Facing up to the failure of carbon markets - Carbon markets after Paris: trading in trouble

The 2015 Paris Climate Agreement and the “intended nationally determined contributions”submitted to the UNFCCC enshrines carbon markets and emissions trading schemes (ETSs) as a key mechanism for reducing emissions. But are carbon markets effective?

Since the early 1990s, “putting a price on carbon” has been, perhaps, the primary policy proposal for reducing greenhouse gas emissions (GHGs). Proponents see it as a way to gently guide investment away from high carbon sectors and practices toward low carbon ones, thus removing the need for more decisive government interventions. ETSs, in particular, have been favored by businesses and neoliberal policy makers seeking to limit emissions without unduly disrupting business-as-usual and economic growth.

The Lost Decade

In the TUED Working Paper Carbon Markets After Paris: Trading in Trouble, I examined recent reports released by the World Bank and Nicholas Stern’s Global Commission on the Economy and Climate. These reports hail the decade-long progress made by carbon pricing and ETSs in particular–which has “tripled” the proportion of the world’s carbon emissions that now involve polluters paying for the global warming pollution they generate. These reports are intended to convince policy makers and investors that all is more or less going according to plan.

But the facts presented in these reports actually tell a different story. Two things stand out.  Firstly, only 12% of global GHGs are priced (and this 12% includes the GHGs covered by proposed ETSs that are not yet in place). Secondly, the price of GHGs is almost invariably much too low to have any appreciable effect on emissions levels.  The global average price is around $10 per ton, when it needs to be in the range of $80 – $120 a ton to be consistent with the 2° Celsius target adopted in Paris and perhaps $150-$200 per ton if 1.5° Celsius is to be taken seriously.

The European Union’s ETS, (known as the EU ETS), has been in operation for a decade and is still the world’s largest carbon market. In Februay 2016, the EU ETS’ carbon price had fallen below $7 per ton (or €6).  The EU ETS has been a complete failure and efforts to “reform” the scheme have so far been unsuccessful. New ETSs being set up in different parts of the world–which are limited both in number and in their geographical reach–have often been plagued with similar problems, principal among them being the over-issuing of pollution permits. In the EU, free permits have been valued at €160 billion.

Both the World Bank and the Stern Commission acknowledge that these two problems, namely the low price and the limited geographical spread of carbon markets, but believe these problems can be resolved. “International cooperation” is needed in order to spread carbon markets to cover the entire globe and then raise the carbon price high enough so that it can actually do the job. It’s just a matter of time, we are reassured, before this happens.

The “Worker Pays” Principle? 

In the meantime, the proposed expansion of carbon markets nevertheless spells trouble for unions. Carbon Markets After Paris revisits the difficult debates between unions in the EU around the EU ETS. The European Trade Union Confederation (ETUC) has supported the EU ETS and the EU’s climate commitments overall, based on the hope that the EU could become both a world leader on climate protection and a model of “green growth” anchored in social dialogue.

However, EU-based unions in energy-intensive industries were deeply concerned about how pricing carbon might lead to “carbon leakage”–where companies either move polluting activities (and associated jobs) to jurisdictions without price constraints on pollution or simply surrender market share to competitors based in other countries that don’t have to pay to pollute. These unions have often been sharply critical of the EU ETS. Because the price of carbon is presently very low, serious levels of carbon leakage have been contained–for now. But the EU plans to meet its Paris commitments largely by raising the price on carbon by way of the EU ETS, thus threatening jobs at home while at the same time “leaking” carbon pollution to other parts of the world.

The proposed spread of ETSs to other countries and regions means that it is workers, not polluters, who are likely to pay for a price on carbon. Meanwhile, the atmosphere and oceans will continue to be bombarded by ever higher levels of emissions. With Paris giving an even more prominent role to carbon markets, unions around the world are likely to be pulled in different directions as concerns about carbon leakage spread internationally.

Beyond “Lose/Lose/Lose”

Carbon Markets After Paris argues that ETSs have failed both workers and the climate, and they have led to tensions between unions. ETSs are therefore a “lose/lose/lose” proposition for the labor movement. Even a low price on carbon will raise anxieties about job losses, but those same low prices will not appreciably reduce GHGs. Unions in all sectors want to address the climate crisis, but the neoliberal and market-based approaches merely divide the trade union movement.  In the EU, many unions became either de factosupporters of an unfulfilled market-driven “green growth” future or defenders of an unsustainable carbon-intensive past.

Carbon trading and neoliberal climate policy has also helped fuel a right-wing backlash against climate protection in the EU and in other parts of the world–a backlash that risks throwing both worker and environmental protections back to the levels of the early 20th Century. Market-based solutions may be appealing to business interests, but unions and their allies in other movements must develop an approach to emission reductions that is both effective and equitable. Carbon markets will not be be able to deliver even the weak emissions pledges made in Paris, and supporting such measures plays into the hands of right wing populists and climate change deniers who take advantage of legitimate working class concerns about jobs and precariousness.

With carbon trading in deep trouble, unions now have an opportunity to organize against neoliberal approaches to reducing emissions and climate protection. A bold approach to climate change can, and already is, aiding the rising resistance to austerity and inequality in different parts of the world. Many unions now support social ownership and democratic control of energy as an important means to manage the shift to a low carbon future in a way that can seriously tackle climate change and at the same time ensure a truly “just transition” for workers and communities.

Reclaiming and restructuring the energy system is a long term struggle and there is, of course, no clear blueprint or road map.But we can at least work to dispel the neoliberal illusion generated by the likes of the World Bank and Stern’s “Global Commission” that carbon trading will, at some point in the future, with the right amount of political will and “international cooperation”, evolve into a global carbon market that will, then, hopefully, impose a universal and unwavering price on carbon that is high enough to drive down emissions to levels consistent with the “well below 2° Celsius” target adopted in Paris.

This is a neoliberal fantasy and it is simply not going to happen. Facing up to the the failure of carbon markets will allow unions and their allies to better concentrate on developing and organizing around the kind of programmatic commitments that can seriously tackle climate change and the systemic roots of the crisis. Such commitments are needed to engage and inspire union members and to build confidence in the fact that, by extending social ownership of key sectors like energy, a genuine ‘just transition’ is possible and that unions can play an important role in making it happen.

Disclaimer: Carbon Markets After Paris represents the views of its author.  The opinions expressed in the paper may or may not be consistent with the policies and positions of unions participating in TUED. Thepaper is offered for discussion and debate.