricity system without actually transforming it such that it becomes compatible with decentralised market activities. The promise of economic efficiency as a by-product of liberalisation in the power sector has not addressed existing socio-political and environmental problems. Instead, new challenges have been created in the meeting of equity and sustainability goals.

In India, the actors promoting the CDM are employing an eerily similar vocabulary. “The Indian government has a proactive position on CDM, so that India is the biggest player in the CDM area with the largest number of projects presented to date,” is an opinion presented in personal communication with an executive officer of a carbon trading consultancy. “In our opinion, India has not set excessively stringent sustainable development goals in order to impede CDM project development.”

Therein lies the nub of an alarming consideration. For, Indian industry is a frontrunner in a market that is fast evolving, and with moves afoot to extend the European emissions trading scheme beyond 2012 (when the Kyoto Protocol in its present form expires). Indian firms are likely to capture more than 10% of the global trade. Data made available in November 2005 by the Ministry of Environment and Forests’ National CDM Authority shows that India is overwhelmingly dominant in the Asia-Pacific region in terms of number of CDM projects, which are designed to reduce emissions of greenhouse gases that contribute to global warming (see box).

In India, the CDM is rhetorically mandated to assist in achieving sustainable development. However, neither the CDM’s architecture nor practice within industry appears able to internalise this objective. For all the politically correct intentions made public about sustainable development, CDM projects generate revenues by reducing or storing a quantity of greenhouse gas emissions which are commodified as carbon credits and sold. The various co-benefits that these projects may create are not commodified and do not directly produce revenues through the CDM.

Arguably, the CDM’s project-based structure makes it almost impossible for the broader sectoral or national benefits provided by a renewables project to be rewarded because they are so difficult to quantify on a project level. Judging how many tonnes of a specified greenhouse gas have been reduced or stored by an individual project in a delineated project boundary -- as compared to a theorised business-as-usual scenario -- is complex enough. Yet, quantifying and commodifying the additional benefits that a renewables project provides outside that boundary would be extremely difficult and prohibitively expensive for each individual project. Which is why these are not addressed, despite the apparently impressive strata of national regulation and authority, the claim of industry self-regulation, the scrutiny of certification agencies and validation authorities. Perversely, and perhaps more worryingly, the project-based structure also fails to penalise negative impacts outside the project boundary and can reward projects that, while delivering cheap carbon credits, undermine the broader goal of climate protection and sustainable development.

At the same time, in India as elsewhere, there has been an explosion in numerous types of carbon market financial services in brokerage, project development, consultancy, procurement, online trading, financial journalism, event planning, project financing and so on. The branding is a smooth mix of cyber-environmental and financial language, and helps the formation of post-industrial names like CO2e.com, Eyeforenergy, Natsource and Ecosecurities. There are also more active and advanced international trading associations, stakeholder dialogue fora and consortia to conceptualise the way exchanges may work in the future.

Has this imposing array of expertise been able to help balance the equation in the national interest? It would appear not, and a critical gap has to do with the very structure of the CDM, which turns into a tradable commodity (notional savings of greenhouse gas emissions) what we really have no means to measure. It is, in many ways, a web of interconnected systems with, at its focus, nothing more than smoke and artfully arranged mirrors.

India, through industry rather than development policy, demonstrates a vague commitment to climate action, with the inherent problems relating to carbon ‘offsets’ and emissions trading being swept aside by a firm belief in the market. The problem of climate justice then requires not a radical rethink about fuel sources and their use, about social and community imperatives, but the ‘invisible hand’ of the market to sweep up the mess in the most cost-effective manner possible. Part Dalal Street economics and part business process outsourcing, this reliance upon the market represents an increasingly prevalent paradigm in India’s response to climate change.

The ‘win-win’ rhetoric pervading the climate discourse is both an attempt to confound and marginalise those seeking more meaningful and effective action on climate change, as well as contribute to increased corporate power and further commodification of natural resources such as the earth’s carbon-cycling capacity. The neoliberal ethic embodied in power blocs such as the G8, themselves highly dependent on the fossil fuel economy, is ultimately what drives this agenda forward. Free-market environmentalism and increased trade and investment liberalisation in the area of ‘environmental goods’ and ‘ecosystem services’ is ultimately a false promise. For activists seeking to engender meaningful social and environmental change in the climate arena, these trends must be challenged outright.

“The main problem with the CDM is the problem of determining the baseline emissions that would otherwise have occurred, as well as the amount of administrative cost involved in having CDM projects evaluated and approved,” states a policy study on India and climate change. “Probably the most attractive aspects of the CDM approach is the application to changes in land use practice and afforestation of degraded areas. However, India is already spending resources on reforestation independently of the CDM mechanism and it may be unclear what is additional to baseline,” (Climate Change Policy for India, by Warwick J McKibbin, The Lowy Institute for International Policy, Sydney; Centre for Applied Macroeconomic Analysis, ANU, Canberra; and The Brookings Institution, Washington DC).

While industry is certainly attracting a substantial share of criticism for railroading through its ideas about sustainable development via the lens of climate change, India’s national authority -- the Ministry of Environment and Forests’ National CDM Authority -- is for its part no honest broker. Even so, the CDM landscape in India is akin to that which obtains elsewhere. The United Nations Framework Convention on Climate Change (UNFCCC) and national governments caught up in the spirit of deregulation (or rather, corporate-friendly re-regulation) have been reluctant to develop uncompromising rules for the use of market-based mechanisms in the Kyoto Protocol.

In the absence of unambiguous coda and strict enforcement mechanisms, business has been largely left to its own devices and, in many cases, actively encouraged to develop the rules of the marketplace as it sees fit. This laissez-faire approach makes it easier for corporations to influence the pace and development of these markets. When norms and standards are established -- as is the case in India -- it will be much more difficult for governments to intervene in the markets, assuming of course that there is such an intent at all.

A collective statement written in October 2004 by several research groups worldwide says carbon trading is designed to “... allow big fossil fuel users to delay reductions by buying their way out of trouble or by building new dumps (such as tree plantations) to park their carbon in temporarily. ‘Giving carbon a price’ will not prove to be any more effective, democratic or conducive to human welfare than giving genes, forests, biodiversity or clean rivers a price. There is no point in governments, export credit agencies, corporations and international financial institutions constructing a carbon market with one hand while, with the other, continuing to finance fossil fuel developments and forest destruction and dedicating only token sums to renewable energy”.

The problem is a hydra-headed one. The planner or government bureaucrat in the South insists that he has the sole right to decide how to process nature or human labour, since he alone has access to modern science. In addition, he claims to act in the national interest. Since science is efficient and resources are scarce, only modern industry should be permitted to produce goods: both natural and older technological forms are inefficient, backward or slow. So runs the wisdom.

The definition of efficiency is, of course, arbitrary. The legitimisation of industry’s rights over the rights of other processors has been adjudicated not by an impartial authority, but by powerful interests supported by an equally biased (often dreadfully mis- and under-informed) state power. Industrial processing has merely been assumed to be superior. Such unexamined assumptions can act as superstitions, generating in their wake an entire chain of painful consequences.

Paralysing superstition indeed is the leitmotif of the technocratic response to a matter as staggeringly complex as climate change. The reigning superstition is the one that assumes a degree of measurability in any of the innumerable variables that govern such a concept. Forests, for example, which were till the other day thought to be carbon sinks are now viewed with suspicion as methane factories. Deep ocean currents yield through their meanderings no secrets to inquisitive instruments. Now a carbon numerocracy seeks, pathetically, to define the myriad fluid contours of our world. It would be laughable, a grand jest, were it not for the uncomfortable realisation that this post-modern operetta is being written into the balance sheets of biscuit factories and gasket manufacturers.

What lies ahead? For our rural and urban communities in whose names such sophistry is being practised as technologically-sanctioned sustainable development? For industries that are already hiring glib accountants versed in the metre and rhythm of the world’s newest tradable commodity? For our planners, struggling to balance development cant against economic catechism and harried all the while by the clinical formulae of multilateral lending agencies?

India is a party to the climate convention and must demand and design a mechanism within the Kyoto framework (or the new, six-country Asia-Pacific Partnership on Clean Development) that promotes sustainable development in the South and which delivers targeted technology transfer, not supports a technology-neutral commodities market. Its insistence must be on the promotion of projects that -- according to more parameters than just the technocratic -- contribute to sustainable development, such as renewables. More important still is to address the context in which such a mechanism will function. If it operates within a policy perversity that forces co-existence of a Kyoto Protocol and the CDM alongside massive North-South financial flows to fossil fuels, it will fail. A real Indian solution to climate change and sustainable development must divert these flows, not underwrite carbon markets alongside them.

(Rahul Goswami is an independent journalist and researcher based in Goa)

InfoChange News & Features, June 2006