Cool carbon credits our hottest commodity

It’s the beginning of the year, and tax time is around the corner. Guy Dauncey has a little more to worry about than the rest of us. That’s because in addition to his other taxes, he voluntarily pays an extra tax on his contribution to global warming. Call it his greenhouse-gas tax.

Three years ago, Dauncey, a Victoria environmentalist, figured out that his car use and lifestyle were responsible for four tonnes of greenhouse-gas emissions each year. Add another 10 to 24 tonnes from flying to environmental conferences and Dauncey was a one-man ice-cap-melting machine. Not too good for the climate-change critic of the Green Party of Canada.

He decided he had to do something. Each year at tax time, Dauncey makes an offsetting donation to a group that promotes solar electricity in the developing world. “I’m carbon-neutral,” he said on the phone from his home. “I just felt it was the personally responsible thing for me to do.”

Dauncey is part of a worldwide craze for carbon offsets that has become a cornerstone of efforts to stop global warming. Everyone is getting in on it: from bands like Coldplay and Pearl Jam, which have announced carbon-neutral albums, to the G8 Summit, soccer’s 2006 World Cup, and the bank HSBC.

It has helped turn something called carbon credits into the world’s hottest commodity. If you thought gasoline or land prices were soaring, that’s nothing compared to the market of saving the world. In the new environmental world order, the fight against global warming is all about trading carbon, and that means fantastic sums of money.

It works like this. Say you’re an industrial polluter and you can’t meet your emissions-reduction target under the Kyoto accord on climate change. What do you do? Simple. You buy carbon credits to make up the difference. The credits are like a free pass to pollute. They come from projects that absorb carbon-based greenhouse gases in the atmosphere, like tree plantations, or products that otherwise reduce gas emissions, like low-energy light bulbs or solar-power panels.

Where do you buy these magical credits? As with any commodity, the buyers and sellers come together at an exchange. After the European Climate Exchange opened in Amsterdam in April 2005, an extraordinary US$11 billion in carbon credits changed hands that year at the exchange. The volume for the first nine months last year was $21.5 billion. A United Nations study says the market could be worth an astonishing $2 trillion a year by 2012, the final year of Kyoto.

The exchange mostly serves European companies and governments that have to meet emissions-reduction targets fixed by Kyoto. But there’s also a huge and fast-growing side market made up of entirely voluntary “purchases” of offsets by people like Guy Dauncey and organizations that want to be carbon-neutral.

Canada was also supposed to have a large share of the massive carbon market. That is, until Stephen Harper’s anti-Kyoto Conservatives came to power. Under the Liberals, Ottawa pledged $10 billion to meet Canada’s Kyoto target of reducing carbon emissions to six percent below the 1990 level by 2012. Anywhere from 35 to 75 percent of that reduction was expected to come from the purchase of carbon credits by industry and government. “It’s absolutely huge,” John Bennett, senior policy advisor to the Sierra Club of Canada, said over the phone from his office in Ottawa. “There is a huge amount of investment needed [in emissions reduction].”

Eyeing the lucrative market, the Montreal-based Canadian Financial Options and Futures Exchange announced plans last year to open the Canadian Climate Exchange, where investors and companies would be able to trade in carbon credits as they already do in Europe.

But the election of Harper last January changed all that. Montreal Exchange vice-president Léon Bitton said the Canadian Climate Exchange is stalled until Ottawa announces its emissions-reduction targets. Harper initially opposed Kyoto altogether but has since backtracked amid withering international condemnation. In October, his government introduced legislation promising to cut emissions by 45 to 65 percent of the 2003 level by 2050. But the proposed bill has been roundly criticized because in 2003 the level of emissions was already 25 percent higher than in 1990, the base-line year for Kyoto.

“They’re trying to stay in office without doing anything,” Bennett said. “They make announcements that sound tough, but when you look at the details there’s nothing there.”

Dauncey, who is also president of the B.C. Sustainable Energy Association, agreed: “Of this government, no one expects anything. If you scratch this government, probably there is no one there who believes in climate change.”

Bitton’s concern is that the government has yet to spell out shorter-term targets for how industry and governments will start to reduce emissions in the next several years. “In order to avoid a high adjustment cost, we need to establish short-term targets as soon as possible,” he said on the phone from his office. “We need a clear policy signal and regulatory certainty.”

The goal of all this is to stabilize greenhouse gas in the atmosphere before it hits twice the pre–industrial revolution level. That’s the level that most scientists agree is the climatic tipping point of planetary catastrophe, likely setting into irreversible motion the eventual melting of the three-kilometre-thick Greenland ice sheet, which contains 2.85 million cubic kilometres of ice, or about 10 percent of the world’s fresh water. Ultimately, that melting, over many years, would raise sea levels by seven metres and flood most coastal areas, including B.C.’s Lower Mainland.

If current emission levels continue, that tipping point will likely be reached by 2035, according to a landmark study for the British government released in October. Emissions ultimately must be cut 80 percent for gas concentrations to stabilize, the report said. Kyoto is just the first pilot project for many more rounds of international emission cuts.

Meanwhile, the entire process is still being questioned by the United States—the world’s biggest overall emitter of the gases—and Canada, the second-largest per capita emitter after Australia. Last June, Harper slashed funds for programs designed to reduce greenhouse gases, and then–environment minister Rona Ambrose announced last April that meeting Canada’s Kyoto target is “impossible”.

Still, a similar lack of Kyoto enthusiasm in Washington didn’t stop Richard Sandor from taking matters into his own hands and starting the Chicago Climate Exchange. Sandor made a fortune at Drexel Burnham Lambert, the firm of junk-bond king Michael Milken, and is known as the “father of financial futures” for founding the interest-rate futures market, now worth trillions of dollars.

Since opening in 2003, the Chicago exchange has seen $60 million to $65 million in carbon credits change hands. Sandor has also gone international, creating the European Climate Exchange and partnering with the Montreal Exchange on the Canadian version. The Chicago exchange’s 225 members include Ford Motor Co., Motorola, the City of Chicago, and the Iowa Farm Bureau. All voluntarily pledge to cut their carbon emissions by one percent each year.

The exchange brings emitters together with folks like Dennis Haubenschild, a Minnesota dairy farmer with 850 cows on his 480-hectare spread. His cows produce 90 to 100 tonnes of manure each week, which he burns in a manure digester and turns into electricity that he sells to the local power utility—enough to power his farm and 80 homes. What’s more, every tonne of methane-producing manure he burns is worth $3.40 to the Chicago Climate Exchange, which pays him through a broker for reducing greenhouse gases. The exchange then sells it as carbon credits to its members who want to meet their emissions-reduction targets.

“We have got to lessen our footprint on the planet,” Haubenschild said on the phone from his farmhouse. “We’ve got to start being more sustainable, and agriculture can play a big part in that.”

Carbon trading has its skeptics. They point out that greenhouse-gas emissions are still going up despite all the billions of dollars of carbon credits. Some critics also worry about the lax regulation of offset projects and say the credits really just let polluters buy their way out of reducing emissions.

Hannah Wittman, an assistant professor in Simon Fraser University’s sociology and anthropology department, studied one offset project funded by a large Connecticut power plant—a tree plantation in Guatemala. “It didn’t work very well,” she said from her home in Vancouver. “It didn’t offset the expected amount. They still haven’t come up with an accurate way of measuring [the offset emissions].” Wittman also has a more fundamental concern: “The whole problem is it doesn’t address greenhouse-gas emissions. Instead, the idea is, ”˜Let’s turn this into a business that lets coal plants pollute, and these poor people in Guatemala will pick up the pieces for you.’ ”

Questions have arisen about other offsetting projects, especially those involving tree-planting. Because trees store carbon dioxide, they have emerged as a leading source of offsetting carbon credits. But trees don’t live forever. When they die, the carbon they store returns to the atmosphere. Also, it is hard to reliably measure a forest’s offsetting impact. Coldplay’s attempt to produce a carbon-neutral album floundered when most of the 10,000 mango trees the band funded in India died from drought and apparent neglect.

“Once you have a system that leaks outside international boundaries, it’s hard to have monitoring and control. There is very little inspection and oversight,” said Adam Ma’anit, cofounder of the Amsterdam-based Carbon Trade Watch, speaking on the phone from his office in London, England. “The fundamental structural problem is this market is designed to produce cheap credits for corporations trying to avoid regulations.”

Other criticism comes from industry. In an interview with the Georgia Straight, Pierre Alvarez, head of the Canadian Association of Petroleum Producers, called the European carbon market “an unmitigated disaster”. He complained of “enormous complexity” and price fluctuations for the carbon credits.

The Montreal Exchange’s Bitton, for his part, defended the European system and said price volatility is normal in commodity markets. “What they did in Europe is exactly what we want in Canada.”

Some Canadian environmentalists, while acknowledging the flaws, also seem to generally see the carbon market as a cornerstone of Kyoto. Paul Lingl, the David Suzuki Foundation’s climate-change campaigner, said carbon trading should be complemented by conservation efforts and renewable-energy projects. “We see it as one piece of the puzzle,” he said on the phone from his Vancouver office.

Guy Dauncey was more emphatic. “It’s quite critical” to Kyoto, he said. “Carbon trading is here to stay. There are a lot of problems around transparency and certification, but we have to accept those challenges.”