In addition to trading the allowances and offsets themselves, participants in carbon markets can also deal in their derivatives—such as futures contracts to deliver a certain number of allowances at an agreed price and time. These instruments will be traded not only by polluters that need to buy credits to comply with environmental regulations, but also by financial services firms. In fact, a study (PDF) by Duke University’s Nicholas Institute for Environmental Policy Solutions anticipates that if the United States passes a cap-and-trade law, the derivatives trade will probably exceed the market for the allowances themselves. “We are on the verge of creating a new trillion-dollar market in financial assets that will be securitized, derivatized, and speculated by Wall Street like the mortgage-backed securities market,” says Robert Shapiro, a former undersecretary of commerce in the Clinton administration and a cofounder of the US Climate Task Force.

1. We need to massively reduce emissions. And we need to stop deforestation. Currently the targets for emissions reductions are not deep enough. One of the reasons they are not deep enough is because countries are attempting to trade off avoided deforestation against continued emissions.

2. You keep saying that carbon markets and derivatives markets are not the same thing. But you provide no evidence to back up this point. Friends of the Earth also sees similarities between carbon markets and derivatives trading. You can read their report: “Subprime Carbon? Re-thinking the world’s largest new derivatives market“. “This new report finds that existing financial regulations, as well as those in major cap-and-trade bills, are inadequate to govern carbon trading, creating a potentially huge regulatory gap.”

3. So PNG may say one thing, but it is doing another. Should we pay attention to what the government says or what the OCC does?

4. Carbon trading is undermining target setting. It creates a loophole in any targets set.

As you are aware, REDD-Monitor monitors and comments on the REDD negotiations. Obviously, I have a different opinion than you about carbon trading. Do you tell students who hold different opinions to “get educated” or ask them to “try real hard to understand”, while repeating the same statements over and over again, without providing any evidence, sources or references for the statements?

Before replying to this, could you please read George Monbiot’s most recent article, which gives “the simple mathematical reason why large scale carbon offsets can’t work”. Whether you like it or not, if REDD is to be funded by carbon trading it is an offset mechanism. The article concludes as follows:

Carbon offsetting makes sense if you are seeking a global cut of 5% between now and forever. It is the cheapest and quickest way of achieving an insignificant reduction. But as soon as you seek substantial cuts, it becomes an unfair, impossible nonsense, the equivalent of pulling yourself off the ground by your whiskers. Yes, let us help poorer nations to reduce deforestation and clean up pollution. But let us not pretend that it lets us off the hook.

2. Regulated carbon markets and unregulated derivative markets are two totally different things. Again, your lack of economic understanding is provides a gaping hole in your analysis! Get educated before pretending to be an expert.

3. Not familiar with these specifics, but looking at the posts, it seems the OCC was not following government policy.

4. Again, you totally do not understand the role of carbon trading. It is difficult speaking to someone so uneducated. I explained the role between target setting and carbon trading last time. Please read and try real hard to understand.

No, I work for a university (having no direct interest in forests carbon markets) and actually do know something about policy, markets and forests. But, I do not run a web-page PRETENDING to know something about REDD, like you do. So, the questions should be about you, not me.

1. The current targets are not deep enough. Do you accept that point? Neither the EU nor Australia are suggesting deep enough targets.

Deeper targets are meaningless if they do not involve deep reductions in emissions of fossil fuels at home. The problem is that a coal fired power plant built today will continue to emit for 50 years or so. I agree with you that the time to make corrections is now. So we need to put a system in place that will stop the construction of new coal-fired power plants not one that will allow them to be built.

You suggest that “Voluntary deductions from AAU accounts” as a way of securing deeper targets. Two things: First, why voluntary? And what if the country concerned decides not to do this? Second, one country would effectively be claiming for itself emissions reductions that are to take place in another country as its own reductions. This brings in the issues of additionality and permanence. The emissions have to be avoided for 100 years, at least (since CO2 is in the atmosphere for so long). So far, no one has come up with a reliable way of predicting the future. Watch this interview with Kevin Anderson, Research Director at the Tyndall Centre for Climate Change Research, for his suggestion of an additionality test:

“If you can imagine Marconi and the Wright brothers getting together to discuss whether actually in 2009 Easyjet and the Internet will be facilitating each other through internet booking, that’s the level of additionality certainty you’d have to have over that period. You cannot have that. Society is inherently complex. The CO2 is there [in the atmosphere] for that long. So additionality is a meaningless concept in a complex system, which society is over that sort of time frame.”

2. “Balancing supply and demand”. You’re right, I studied architecture and forestry (both of which included bits of economics, but I wouldn’t call myself an economist – any more than I’d call myself an architect or a forester for that matter). However, I think it’s worth looking at the surge in oil prices last year (for example) and asking yourself whether that had anything to do with supply and demand.

You say that derivatives and carbon trading are “two totally different financial platforms”. Other people disagree. Larry Lohmann, for example: “One lesson the current financial crisis teaches us is: beware of the new carbon markets that constitute today’s main official response to climate change. These markets are startlingly similar to the financial derivatives markets that have thrown banking systems into chaos and the world economy into a tailspin.”

You can read Lohmann’s “Financialization, Quantism and Carbon Markets” here.

On “regulated markets”, you might want to read “The Great American Bubble Machine“, an article by Matt Taibbi about Goldman Sachs in this month’s Rolling Stone magazine. The final paragraph is particularly interesting:

“Gone are Hank Paulson and Neel Kashkari; in their place are Treasury chief of staff Mark Patterson and CFTC chief Gary Gensler, both former Goldmanites. (Gensler was the firm’s co-head of finance.) And instead of credit derivatives or oil futures or mortgage-backed CDOs, the new game in town, the next bubble, is in carbon credits — a booming trillion- dollar market that barely even exists yet, but will if the Democratic Party that it gave $4,452,585 to in the last election manages to push into existence a groundbreaking new commodities bubble, disguised as an “environmental plan,” called cap-and-trade. The new carbon-credit market is a virtual repeat of the commodities-market casino that’s been kind to Goldman, except it has one delicious new wrinkle: If the plan goes forward as expected, the rise in prices will be government-mandated. Goldman won’t even have to rig the game. It will be rigged in advance.”

3. For several weeks PNG has been embroiled in a scandal over the issuance of a series of REDD “credits”. In none of the documents that I’ve seen is there any mention of voluntary deductions from AAU accounts.

4. Thanks for clarifying my point about carbon markets. I’ll repeat it: “Carbon trading does not reduce emissions.” As you point out, “the target setting process sets the level of emission reductions”. I agree, the problem being that the current targets that we have are woefully inadequate.

Meanwhile, you say “A carbon market is designed simply to achieve the most efficiently reductions after the target are set.” If it’s cheaper to buy credits than it is to close down a coal-fired power plant, then that’s what industry will do. Carbon markets are a way of making money – included in the Kyoto Protocol by the US in Kyoto, under the leadership of Al Gore. Global carbon markets already exist, despite the fact that there is no global cap. Please listen to the interview with Kevin Anderson, linked above.

Just out of curiosity, what is your interest in carbon trading and REDD? Who do you work for?

All the best!

Thanks for the reply, but again there are many unsubstantiated biases, intellectual gaps and factual errors in your response.

Time is short, but let me highlight just a few:

1. Deeper Targets: Both the EU and Australia, for example, have proposed deeper targets in response to action be developing countries. This approach needs to be encouraged, not derided. But, there are other ways to secure deeper targets that are being proposed — like I stated clearly in my last post — such as voluntary deductions from AAU accounts. Your data is regarding the first commitment period, but REDD will be included in the 2nd. The time to make corrections is now. Your simplistic position appears to be due to an intellectual gap, or clear bias.

2. Balancing Supply and Demand: Again, in your educational background or professional experience it is clear that you skipped basic economics nor have you developed an understanding of the basic market functions and governance. For example, derivatives and carbon trading are two totally different financial platforms. Secondly, there are numerous examples of regulated markets. You are simply waving bogus red flags with no understanding of the fundamentals. Again, a clear demonstration of intellectual gaps, unsubstantiated bias, and factual errors.

3. Off-Sets: Again, it appears that you do not even follow the negotiations for which you claim expertise. For example, both PNG and Guyana have specifically made submissions against REDD as an offset. Rather, they have asked that AAUs be voluntary subtracted to make room for REDD actions. This way REDD is additional, not an offset. Do you understand the difference? Again, a clear intellectual gap that seems to be driven by personal biases or a malicious distortion of the facts.

4. Carbon Markets: To say that carbon trading does not reduce emissions is fundamentally false. Try to understand: the target setting process sets the level of emission reductions. A carbon market is designed simply to achieve the most efficiently reductions after the target are set. These are two separate processes that you are comingling and confusing. And again demonstrates your intellectual shortcomings.

Really, my friend, you should expound on other issues. As in this space, you are clearly a biased novice.

Cheers!

1. REDD countries may well be asking for deeper targets by rich countries. Unfortunately rich countries are completely ignoring these requests. The Potsdam Institute on Climate Impact Research has been looking at the targets that governments are currently setting. See this presentation by Joeri Rogelj at a side event at the recent climate negotiations in Bonn. IPCC 4 suggests a target of between 25% and 40% below 1990 levels by 2020 for annex I countries – to limit GHG concentrations to 445-495 ppm. Current targets are somewhere between -8.2% and -14.9%.

One of the reasons that annex I countries can get away with such weak targets is that they include offsets in their targets – one example being the USA, which includes up to 2.5 billion tonnes a year as offsets.

You say that there are “clear proposals on how to balance supply and demand to avoid market crashes”. Unfortunately, the reality of the carbon markets is that they are extremely volatile, unregulated and pretty much unregulatable – much like the markets in derivatives which led to the current financial crisis. Some of the people who created derivatives markets are now working in the carbon markets – Richard Sandor, for example.

2. Some “REDD countries” are in fact very interested in offsets and want to see carbon credits issued to finance REDD projects in their countries (Indonesia, Papua New Guinea, Guyana, to name three). The reality is that annex I countries are attempting to use REDD to create the biggest loophole in the climate negotiations. Australia is perhaps the most extreme example of this, as Guy Pearse demonstrates (see also this post on REDD-Monitor about the loophole that Australia wants to create through REDD).

3. I agree that stopping deforestation is important, for the climate, for Indigenous Peoples and for local communities who are dependent on forests. The point I am making is that if the carbon stored in forests is traded what is guaranteed is that emissions elsewhere will take place. This is in itself a problem because we need to reduce emissions and stop deforestation. We cannot trade the one off against the other.

I agree that healthy tropical forests do not burn. But several institutions are pushing to include “sustainable forest management” in REDD, whereby logging companies would be subsidised through REDD payments for logging forests slightly less destructively. As Global Witness points out in a recent report, “During the El Niño events in the late 1990s, 60% of logged forests in Indonesian Borneo went up in smoke compared with 6% of primary forest. In fact, the increase in forest fires caused by logging can be more devastating and release more carbon than the logging operations themselves.”

The problem, as I stated in the article, is that “Carbon trading does not reduce emissions.” No matter how “outdated and out of touch with REDD negotiations” this statement may be, it remains true.

First, REDD countries are asking that new demand be created to meet the new supply from REDD — meaning deeper targets by rich countries. There are clear proposals on how to balance supply and demand to avoid market crashes.

Second, REDD countries are not asking for ‘off-sets’ but that REDD is additional. No REDD country, all facing serious adaptation risks due to climate change, wants those responsible for climate change to use REDD as an escape clause. In this way, REDD countries are requesting that AAUs be deducted from the accounts of rich countries to make room for REDD.

Third, your argument is also flawed. First, not providing incentives to stop deforestation through REDD only increases the odds that the climate gets worse as a significant emissions source continues. Further, Australia is largely a dessert, but obviously you have not been there. Healthy tropical forests do not burn — unless seriously degraded. So, the carbon in healthy tropical forests is more secure than fossil fuels in a world addicted to their use.

Therefore, in summary, each of your arguments against REDD baseless and fundamentally flawed.