Market News

 April 02, 2009
Is carbon trading the most cost-effective way to reduce emissions?

 Carbon trading expert Abyd Karmali answers comments from carbon market critics

Critics: "No, carbon trading is a giant money-making scam"

"It seems that the entire carbon credits trading industry is designed by greedy businessmen who want to profit from the brokering fees and profits from trading what is in essence, nothing but hot air!

If we want to clean up the environment, just do it! Why bother with carbon credits at all? If you follow the money, you will see that the biggest proponents of the carbon credits scheme are also making money from it. Sounds to me a lot like a credit default swap marketplace!"

"Most of the "green" stuff is verging on a gigantic scam. Carbon trading , with its huge government subsidies, is just what finance and industry wanted. It's not going to do a damn thing about climate change, but it'll make a lot of money for a lot of people and postpone the moment of reckoning."

Environmentalist James Lovelock, author of "The Vanishing Face of Gaia" comments in New Scientist

Abyd Karmali: "Yes: Carbon trading can work effectively in conjunction with other climate policies"

"Many questions have been raised about the value of carbon emissions trading.

Those who advocate only command-and-control regulation seem to ignore all of the published data, from the experiences of academics, governments and the private sector, that highlight precisely why emissions trading is a more cost-effective approach to reducing emissions than blunt regulation.

Put simply, it is better to reduce emissions in a way that results in lowest costs to society. Some other important benefits include:

1) The climate change problem is a problem of quantity - setting the cap and then reducing the cap is the only measure that provides policy-makers with certainty about the absolute level of emissions which will be attained

2) Having a price of CO2 in the OECD countries provides an incentive for developing countries to reduce emissions too through the carbon credit mechanisms - again, a cap-and-trade approach is the only measure which has this stimulating type of impact during this transition period leading to a more widespread cap that includes more developed emerging markets such as China and India

3) Carbon markets are better than other instruments in overcoming barriers, diffusing learning, and rewarding those who are bold enough to innovate and provide risk capital for emerging technologies.

Those who assume that the carbon market is purely a private market miss the point that the entire market is a creation of government policy.

Moreover, it is important to realise that, to flourish, carbon markets need a strong regulator and approach to governance.

This means, for example, that the emission reduction targets must be ratcheted down over time, rules about eligibility of carbon credits must be clear etc. Also, carbon markets need to work in concert with other policies and measures since not even the most ardent market proponents are under any illusion that markets alone will solve the problem.

There will always be sectors of the economy that are difficult to include a cap-and-trade programme because of, for example, high administrative or transaction costs.

Furthermore, low-carbon technologies that are too far up the marginal abatement cost curve (ie, they have very high costs/tonne of emissions reduced at present) will likely never be deployed under a cap-and-trade programme and need to rely upon some form of subsidy to help bring their costs down over time through wider deployment.

This is the rationale behind the European Union's decision to include a large number of allowances as a financial incentive for first-mover carbon capture and sequestration projects and, for example, the panapoly of incentives schemes being used to promote renewable energy."

Abyd Karmali
Managing Director, Global Head of Carbon Markets
Merrill Lynch