Block’s Indicator of Sustainable Growth

by Ray Block

Europol, the international police force has exposed criminal activities associated with the European Union’s emissions trading scheme, involving fraud costing European taxpayers more than 5 billion euros (US$7.4 billion).

 Fraudulent activities existing at least over the last 18 months became evident, with an exceptional level of trading volume, when several of the European carbon markets had unprecedented rises in trading volume in late 2008. The fraudulent trading could have accounted for up to 90 per cent of overall financial trading in the carbon markets. While the trading volume peaked in May 2009, Interpol is still trying to stamp out all the elements of fraud.

 Under the cap-and-trade carbon scheme, there are six European trading platforms in UK, Norway, Germany, Austria, Netherlands and France creating an overall European carbon market worth about $132 billion a year, on Europol estimates.

 Apart from fraudulent trading in carbon credits, which is always potentially present, the use of carbon offsets under the Clean Development Mechanism (CDM) is wide open to manipulation.

 The CDM, originating under the Kyoto Protocol, was designed to ensure that worthwhile carbon reducing projects in renewable energy were installed in developing countries, which could be credited as emission reduction credits (CERs).

 These credits, traded and sold to European manufacturers, qualified as if they were their own European emission reduction targets. Each credit is equivalent to one tonne of CO2. The effect on the part of the European companies was to limit carbon reductions in their own facilities. This practice still continues to this day.

 In theory, the projects “must qualify through a rigorous and public registration and issuance process designed to ensure real measurable and verifiable emission reductions, additional to what would have occurred without the project. The mechanism is overseen by the CDM Executive Board.” 

 A Barclays Capital report estimate that four countries-Brazil, India, China, and Korea currently have generated 92 per cent of all the credits created through CDM projects. Moreover, 75 of the largest projects represented 90 per cent of the CDM credits, which were subsequently sold in the world cap-and-trade markets.

 This is a distortion of what should happen in practice, if the mechanism is to live up to its name of reducing emissions, a policy prescription China and India are not prepared to accept.  Moreover, the two large industrialising countries,China and India, have had too many”free lunches.”It’s about time they pay their own way.

Finally, some common sense has developed within the CDM Executive Board in knocking back support for some new Chinese wind farms, on the grounds that the Chinese would have otherwise funded the projects themselves.

The World Bank wants the carbon offset program to continue post-Kyoto in 2012, thereby compounding the opportunities for some to profit at the expense of the many.