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Tropical forests on the carbon market: a historical opportunity for the climate or a new source of hot air?

Posted by Alain Karsenty on 11 February 2011

In 1997, just before the Kyoto conference, it was anyone’s guess whether negotiators would focus on a carbon tax or tradable emissions permits to reduce greenhouse gases. In the end, tradable permits were chosen, along with “flexibility mechanisms” such as the Clean Development Mechanism (CDM). These mechanisms were supposed to achieve the adopted quantitative targets for reducing emissions at a lower cost. These choices were based on economic theories stating that to achieve an environmental objective we can choose to regulate prices (through taxes) or quantity (through quotas). The possible existence of a dangerous threshold concentration that would tip the climate system into an uncontrollable dynamic proned a cap and trade approach of emission permits. Unfortunately, an emissions cap was never implemented because emerging countries did not participate and because of various “loopholes” such as the CDM.

Nearly 10 years after the flexible mechanisms took effect, it has become increasingly clear that they have been primarily used to defer investments for emissions reductions and the necessary adjustments in patterns of consumption and transportation in industrialized countries. They have had only a marginal influence on the end-goals of the Climate Convention. The CDM has allowed a host of experts to do good business but has not prevented hundreds of coal plants to open alongside wind farms in China and elsewhere; contrary to hopes at the end 1990s. The political economy of a mechanism whose reliability depends on rigorous expert analysis based on the accuracy and transparency of information provided by the businesses themselves was utterly underestimated. The very design of the instrument, based on scenarios such as “what would have happened without the project?” coupled with a market where certification offices compete with companies applying for CDMs, has lead the way to all sorts of abuses that the regulatory institution is incapable of controlling. As for ‘development’ goals that were supposed to be the prerequisite for a CDM project, they were quickly abandoned.

Just a lot of hot air?

Even though a proper assessment of these market devices has yet to be completed by the Climate Convention (the systems have been criticized by experts as well known as Hansen, the climatologist, or Nordhaus the economist of climate change), it is entirely possible that they will be renewed and their scope extended to include tropical forests through the REDD program (Reducing Emissions from Deforestation and Degradation). Variations in deforestation rates from one period to another depend more on fluctuations in agricultural prices and weather incidents than they do on public action, especially in “faltering states”. The carbon credits issued in such situations will most certainly be the result of circumstantial incidents rather than a deliberate choice of public undertaking. This in turn will generate even more hot air and weaken the price signal, which is the basis of the incentive system.

It is possible to envision a new structure for both the post-Kyoto world and the REDD program that revolves around taxation. The creation of an International Fund to Fight against Deforestation needs only a concerted decision by a certain number of countries. They could supplement it with the much talked about “innovative financing” that can be implemented within their own borders. This is George Soros’ idea; he argues for financing such a fund, at least initially, with taxes on airline tickets – similar to the system France helped initiate to fight AIDS. This fund could also support agricultural transformations in tropical countries. These measures should also aim to support economic activities that focus on sustainably developing various forest resources, as well as the agricultural sector through “ecological intensification”, and land ownership (enforceable rights for farmers and communities against monopolizing attempts by Agribusiness). In failing states, nothing can be achieved without first reconstructing the capacity for public action and restoring a minimum rule of law. These are all public policy priorities that we cannot expect the carbon market to address.

Alain Karsenty

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