Carbon emissions trading is poised to go global, and billions of dollars — maybe even trillions — could be at stake. That's thanks to last month's U.N. climate summit in Glasgow, Scotland, which approved a new international trading system where companies pay for cuts in greenhouse gas emissions somewhere else, rather than doing it themselves.
In theory, it's a more efficient way to fight climate change, paying for clean energy or forest preservation in countries that lack the resources to do it on their own.
"Those financial flows are so crucial to climate action," says Kelley Kizzier, vice president for global climate at the Environmental Defense Fund (EDF).
Yet emissions trading has fierce critics who say it allows companies to continue burning fossil fuels without delivering the promised cuts in overall emissions.
"I'm pretty skeptical about the effectiveness of carbon markets," says Erika Lennon, a senior attorney with the Center for International Environmental Law (CIEL).
Fueling the market for carbon offsets
The 2015 Paris Agreement on climate approved emissions trading in principle, but it took until this year's meeting in Glasgow for nations to agree on the rules governing such trades.
There were lots of potential buyers and sellers of carbon credits at the Glasgow summit. The buyers came from big companies that burn fossil fuels, like Ahmed Idress, from Capital Power, based in the Canadian province of Alberta.
Idress's company burns gas and coal to make electricity, releasing about 11.5 million tons of carbon dioxide into the air each year. Canada now is taxing those emissions. "As of today, you pay about $40 (Canadian) a ton," Idress said. "Next year, it's going to be $50. The federal government is asking that the price should continue to escalate to $170 [a ton] by 2030."
Capital Power is cutting that tax bill in part by switching to cleaner energy sources, like wind power, but it also has another option. The province of Alberta has created an "emission offset system" that allows Capital Power to cancel out its emissions by buying carbon credits. Other Alberta companies are able to sell credits that they've earned by doing something to cut their own emissions, such as installing more efficient heating systems or by capturing methane, a powerful greenhouse gas, from cow manure.
California also uses versions of emissions trading to limit carbon emissions from power plants and transportation fuel. Polluting companies are forced to buy credits, and the proceeds of those sales are flowing to companies that make biodiesel, a low-carbon fuel, and to dairy farmers who are creating "renewable natural gas" from cow manure. The European Union, meanwhile, runs the world's biggest market in carbon emissions.
The decisions in Glasgow now might open the door for such legally mandated carbon markets to link up across national and regional boundaries. In theory, a company like Capital Power, in Canada, could buy credits generated in Brazil.
The new rules do not, however, cover privately run systems of voluntary carbon offsets, which companies sometimes buy in order to meet their environmental goals.
Proponents see promise in a global system
Backers of emissions trading say that it promotes efficiency, allowing companies to buy their greenhouse gas reductions from whomever can do it most cheaply and easily. They also say that it provides a vital stream of funding to companies in the clean energy business.
"People are starting to understand that with this global crisis, carbon markets provide a really important tool," says Kizzier.
Thanks to the U.N. decision in Glasgow, there now are rules for how to account for such transactions under the 2015 Paris Agreement. The rules ban double-counting, for instance. When one country pays for reductions in emissions in another country, those cuts can be included in the national emissions totals of just one of the countries, not both.
The U.N. now has the authority to decide which actions — like building a wind farm, or protecting a patch of the Amazon — are truly valid for earning credits under this system.
Legal experts already are debating what some of the new rules mean. Gilles Dufrasne, from the watchdog group Carbon Market Watch, based in Brussels, wrote in an email to NPR that the rules "do not allow the generation of credits for forest protection," because they do not mention the idea of credit for "avoided emissions."
Other experts, such as Kizzier and Chirag Gajjar, from the World Resources Institute, say that the U.N.-backed trading system could, in fact, embrace forest protection. It authorizes credits for any activity that removes carbon from the atmosphere, and that could include forestry initiatives.
Some companies — and countries — are hoping to make a lot of money from this trading system.
"Brazil is really positioning itself as a massive supplier, since, essentially, carbon credits are our product," said Gabriella Dorlhiac, executive director of the International Chamber of Commerce in Brazil, at a session in Glasgow organized by the International Emissions Trading Association. Dorlhiac presented a study which estimates that Brazil could sell up to $100 billion worth of carbon credits over the next decade, mostly generated by protecting forests or expanding them.
"That's exactly what we want," says EDF's Kizzier. "I think people should be looking at this as a revenue opportunity, and as a way that we get finance flowing from developed to developing countries." Those countries need investment capital, far above what they're getting in aid from governments, in order to build clean energy systems and adapt to climate change.
Critics say carbon trading won't help climate change
Yet many observers remain unconvinced that emissions trading is a good idea. They believe that these carbon markets simply allow polluting companies to continue releasing carbon.
This can happen through bad accounting. At the Glasgow meeting, loud protests erupted over "zombie credits." These are carbon credits that some nations earned years ago through an emissions trading system established by the 1997 Kyoto Protocol on climate. There wasn't much demand for these credits, because limits on greenhouse emissions at the time weren't tight enough.
Under the Glasgow rules, millions of those old credits might get sold as carbon offsets without actually stimulating new efforts to cut carbon emissions.
Another accounting pitfall: Say that Indonesia is already protecting its forests under its own national laws. If it also gets carbon credits for doing this, those credits don't really represent a reduction in carbon emissions. Under the U.N. guidelines, carbon credits are only supposed to result from actions that are new and additional, but determining this can be hard.
Many defenders of emissions trading, like Kizzier, agree that the system needs tight rules.
Lennon, from CIEL, goes further, arguing that the climate situation is way too dire to let companies now buy offsets. "You're not reducing anything. You're just trading around the world, and what we really need to do is reduce the overall emissions," she says.
Many economists say that for emissions trading to work, countries will have to impose overall limits on emissions that are much tighter than most been willing to set so far. That's what it will take to boost demand for credits, driving up their price and convincing companies that it's just too expensive to keep burning fossil fuels.
RACHEL MARTIN, HOST:
OK. Hundreds of billions of dollars could change hands in the coming years through a global market in greenhouse emissions. Last month's climate summit in Glasgow, Scotland, approved the new trading system. In theory, it's an efficient way to fight climate change. But there are pitfalls. NPR's Dan Charles has the story.
DAN CHARLES, BYLINE: Carbon trading takes buyers and sellers, and they were all there at the Glasgow summit in a giant exhibition hall. The buyers came from big companies that burn fossil fuels.
AHMED IDRESS: My name is Ahmed Idress, and I work for Capital Power in Canada.
CHARLES: Idress' company burns gas and coal to make electricity, which pumps carbon dioxide into the air, heating up the planet.
IDRESS: The company total emission is about 11.5 million ton.
CHARLES: And Canada is now taxing those carbon emissions.
IDRESS: As of today, you pay about $40 a ton. Next year, it's going to be $50. The federal government is asking that the price to continue to escalate to $170 by 2030.
CHARLES: Capital Power is cutting that tax bill a little by switching to cleaner energy, but it has another option under a system set up by the province of Alberta, where its plants are located. It can cancel out those emissions by buying carbon credits. It buys them from other companies in Alberta that earn them by doing something to cut their emissions, like capturing the greenhouse gas methane from cow manure. This is emissions trading. The theory is it's more efficient to let companies buy their greenhouse gas reductions from whomever can do it most cheaply and easily. Maybe that's dairy farmers. Kelley Kizzier from the Environmental Defense Fund says interest in emissions trading systems has been booming.
KELLEY KIZZIER: People are starting to understand that with this global crisis, carbon markets provide a really important tool.
CHARLES: California has an emissions trading system. The European Union does, too. And now those markets might be able to link up globally. The U.N. climate summit in Glasgow agreed on some rules for these international trades. Kizzier says it opens up new possibilities for companies like Capital Power.
KIZZIER: So let's say that a company in Alberta wants to buy credits from Brazil.
CHARLES: There now are rules for how to handle that transaction. And a U.N. agency can decide which actions, like building a wind farm or restoring a forest, are truly valid for earning credits. Some companies and countries are hoping to make a lot of money from this, which brings us to the potential sellers. Gabriella Dorlhiac from the International Chamber of Commerce in Brazil was representing a lot of them at the climate meeting in Glasgow.
(SOUNDBITE OF ARCHIVED RECORDING)
GABRIELLA DORLHIAC: Brazil really positioning itself as a massive supplier, since essentially carbon credits are a product.
CHARLES: She told her audience that Brazil could sell up to $100 billion worth of carbon credits over the next decade, mostly from protecting forests or expanding them. Kelley Kizzier from the Environmental Defense Fund says that's great.
KIZZIER: That's exactly what we want. I think people should be looking at this as a revenue opportunity and as a way that we get finance flowing from developed to developing countries.
CHARLES: It's developing countries that need money most to deal with climate change. But a lot of people are unconvinced that emissions trading is a good idea.
(SOUNDBITE OF ARCHIVED RECORDING)
UNIDENTIFIED PROTESTERS: (Chanting) No more zombie credits. No more zombie credits.
CHARLES: There were protesters in Glasgow who say these markets just let polluters keep polluting, for instance, through bad accounting. The zombie credits that those people were chanting about are credits that countries like Brazil earned years ago but never sold because there wasn't much demand for them. Now those old credits might get sold as carbon offsets, but they won't bring any new reductions in emissions. Or let's say a country is already protecting its forests just because that's the law, but then it also gets carbon credits for doing it. Those credits don't really represent a reduction in carbon emissions. Erika Lennon, an attorney with the Center for International Environmental Law, says the climate situation now is way too dire to let companies buy offsets for their emissions.
ERIKA LENNON: You're not reducing anything; you're just sort of trading around the world. And what we really need to do is reduce the overall emissions.
CHARLES: Many economists say for emissions trading to really work, countries will have to impose limits on those overall emissions that are much tighter than most have been willing to set so far. That's what it will take to boost demand for credits - driving up their price and convincing companies that it's just too expensive to keep burning fossil fuels.
Dan Charles, NPR News.
(SOUNDBITE OF KINACK'S "NIGHT LOVE") Transcript provided by NPR, Copyright NPR.