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Smoke and Mirrors

Will Global Pollution Trading Save the Climate or Promote Injustice and Fraud?
by Michael BelliveauCorpWatch
October 1st, 1998

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Almost a year after governments agreed to the Kyoto Protocol on climate change, a growing number of environmentalists are sounding the alarm on the Treaty's call for a system of global emissions trading.

This report shows that emissions trading amounts to an elaborate shell game that threatens to undercut the Protocol's goal of stemming global warming. Experience with pollution trading in the U.S. demonstrates that buying and selling carbon dioxide credits will deliver only illusory emission reductions, invite fraud and result in disproportionate health and economic impacts on poor communities.

When emissions trading is discussed in the upcoming Buenos Aires meeting of the Kyoto Protocol, it will be touted by delegates and some environmental groups as a strategic tool in combating global warming. Not surprisingly, the U.S. is leading the charge as it fosters the rapid growth in economic incentive policies, both domestically and internationally.


"Blind faith in market forces and neoliberal passion for regulatory reform have overshadowed the fact that emissions trading does not in fact reduce pollution."


Yet these so-called "joint implementation" initiatives signal a shift toward a fundamentally anti-democratic strategy of deregulation for corporate polluters. Ideological zeal for free market policies are now infecting the climate change agreement—with potentially disastrous results. While some may support free market environmentalism, and others may object to buying and selling the "right" to pollute on moral grounds, mounting evidence shows that pollution trading makes for poor environmental policy—regardless of political philosophy.

Blind faith in market forces and neoliberal passion for regulatory reform have overshadowed the fact that emissions trading does not in fact reduce pollution.

Here's how it's supposed to work: Country A (or corporation A) reduces greenhouse gas emissions below a specified goal, earning credits for its extra reductions. At the same time, country/corporation B decides that emission controls are too expensive, so they purchase A's emission reduction credits. A declining cap on allowable emissions reduces the available number of credits over time. According to trading theorists, policy makers need only establish the trading ground rules, stand out of the way, and let the invisible hand of the market protect the planet from ecological havoc. All of this for a lower price than "command and control" regulatory mandates.

What's wrong with this picture? Plans to award excess credits to Russia grimly hint at what's to come. Since the tragic collapse of the Russian economy has driven the country's carbon dioxide emissions more than 30% below 1990 levels, trading advocates want to vest Russia with substantial free credits.1 Look for major corporate polluters in U.S. and Japan to buy up the "hot air" credits, reducing carbon pollution on paper without providing any real environmental benefit. That's just the beginning of what's wrong with pollution trading.

The Seven Deadly Sins of Global Pollution Trading

Based on the now extensive U.S. experience with trading in emission reduction credits (See Trading Places - Lethal Lessons form Los Angeles and Beltway Bandits - Pollution Trading as National Policy), several problems will plague global trading in carbon dioxide. Together these troubles add up to continued global warming.

If the Kyoto Protocol winds up relying on emissions trading as a key tool to reduce greenhouse gas emissions, it will only prolong overconsumption in the North and lock in a place a fossil fuel dependent economy in the South. Here are the seven deadly sins that condemn pollution trading to certain failure.

  1. PHANTOM REDUCTIONS

    An inflated baseline of allowable or assigned emissions means that, even in an honest trading program, most of the early emissions "reductions" are nothing of the sort. In the RECLAIM program (See Trading Places - Lethal Lessons form Los Angeles), an extra 40,000 tons of air pollution were allowed to foul already smoggy Los Angeles skies as a result of corporate lobbying efforts.2 Under the Kyoto protocol, Russian and Ukrainian credits represent environmentally worthless abstractions, not future emission reductions. In both instances, poor economic conditions are being used to justify regulatory relief for major polluters in other countries. The inflated baseline credits protect corporate profits and provide zero environmental benefits during their lifetime.

  2. REWARDS THE WORST POLLUTERS

    Pollution trading programs entitle the polluter to an emissions rate based on their historic levels of pollution. Once emission levels are set, polluting countries or companies can emit to those levels, sell unused portions of their entitlement or bank their balance for future use or financial speculation. The worst polluters earn the highest pollution entitlements.

    The U.S., for example, enjoys the lowest rate of required reductions among industrialized countries, despite owning the largest share of carbon emissions of any country.3 In this respect, the Kyoto Protocol also rewards corporations who control market share for polluting fossil fuels sold in the United States.

    In developing countries, the Kyoto protocol creates a perverse incentive to increase emissions in the near term. No specific emission reductions are required yet for these nations. Under a pollution trading scheme, higher emissions mean a greater entitlement to pollute and more potential to bank valuable credits. By increasing greenhouse emissions now, developing nations will ensure a higher right to pollute when reduction goals are set for them in the next round of global negotiations.

  3. PROMOTES FRAUD

    When emission reductions translate into dollar values, tremendous pressure exists to fudge the data. Pollution trading becomes a giant numbers game, easily manipulated to claim exaggerated results. In the L.A. car scrapping program (See Trading Places - Lethal Lessons form Los Angeles), widespread fraud was routine.4 Why not? All the market incentives were in place -- to cheat, that is.

    Any policy strategy must ensure that emission reductions are verifiable and enforceable. Here's where pollution trading is at a distinct disadvantage when compared to real regulation.

    Compliance with technology-forcing mandates can be readily determined because polluting technologies are measurable and preventive solutions are verifiable. For example, suppose the U.S. required that within five years 50% of industrial fossil fuel use be slashed through conservation, solar energy and hydrogen-powered fuel cells. Through reporting, emissions monitoring and on-site inspection, compliance with these goals can be verified. Some uncertainty always exists regarding the exact amount of emissions released or reduced. But we can tell whether the preventive technology was implemented and whether emissions are going down as a result.

    By contrast, a pollution trading scheme depends on highly accurate accounting of emissions and reductions. Instead of monitoring polluting technologies and industries, emission reduction credits will be accrued from countless transactions around the globe that are brokered by far removed "middle men." Trading advocates decry independent verification before each trade as market interference. Even after-the-fact enforcement remains daunting. How many emissions were really reduced? And how accurate are the credits for future emissions reductions? And how can credits be objectively assigned to carbon "sinks" like tree planting or habitat preservation?

  4. UNDERMINES TECHNOLOGY INNOVATION

    The technical capacity, human resources and capital needed to develop new technologies to reduce carbon emissions are concentrated in industrialized countries, such as in the United States, Japan and the European Community. Under the proposed trading provision, these countries will buy up cheap and sometimes bogus emission reduction credits for the next ten to fifteen years.

    This means that they will have little incentive to develop alternative energy sources or pollution reducing technology. In turn, high consumption and emission rates will continue. Existing technologies will be used to curb carbon emissions in the developing world where energy is less efficient. The demand for new technology in both North and South will be slowed, as will the reduction of greenhouse gas emissions in the North, which is responsible for about three quarters of all global warming gasses.

  5. DEEPENS ENVIRONMENTAL RACISM IN THE UNITED STATES

    One of the most potentially tragic aspects of the push for global trading in carbon dioxide is that it would exacerbate the disproportionate impact on low income communities of color in the United States, a country which plans to purchase carbon credits rather than adequately reduce its emissions.

    Greenhouse gas emissions are not locally and regionally benign pollutants that just happen to threaten global ecology.


    "Greenhouse gas emissions are not locally and regionally benign pollutants that just happen to threaten global ecology."


    Carbon dioxide emissions cannot be separated from the other co-pollutants that result from the same sources -- the production and combustion of petrochemicals and fossil fuels. Therefore, whenever a company forgoes reductions in carbon dioxide emissions because it purchased a credit, much more than carbon dioxide continues to flow from that company's stack. Every combustion source also emits dozens of other co-pollutants that pose deadly health risks locally and regionally. These include cancer-causing products of incomplete combustion such as polycyclic aromatic hydrocarbons (PAHs), unburned toxic hydrocarbons, and fine particulate matter linked to excessive death rates.5

    In the U.S., oil refineries and other industrial polluters are disproportionately located in poor communities of color. This means that in a country where 100 million people breathe polluted air every day, low income people of color will continue to be hardest hit.6 Global pollution trading will do nothing to ease this disproportionate impact on public health—a phenomenon known as environmental racism—and may in fact exacerbate it.

  6. WIDENS GLOBAL ECONOMIC INJUSTICE

    The developing countries lose twice in the global market in greenhouse gas reduction credits.7 Pollution trading will encourage efforts to reduce carbon emissions in the South, where energy use is less efficient; in order to generate low-cost emission reduction credits for sale to the big polluters in the North.

    Competition among developing countries to produce the cheapest possible credits will tend to minimize the capital investments really needed to overhaul their energy wasteful economies. These capital starved nations need sustained investment in state of the art, clean energy technology. Instead, they will experience entrepreneurial "hit and run" projects aimed at bleeding off the cheapest reductions available. And to the extent that Russian "hot air" credits and informal cheating keep the price of emission credits low, these scattershot investments in the South will not significantly meet these structural needs.

    The second problem strikes deeper and later. During the next phase in the long term struggle to reverse global warming, the South will be required to reduce carbon emissions just as the Kyoto protocol mandates reductions in the North. By that time, however, the industrialized countries will have already used up easy emission reductions in the South through pollution trading. This leaves the developing countries in the lurch—deeply locked into a fossil fuel development path, reliant on what will quickly become obsolete technology and with few means to meet their own future obligations to reduce carbon.

    Over the duration of the carbon reduction effort, the least developed countries end up mortgaging their economic future to enable the industrial North to once again exploit Third World resources, thus sustaining its excessive consumption and carbon emission habits. The historic injustice of five hundred years of colonization and unequal development will stay the course under a global pollution trading regime.

  7. EMPOWERS THE CORPORATE ELITE

    Many transnational corporations and the institutions that support them need firm control over a fossil-fuel reliant global economy to stay profitable. The pollution trading provisions of the Kyoto protocol, unless altered, will aid that outcome. By creating a carbon reduction scheme that eliminates public participation and minimizes government intervention, climate change negotiators will allow the transnationals to control the pace and degree of real reductions in greenhouse gases.

    Placing pollution trading decisions in the hands of corporate polluters and institutions like the World Bank, will keep a fossil fuel economy locked in place. Begrudgingly, these leaders will move slowly toward improving energy efficiency and introducing new technologies, especially in the developing world where cheap credits will abound.

    In the final analysis, the ultimate market incentive remains unchanged: profit. Those who gain from oil, coal and other petrochemicals, have no motive to abandon their fossil-fuel dependent markets and technologies. Yet we need to rapidly phase out the fossil-fuel economy to minimize the destructive effects of climate change.

A Just Alternative to Global Pollution Trading

Any strategic response to climate change must base itself on environmental and economic justice for workers and communities around the world. Such a just alternative should incorporate three features: technology-forcing mandates, progressive pollution taxes and just transition funding for the displaced and disadvantaged. These elements are briefly sketched below.

  • Technology-Forcing Mandates. MIT Professor Nick Ashford among others has demonstrated that firm regulatory mandates create incentives that force technological innovation to reduce industrial pollution.8 Such a regulatory approach drives market demand more effectively than an inherently flawed pollution trading system. Other market-based policies that are more effective than pollution trading can complement tough regulations to promote carbon reductions.

  • Progressive Pollution Taxes. In a market dominated economy, environmental policies that rely on market forces can work. Market disincentives, such as significant taxes on pollution, will directly discourage the use of polluting products and technologies.9 However pollution taxes alone are regressive, falling disproportionately on those who can least afford increased costs of living.

    Shifting taxes away from wages and savings onto pollution sources coupled with other progressive tax reforms, force those who can most afford it to pay for carbon reductions.

    For example, a much higher tax on gasoline would provide a strong incentive to drive less and increase fuel efficiency in cars. Normally, a gas tax would hit poor and working people harder than the wealthy, making it a regressive tax. But if at the same time income taxes were reduced for low and moderate income taxpayers, then the higher costs of gasoline would be more than offset by lower taxes overall. By creating disincentives to pollute up front and progressive tax relief at the back end, the costs of transitioning to a more sustainable economy would be borne by the wealthiest sector of society.


    "The same market forces that created and perpetuate the ecological and health disasters of the industrial era will not solve the climate change crisis."


    Progressive pollution taxes pose political challenges that will take time to overcome. In the interim, author Ross Gelbspan advocates a Tobin tax to generate the necessary capital to speed a transition from fossil fuels. Named for James Tobin, the Nobel Prize winning economist, just a 0.25% tax on all international currency transactions would generate about $200 billion dollars per year. The financial impact of such a tax would be absorbed by the international banking and financial infrastructure and widely dispersed throughout the global economy without regressive effects.10

  • Just Transition Funding. Funding from a Tobin tax and progressive pollution taxes would enable a more rapid and just transition to clean energy alternatives and environmental restoration. It should also be used to offset the economic impacts on workers displaced by this transition, as well as on lower income consumers and developing countries.

In the U.S., the Oil, Chemical and Atomic Workers Union has proposed that oil workers displaced by the necessary response to global warming be provided with income and education guarantees that offset the economic impacts.11 Communities dependent on oil and coal for their tax base need compensation to spur an economic transition. Fossil fuel price increases, whether due to increased taxes or decreasing supply will unfairly impact low income communities unless they are assisted in making the transition. Developing countries and small businesses require capital to invest in alternative technologies and efficiency projects. The poorest and least powerful communities and countries should not be forced to bear an unjust burden for solving the greenhouse crisis.

The same market forces that created and perpetuate the ecological and health disasters of the industrial era will not solve the climate change crisis.

Survival follows from taking the right path, not the expedient one. By negotiating the ground rules of global pollution trading transactions, governments and environmental groups advocating this "free market" approach will only concede the future to those who profit from delaying the transition to a sustainable economy. Instead, a global strategy to save the climate should be based on international solidarity together with environmental and economic justice.


For a closer look at failed pollution trading programs in the U.S. see the side bars to this article: Trading Places--Lethal Lessons from Los Angeles and Beltway Bandits--Pollution Trading as National Policy.


Just Economics for Environmental Health
P.O. Box 806
Montara, CA  94037
Tel: (650) 728-5728
Fax: (650) 728-5816
email: mbelliveau@igc.org
A Project of the Tides Center

The report is published by the TRAC--Transnational Resource & Action Center. TRAC works to build global links for human rights, environmental justice and corporate accountability.


Footnotes

1) The Kyoto Protocol allows Russia to stabilize its greenhouse gas emissions in 2008 through 2012 at its 1990 levels. Given the sharp decline in Russia's emissions, this target actually sanctions a 33% to 34% increase in total greenhouse gas emissions from today's levels, according to Yurika Ayukawa from the World Wildlife Fund in Japan.

2) Analysis by James Jenal, Citizens for a Better Environment. Los Angeles CA. 1993. Submitted to the South Coast Air Quality Management District.

3) Flavin, Christopher and Dunn. S. "Responding to the Threat of Climate Change." In State of the World 1998. Worldwatch Institute. W.W. Norton. New York NY. 1998

4) Cooper, Mark. "Smoke Screen", New Times. Volume 3, Number 6. Los Angeles CA. February 5-11, 1998; Cone, Marla. "AQMD Tightens Rules of Car Scrapping Program", Los Angeles Times. July 11, 1998.

5) Interagency Workgroup on Industrial Ecology, Material and Energy Flows. "Fossil Residuals". In Materials. Washington DC. September 1997. For copies of the report, contact the President's Council on Sustainable Development distribution hotline at (800) 363-3732.

6) Sexton, K., Gong Jr., H., Bailar III, J.C., Ford, J.G., Gold, D.R., Lambert, W.E. and Utell, M.J. "Air Pollution Health Risks: Do Class and Race Matter?" Toxicology and Industrial Health. 9:843-878. 1993; Principles of Environmental Justice. People of Color Environmental Leadership Summit. Washington DC. October 27, 1991.

7) This section is based on arguments put forth by Anil Agarwal and Sunita Narain of the Centre for Science and Environment (CSE) in India.

8) Ashford, N.A. et al. "The Implications of Health, Safety and Environmental Regulations for Technological Change". Department of Commerce Contract No. NB-79-SAC-A0030. January 15, 1979.

9) Brown, Lester R. and Mitchell, Jennifer. "Building a New Economy: Steering with Tax Policy". In State of the World 1998. W.W. Norton & Co. New York NY. 1998; Brown, Lester R., Flavin, C. and Postel, S. "Green Taxes". In Saving the Planet: How To Shape An Environmentally Sustainable Global Economy. W.W. Norton & Co. New York NY. 1991.

10) Gelbspan, Ross. Speech at Portland State University. Recorded and Produced by Alternative Radio. Broadcast on KQED-FM, San Francisco CA. September 16, 1998.

11) Leopold, Les. Director, Labor Institute. Address to the International Joint Commission 1995 Biennial Meeting on Great Lakes Water Quality, Labor Insight Presentation. Representing the Oil, Chemical and Atomic Workers Union. September 23, 1995; The Public Health Institute and The Labor Institute. A Just Transition for Jobs and the Environment. Draft 7.1, New York, NY. 1998; Fellner, Kim. Unions and Environmentalists: Will Climate Change Change the Climate? In newsletter of National Organizers Alliance, Washington, DC. June 1998.

Michael Belliveau directs Just Economics for Environmental Health, a new research and educational institute working to incorporate principles of environmental and economic justice into market-based environmental policies. Belliveau worked for 18 years at Communities for a Better Environment (CBE), a leading environmental health and justice organization based in California, serving as its Executive Director for 7 years. He holds an environmental science degree from MIT. Belliveau is writing a book on pollution trading.