Emissions Trading Takes

Proposals for emissions trading were made as a means to respond to climate change as early as 1989, in a paper by Michael Grubb25 and subsequently picked up by others.26 These are schemes where actors (countries in international systems, or companies in national ones) are allocated permits to emit GHG emissions, and they must either stay within these limits or buy extra permits from other actors who find it easier to reduce their own emissions and thus have surplus permits to sell. The trajectory of emissions trading from the original proposal to its realisation in the Kyoto Protocol encapsulates many of the big economic changes going on at that time. For Grubb and those of many who took the idea up, like Scott Barrett at the London

24 World Bank, Greening Industry: New Roles for Communities, Markets and Governments (New York: Oxford University Press, 2000).

25 M. Grubb, The Greenhouse Effect: Negotiating Targets (London: Royal Institute of International Affairs, 1989).

26 L. Lunde, 'Global warming and a system of tradeable emissions permits: a review of the current debate', International Challenges, 11(3) (1991), 15-28; R. Hahn and R. Stavins, 'Trading in greenhouse permits: A critical examination of design and implementation issues', in H. Lee (ed.), Shaping National Responses to Climate Change: A Post-Rio Guide (Washington: Island Press, 1995), pp. 117-219.

Business School, or Frank Joshua at the United Nations Conference on Trade and Development (UNCTAD), it was designed both to be efficient and equitable.

Efficiency was fast becoming the most important value in neoliberal ideology, while equity was the legacy of a dominant framing of global environmental politics since the first UN conference on the environment, the Stockholm Conference on the Human Environment in 1972. Emissions trading systems, in Grubb's or UNCTAD's hands, would enable North-South transfers of wealth and technology and thus respond to the challenge of growth in countries like China and India. The assumption was that a principle of per-capita emissions would be the only legitimate basis for allocating emissions, and thus while countries in the North would be short on permits, those in the South would have a surplus, and thus earn income from selling permits to the North.

Once emissions trading became a formal part of the negotiations, however, it became clear that the equitable part of the equation was to be eliminated. This was largely a result of a diplomatic impasse it provoked. Northern countries baulked at the financial transfers implied, while Southern countries resisted steadfastly the implicit limit on their emissions. The legacy of widening inequalities produced this impasse in climate diplomacy. But it also resulted from the ideological priority attached to efficiency and the way that markets are assumed to produce such efficiency, an idea that was more important to powerful actors than the plea for equity.

In fact this obsession with efficiency and markets also explains the way in which emissions trading was preferred over carbon taxes. Such taxes have also been proposed and implemented in one or two countries such as Sweden and the Netherlands, while the UK's climate change levy was a quasi-carbon tax. But they have failed to get off the ground in most places, for example in the EU where a long carbon tax debate was stalled because of strong industry resistance and a reluctance among some member states to cede tax-raising powers to a regional organisation. Canada provides a classic example of the difficulty in generating support for carbon taxes, where one of the two main parties, the Liberals, ran in the federal election of 2008 with carbon taxes as a high profile part of the campaign, and consequently suffered huge losses at the polls.

In the UN negotiating process, occasional proposals for harmonised introduction of such taxes never got anywhere. Everyday political processes of interest groups defending their interests is important here - big corporations successfully resisted on the grounds of the increased costs, and new taxes are never popular with the public. In a more open global economy, the prospect of relocation also meant that 'carbon leakage' might occur, whereby a tax would simply have the effect of driving the most polluting companies or parts of the production process overseas, resulting in no overall reduction in emissions. This was an argument successfully used by industry groups to prevent taxes from being used in the first place.

So emissions trading emerged as the preferred option because of its ideological fit with neoliberal logic. But it was also more successful because of its fit with the interests of newly dominant financial actors. The USA first formally proposed emissions trading in the UN negotiations in December 1996, and initially there was much resistance from more or less everyone. The US rationale was initially to create flexibility for countries in implementing their commitments. The political resistance to emissions reductions in the USA was considerably stronger than in Europe, and the Clinton administration, while favourable itself to action, was heavily constrained by a Congress which was hostile. Economists in the USA also insisted that the costs of reductions to the US economy were very high, and Clinton was certainly a strong proponent of using market-mechanisms to bring compliance costs down. These factors combined to make the USA propose emissions trading as a means to pursue reductions in a manner that minimised the costs associated with them.

In the Kyoto negotiations up to 1997, countries ended up agreeing to emissions trading mostly because of the USA's single-minded determination to include the flexible mechanisms and the desperate desire of others to keep the USA on board. But the interesting period was the next three years, through to around 2000. In this period, there was a dramatic transformation in the fortunes of emissions trading. The Kyoto process plodded on slowly because of the many unresolved questions about its various innovative elements. But the EU changed its mind about emissions trading shortly after Kyoto, during 19981999, becoming a proponent in the Kyoto process but also starting to plan its own system. Individual European countries like the UK and Denmark started also to plan their own emissions trading systems.

Also interested in emissions trading, albeit for different reasons, was a whole range of private market actors that emerged in the late 1990s. Companies such as EcoSecurities (1997), CO2e. com (2000) and Point Carbon (2000) were created. They became key actors in the carbon markets that we discuss at greater length in chapters 5-7. Existing banks, such as Barclays or Dresdner Kleinwort, developed their own carbon trading offices. Annual carbon finance and carbon market conferences were started, and a Carbon Expo - the 'global carbon market fair and conference' - has been held every year since 2004. In 2005 alone emission reduction purchase agreements for more than 100 projects were signed or reached advanced negotiations at Carbon Expo.27 New associations of actors, like the International Emissions Trading Association (IETA) or the Emissions Marketing Association, and more recently the Carbon Markets and Investors Association, were created or expanded considerably in reaction to the growing momentum of emissions trading systems. But they haven't only reacted to the pressure from politicians; they have become crucial to why politicians didn't abandon emissions trading in the face of various pressures over the next few years - notably the ongoing difficult negotiations in the Kyoto process and the withdrawal of the USA from the process in 2001.

Emissions trading thus became almost unstoppable once the dominant financial actors realised its potential as a new market, with its derivatives, options, swaps, insurance, and so on, and thus as a profitable enterprise. While the key period of take-off of this dynamic was 1996-2000, after that date the process continued to mushroom. We explore the character of these markets in more detail in Chapters 5 and 6. Here, the point to underscore is that emissions trading 'gained traction' because of the intertwining of the need that policy-makers had for flexibility in meeting commitments and the realisation by financial institutions that the emissions market could be the site of significant growth and profits.

Some financial actors also became interested in climate change for another reason. As we show in more detail in Chapter 4, insurance companies started to worry in the early 1990s about large-scale payouts for extreme weather events (principally hurricanes and flooding), which had already increased by that point, and were projected in many models to become even more frequent and intense. Insurers started to act through the 1990s, in conjunction in particular with the United Nations Environment Program (UNEP)'s Finance Initiative which was set up to promote action by financial institutions on climate change and other environmental issues. But their activity exploded in the 2000s, particularly through the Carbon Disclosure Project (CDP).

27 See: http://www.carbonexpo.com/wEnglisch/carbonexpo2/global/ueber_die_mes se/carbon_Expo_2.shtml.

Networks for climate change 29

The CDP is a project whereby investors (led by the insurers, but joined by banks and pension funds) attempt to shape the activities of other companies by getting them to disclose their carbon intensity and their strategies to limit emissions. The CDP now has $57 trillion of assets behind it.28

Financial companies thus have complicated interests in relation to climate change. They are exposed to all sorts of risks from climate change itself - direct exposure through insurance for homes and businesses, but also indirectly to banks when loans go bad because of weather-related risks. But they have also become the power brokers in contemporary capitalism, capable of moving money around, putting pressure on manufacturers, governments and other social actors. Their power has become a crucial element in the politics of climate change.

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