Growing Carbon Markets and their impacts on the poor

Peter Kuria – founder and director of Shalin Finland –  is the author and editor of “At the Bottom of The Energy Ladder: Problems and Solutions” to be published later this month. In his paper as published below, he gives a general overview of issues within the book.

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Carbon markets, climate crisis: What is the cost to the poor?

Kyoto Mechanisms managed to create Carbon Markets, which according to the World Bank and industry leaders is projected to be worth billions of dollars and will grow to be one of the largest industries in the future.

Bart Chilton, a Commodity Futures Trading Commission (CFTC) commissioner, and chairman of its Energy and Environmental Markets Advisory Committee estimates that the carbon markets could be worth $2 trillion in transaction value. The Carbon Markets and Investors Association (CMIA)1 an international trade association representing energy companies that finance, build, and support emission reduction projects estimate that the carbon market for 2008 was approximately 126 billion dollars according to a World Bank Report on the Trends of the Carbon Markets2.

On the other hand, different reports and models from Inter-governmental Panel on Climate Change (IPCC) and institutions like the World Bank warn of the cumulative impacts of climate change and how they will adversely affect millions globally. The poor and the most vulnerable in society are expected to bear the brunt from the impacts of climate change.

In a report Shaping Climate-Resilient Development: A Framework for Decision-Making published in September 20093, Lord Nicholas Stern states that climate risk to the world’s economies and its people is real and present, and its impact on people’s lives and livelihoods will worsen rapidly if action is not taken now. The report also states that adaptation is not free, and in some instances, will require deep investment in infrastructure development. The cost for adaptation in developing countries is estimated to be between 75-100 Billion dollars4 per year over the next 40 years.

The Time-Glass approach to Wealth and Poverty creation in Climate Change

The core of the Kyoto Mechanisms is arequirement that countries limit or reduce their greenhouse gas emissions. The process of achieving this is primarily driven by market principles following the rules of the capital markets; therefore, monetary gains and financial integrity is central to all the underlying strategic decisions.

Most argue it is good to have an international legally binding instrument, which the Kyoto Protocol positively delivered. However, the Kyoto mechanisms created an artificial divide between the high and low carbon economies. This served to progress the argument for carbon offsets and the clean development mechanisms (CDM). The time-glass approach of shifting carbon from one economy to another without necessarily cutting back on emissions has created a major implementation difficulty5. The mechanisms are crafted to reward and provide financial incentives to those committed to dealing with the drivers of climate change, but biased in favour of the polluting partner.

In the design of the Kyoto mechanisms, the focus on carbon economies served to exclude the Global South as partners; either as unique drivers of change or a diversified group of contributors to the mitigation of climate change. This also meant that, the accrued “financial and economic” benefits from the mechanisms were specifically crafted to benefit the developed world. The Global South was given a passive role as “off-setters” or receivers of technology especially under the Clean Development Mechanism (CDM)6.

In addition, CDM has been considered a high-risk venture by the proponents and opponents in equal measure. The proponents have cited risks linked to leakages and permanence while the opponents see complexity of the problem emanating from the simplistic approach to the CDM, which ignores issue such as land and human rights. For example under CDM, hundreds of people have lost their land or become displaced to pave way for projects aimed at providing a carbon sink, generate greener fuels or work as an offset7.

Evidence is emerging on the flawed architecture of the current Kyoto mechanisms that in turn affects their effectiveness in dealing with climate change. There are cases being documented with the most prominent ones being from India, Indonesia, Kenya, China and specifically Uganda8 where people have been evicted to create a “CDM compliant” zone.

The Kyoto mechanisms created a process that entrenches inequity, where on one hand they are generating riches for individuals and industry players while on the other, increasing vulnerability plus creating poverty on a massive scale.

While the Kyoto mechanisms have provided a platform for wealth creation, how is this wealth contributing to the mitigation of climate change or the adaptability of the vulnerable members of the society? The mechanisms have generated a massive speculative dimension on how to tackle climate change without actually delivering any “change”. For example, the emerging global carbon market has created service industries such as EcoSecurities9 whose turnover for 2008 was over 69 million euro. “It is unclear how such wealth has translated or contributed towards climate change mitigation or adaptability. It seems that this wealth generated from the carbon market is “not just wealth” according to Larry Lohmann of the Corner House, UK.

On the other hand, the loss of livelihoods, shelter, lives, and biodiversity continues to escalate upwards; in Bangladesh 68 million have been directly affected by effects of climate change over the last 10 years and in Kenya and Eastern Africa, climate refugees are gathering pace with more than 10 million people dependent on food aid after successive drought10. On a global scale it is estimated that annually, 325 million people are affected by frequent weather-related disasters. There are no definitive figures on the financial costs to this vast population, but it is clear on the kind of misery they are facing and continue to face.

If New Orleans and Hurricane Katrina is used as an example (although from a totally different environmental context), the damage was estimated at over 100 Billion Dollars. This exposes the real cost of climate change and, it also draws attention to the fact that, the impact and cost of climate change is not only restricted to the Global South; the West is equally vulnerable and probably with at a higher financial cost. The crisis exposed the weaknesses in responding to a crisis of a large scale, the hidden vulnerable society within society, and the power of nature.

The undeclared assets for the poor, the base of resilience

The real cost and impact on human from climate change is difficult to assess with great accuracy because it results from a complex interplay of social, economic, political and ecological factors. Also, the current climate prediction models have primarily focused on future scenarios related to climate change impacts yet climate change related impacts are already happening today in countries such as Kenya, Ethiopia, Somalia, Vietnam and Bangladesh11 and have been happening over many years with increasing frequency and unpredictability.

The full implication of climate change on economies globally is barely appreciated. The Economics of Ecosystems and Biodiversity (TEEB)12 report a study commissioned by EU attempted to quantify the value of biodiversity. The study put the annual cost of forest loss at between $2 trillion and $5 trillion. These assets translate to losses for the poor since these form part of “their undeclared assets”. The loss in value of these natural assets translates to a loss to the poor. Climate change, among other factors is contributing and affecting the value of this asset base. Therefore, the poor are facing challenges from two fronts, the skewed carbon markets and the degradation of their assets from the impact of climate change.

In effect, big profits are being made while increasing poverty. The Kyoto Protocol architecture13, has made it possible for people, companies and institutions to generate wealth yet achieve little on the ground in terms of addressing the causes of or impacts from climate change.

Meanwhile, whether the world signs a new Climate Treaty or not come 2012, we will still be faced with the same questions on whether the treaty will deliver where its predecessor failed. Currently, the strong aspect of profiteering makes Kyoto mechanisms bad for the poor people. The mechanisms ignore the bigger social and environmental costs, if not making them worse. This contradiction of costs versus opportunities is central to resolving on a permanent basis the stagnating pace of the climate change negotiations and the design of a Post-Kyoto Climate treaty.

References

3 ECA report: Shaping Climate Resilent Development (PDF, 2009)

5 Larry Lohmann, Helsinki 15-23 Climate and Development Week- On the Road to Copenhagen

7 Forestindustries.EU Website article: Carbon Offsets and Human Rights – do they fit one-another?

8 UN ECOSOC Africa Renewal Website article: Saving Africa’s Forests

9 Eco Securities works with both project developers and buyers of emission reduction credits. They are listed in the FTSE London stock exchange with a turnover of 69.48 Million euro in 2008.

10 Sukanta Sen of BARCIK and Kenneth Odero of Climate XL Africa “Climate Change, Adaptation, Mitigation and Local Knowledge: The cases of Kenya, Vietnam and Bangladesh” Helsinki, October 2009

11 Shalin report “Climate Change, Adaptation, Mitigation and Local Knowledge “ The cases of Kenya, Vietnam and Bangladesh, Helsinki (2009) Contact Shalin

13 Climate Funds Update: Climate funds architecture diagram (2009)

 

Further Reading

Guardian article: Why a high-carbon investment bubble could be the lesser of evils published on Friday 15 July 2011 

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