Adding monetary value to CO2
This is an overview of the carbon credit system as it was formalized in Kyoto (1997). The aim is to understand what we can learn from this system with respect to proposing an eco currency. Both try to introduce a non-material good into the financial market in order to keep it from being overrun by current economy.
In order to decrease greenhouse gas emissions and to increase the price of products which do require emissions, carbon credits were introduced. Each unit of this credit represents the emission of one ton of CO2. Other gasses are set to be worth a certain percentage of the carbon credit, according to the threat they pose to the environment.
Each country gets a certain (and set) amount of these caps. Nations are responsible for setting up their own system to register the emissions of their own, local businesses. The UNFCCC monitors these systems to guarantee their honesty.
Operators are free to sell their left over credits or companies that exceed their limits can buy extra through an open market. Companies are given the choice to invest in a cleaner production process or spend their money to buy credits from others. If more companies want to buy credits, supply and and demand will increase their prices which will lead their (polluting) products to be more expensive than cleaner ones.
Three mechanisms for trading caps have been introduced:
- Joint Implementation: One developed nation sets up a business in another developed country.
- Clean development mechanism: A company from a developed country can sponsor a project or company in a developing country. Projects are usually cheaper, but the effects on global emissions are the same, regardless country borders. Investing companies would be given carbon credits, developing nations would benefit from the new technologies brought in.
- Emissions trading: This allows countries to trade their credits on an international market with forces of supply and demand.
The open market also allows for organizations to purchase credits and retire them. The number of credits will go down and their prices go up. Because emitting companies need to buy these credits the price of their polluting products will rise as well. This mechanism will therefore stimulate the use of cleaner material, production, transportation.
As a company you can also generate credits by offsetting or sequestering CO2, these credits can then be sold on the international market. An interesting condition for such a procedure is set: the company has to prove that it wouldn’t have offset this much if it weren’t for the credits. This is essential for the whole system to lead to a net decrease of greenhouse gas emissions.
Since the opening of the financial carbon market in 2005 it has been steadily growing and the market (based in London) is expected to be more and more important.
Although the idea of the Carbon Credit system seems to be beautiful, envisioned results hold off. Godfather of the green movement James Lovelock (among others) states that the operation of this system turned out to be disastrous. In the first phase companies have put their government under pressure to give out more credits than actually needed, threatening with the massive loss of jobs or even moving to another country. This allowed companies to actually benefit financially from the credits they got. Today prices are way too low because of this carbon credit abundance and companies can easily pay off their polluting emissions*.
The complexity of the many boards, panels and monitoring organizations has also led to a more fundamental pessimism. Is it possible for our institutions to organize and administrate such big and complex environment based markets? Critics state that it is inherently impossible and even wrong to put a price on ecosystems, however it seems as the only way to appreciate their value in a world overruled by an economic system that seems out of control. An opportunity for the eco currency project might lay in the international economical crisis, as it seems the only way to get such ideas heard.