Letting the Market Play Means Fraud and Few Environmental Benefits

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Gaming the environment

Friends of the Earth

As Wall Street and the EU continue to reel under the crisis brought on by the financial deregulation of global markets, a recent report on the EU's carbon market shows just how far these (mal)practices have spread.

"Letting the market play: corporate lobbying and the financial regulation of EU carbon trading," co-produced by Carbon Trade Watch and Corporate Europe Observatory, reveals how under-regulation in a market mechanism meant to reduce global carbon emissions led to fraud and over-speculation. The EU is currently changing its rules in response, but corporate lobbies continue to try to influence this process. Ultimately, the author Oscar Reyes concludes that such reforms are bound to fall short, since they attempt to "regulate the unregulatable."

Highlights of the report include:

  • The European Commission adopted a deliberately light touch approach to regulating its Emissions Trading System since its launch in 2005. A series of fraud cases made this position untenable.
  • The Commission has proposed measures to tighten security, which was previously so lax that it was easier to become a carbon trader than to open a bank account. However, the new rules would also cover up evidence of fraud and gaming by hiding carbon permit serial numbers. The Commission’s intention is to re-issue stolen permits, opening an additional hole in the scheme’s accounting for emissions.
  • The Commission has belatedly identified carbon as a commodity that is susceptible to excessive speculation. Leaked drafts of the Market in Financial Instruments Directive (MiFID), a set of rules governing European financial markets, are set to be extended to include carbon trading.
  • New regulations on carbon trading have been consistently opposed by financial services lobbyists. For example, in January 2011, the European Commission halted trading on a key part of the carbon market after the latest in a series of large fraud cases was uncovered. Less than a month later and with the suspension still partly in place, the International Emissions Trading Association (IETA, the main carbon trade lobby group) were privately insisting to Brussels officials that “there might be no need to regulate this market.” This report documents how financial sector lobbying has been driven by a desire to find new opportunities for carbon market speculation.
  • Although the lobbyists look to be losing some of these battles, plenty of loopholes remain in the financial regulation of the carbon market. More fundamentally, emissions trading introduces speculation by design and has failed to meet its stated objectives. There is a need to de-financialize climate policy.

Among the reports discoveries were some prize quotes from EU carbon market insiders:

“Our role is to keep the regulatory structure as simple as possible and let the market play” – Jos Delbeke, European Commission 2009

“The idea was to get the market going without spending a lot of time on security systems. It’s easy prey to get into these markets. Your grandmother could open one of these accounts. There is no certification.” – Simone Ruiz, European policy director for IETA

“[T]hese controversies provide evidence that the emissions market is maturing and becoming mainstreamed within the European economy. Entities don’t seek out loopholes in insignificant markets, fraudsters do not focus on small businesses” – World Bank, State and Trends of the Carbon Market 2010 (learn more about the World Bank's new role under the Green Climate Fund)

The report also highlights how carbon trading schemes like the Clean Development Mechanism (CDM) are awash with paper “reductions” that do not correspond to actual reductions of greenhouse gas emissions in the real world. This is clearly evident in the recent Wikileaks scandal out of Mumbai. Despite ample evidence that the CDM is failing to produce real emissions reductions, faulty projects continue to get registered. As Reyes aptly concludes, "gaming results in windfall profits and undermines efforts to address climate change."

Occupy Wall Street

NY Daily News

Like the protesters at Zuccotti Park in New York City (and those worldwide), from this report we realize that more fundamental changes to the system are needed if we are truly serious about curbing our carbon footprint. While the EU and the UN explores new reforms and market mechanisms to combat global climate change in Durban next month (see "U.N. regulators call for a global review of the Clean Development Mechanism," sub req'd), we hope that leaders in the climate change movement will seize the moment to call for fundamental changes to how we address climate change that go beyond mere market solutions.

What's the answer? I don't know. But like the now global Occupy protesters, I do know that there are a myriad of solutions and great ideas. The 99% of us are fed up with being unheard and trampled on by industry lobbyists seeking to maintain the status quo. But we can come closer to achieving the world we want to live in if we are as much a part of the discussion as the World Bank, IETA, and Wall Street. Occupy Durban.