Diminishing Returns: Carbon Market Crisis and the Future of Market-Dependent Climate Change Finance

Abstract

The current and future costs of meeting climate change mitigation needs in the global South vastly exceed levels of available funding from public sources in the North. As a possible solution to this problem, policy-makers and various observers have pushed increasingly for the adoption of market-based carbon financing strategies, with the United Nations Clean Development Mechanism (CDM) representing the most consistent application of this approach to date. Nevertheless, market-based carbon finance remains highly volatile given its heavy dependence on conditions in the broader global carbon market which remains in the throes of a devastating crisis, earning carbon the distinction of 2011s worst performing global commodity. By demonstrating that it is through carbon's market price that finance-generating investment in the CDM is largely derived, and which also determines the ex post value of CDM projects, this paper argues for the decoupling of climate change finance from carbon's market value. The need to do so is particularly pressing since, it is argued, the current crisis in the global carbon market reflects an embedded crisis tendency in that market, born in part from the political machinations through which it was born and which leaves it prone to persisting crises of oversupply.

Keywords:

• emissions trading
• carbon market crisis
• climate change finance
• Clean Development Mechanism
• market environmentalism

Notes on contributor

Kate Ervine is an Assistant Professor in the International Development Studies Program at Saint Mary's University, Halifax, Canada.

Notes

1. See Taylor (2007: 534) for a discussion of what he terms ‘network essentialism’ in relation the academic literature on global commodity chains (GCCs) and the tendency, within some of this work, to essentialise governance networks and their functional characteristics as driving GCCs, while ignoring the influence of broader structural factors in their constitution.

2. The Kyoto Protocol regulates six greenhouse gases especially responsible for global warming, including carbon dioxide (CO₂), methane (CH₄), N₂O, hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF₆). In order to ensure market fungibility, each gas is measured according to its CO₂-equivalency (Spash 2010: 174; UNFCCC 2012). For a review of the literature that examines the environmental integrity and social and human rights implications of CDM projects in the Global South, see Böhm and Dabhi (2009) and Bond (2012).

3. Revenue from CDM projects will be distributed differentially depending on the country and regulatory structures in place for applying fees, or taxing, CER revenue. In the case of China, CER revenues are taxed at 65 per cent from HFC and PFC projects, 30 per cent from N₂O projects, with a 2 per cent royalty fee on other projects within areas deemed a priority for investment (Schroeder 2009: 241).

4. Carbon is valued according to various asset classes. EUAs are those credits used in the EU ETS, with CERs produced under the CDM and ERUs produced under Joint Implementation, fungible with EUAs and eligible for use in the EU ETS and Kyoto's wider compliance market. In addition, AAUs are Kyoto credits that are issued within Annex I countries according to their emission reduction targets and can be traded in within Kyoto's compliance market. Additional asset classes exist in Australia's, New Zealand's and North American carbon markets.