Beyond carbon markets.

• Author: Reyes, Oscar

"Billions Wasted on UN Climate Programme"

"Truth About Kyoto: Huge Profits, Little Carbon Saved"

"UN Effort to Curtail Emissions in Turmoil"

The headlines generated by the carbon trading mechanisms at the heart of the Kyoto Protocol, most notably the Clean Development Mechanism (CDM), tell a story of a scheme in trouble. But why has it caused such controversy?

Carbon trading is a complex system which sets itself a simple goal: to make it cheaper for companies and Governments to meet emissions reduction targets. The Kyoto Protocol saw industrialized countries (described as "Annex 1") commit to cutting greenhouse gas emissions by 2012 to levels 5.2 per cent lower than those of 1990. At the same time, a series of "flexible mechanisms" were agreed to, which meant that these targets need not be met domestically.

The CDM is the largest such mechanism, with almost 1,800 registered projects as of September 2009 and over 2,600 further projects awaiting approval. Based on current prices, the credits produced by approved schemes could generate over $55 billion by 2012. The CDM takes the form of carbon "offsetting," which allows companies, international financial institutions and Governments to finance "emissions-saving projects" outside the Annex 1 countries.

Although carbon offsets are often presented as emissions reductions, they do not actually reduce emissions. At best, they move reductions to where it is cheapest to make them, which normally means a shift from Northern to Southern countries. Greenhouse gas emissions continue to be made at one location on the assumption that an equivalent savings will happen elsewhere. The projects that count as "emissions saving" range from building hydro-electric dams to capturing methane from industrial livestock facilities.

These "savings" are calculated according to how much less greenhouse gas is presumed to be entering the atmosphere than would have been the case in the absence of the project. But no ways exist to demonstrate that it is carbon finance that makes the project possible. Researcher Dan Welch sums up the difficulty: "Offsets are an imaginary commodity created by deducting what you hope happens from what you guess would have happened." Estimates vary, but academic analysis of existing projects suggests that between one third and three quarters of projects do not represent "emissions savings" by any reckoning. The companies behind such projects are paid to do what they would have done anyway...