Inexorable March to Carbon Markets at Copenhagen

There are two separate meetings going on here in Copenhagen, really. The one that everyone is focused on is the official negotiations between the countries to reach a new binding agreement on climate change (or extend Kyoto in some form). The other “meeting” is the interaction of the observer organizations inside and outside of the side event meetings and their informal reports to the official delegations. This second “meeting” is more amorphous, and more subject to chaos (the security clearance for credentialed observers has required more than seven hours of waiting in the cold and this morning (Wednesday) was suspended indefinitely). Nevertheless, it appears to me that there is some significant progress being made.

While here, I've focused on the intersecting issues of the carbon market, offsets and adaptation assistance to affected countries. From the official reports, it appears that little has happened in these areas. Many of the developing countries remain suspicious of CO2 trading schemes, and are at least publicly measuring success by the amount of money that they will receive for adaptation. However, the very crux of the argument points out some important facts. First, the fault line on adaptation funding is now clearly whether it will come from a tax or other proceeds from a carbon market or from direct aid. The negotiating position of the developed countries that they wish to secure adaptation funding from carbon trading is now an official position, indicating that most of the developed world is more than ever bought into the idea of using CO2 trading markets for controlling greenhouse gases. Even as the United States considers the latest legislative idea that eschews trading (the “cap and dividend” proposal from Senators Cantwell and Collins), it appears more than ever that cap and trade is what must ultimately happen in the US. The United States is a big player for sure, but even it must be affected by what goes on in the rest of the world. You can be sure that U.S. businesses will not want to be cut out of the growing international market in CO2 trading that will be in the EU and likely other countries as well. Nothing in the “cap and dividend” proposal is inconsistent with trading, and the auctioning of rights to emit is clearly borrowed from the scheme.

The New York Times reports that the official negotiations have reached a significant agreement on recognizing and compensating poorer countries for reduced deforestation (REDD). While a victory for the developing world, particularly countries like Brazil and Indonesia, this is also a huge movement toward cap and trade markets, since the impetus for the developed world in REDD is to provide an offset supply for the cap and trade markets.

This in turn can assist in moving progress on offsets in general. Partially because of agreement on REDD, it has been rumored that overall progress has been made on reforming the CDM to meet the desires of the U.S. delegation. If true, this will be a significant step towards the possibility of one integrated trading market between the United States and the European Union. I hope that the U.S. delegation has been able to introduce a more robust review of offsets for environmental and other social harms, since this has been the focus of several of the U.S. legislative proposals. What is most interesting, however, is that this integrated market is being treated as a “fait accompli” in the negotiating positions in the developed world, again showing the inexorable movement toward the CO2 trading market.

The emphasis on the trading markets, offsets, and adaptation funding is even more pronounced in the side events. Here there are significant signs of progress. People here are paying attention to how adaptation funding can be properly deployed, and even more to how robust carbon markets and genuine offsets meet the environmental goals of reducing greenhouse gases. (At a recent event on ensuring that forestry offsets are genuine, there was a demonstration of technical improvements to measuring and verifying forestry carbon uptake.) This in turn means that there is a greater possibility of using offsets in developing countries -- which can also provide economic benefits.

It seems odd to talk about the business of global warming, but that is the distinct impression one gets from the overall position of the developed world in negotiations. Many of my environmental colleagues are suspicious of carbon markets as an effective way to control greenhouses gases, and several grassroots environmental organizations here have been protesting the same point. But there is no denying continued movement in this direction. Even if official talks here are branded a failure, it appears that the EU, Australia, Japan, the United States and Canada will be moving forward with a unilateral scheme to meet reduction targets using CO2 trading as long as they can get some involvement from China. China in turn has a vested interest in this turn of events because of its rush to create products for a new low energy economy.

To be sure, carbon markets alone will not save the world. There are too many other policies that affect the use of CO2 and other greenhouse gases. Copenhagen shows progress in some of these areas as well. In a very provocative session on fossil fuel subsidies, the former President of Costa Rica implored the developing world to end this 750 billion dollar drain on their economies. It was estimated that ending these subsidies alone would meet 20% of the U.N. reduction target by 2050.

However the summit ends, I believe that the intense negotiations and interactions will ultimately prove fruitful. The positions are clearer and the mechanisms to support those positions will have taken a step forward. I also believe that markets and offsets can really work if we are careful. Put me in the Hopenhagen camp.