The EU has set closer climate change cooperation with the South Korea, which culminated in the launching of a €3.5 million emissions trading project. Yet, the unshakeable belief in the robustness of international carbon markets deserves greater scrutiny.

The EU has forged closer climate change cooperation ties with the Republic of Korea which culminated in the launching of a €3.5 million emissions trading project. The three-year initiative seeks to assist the Korean Emissions Trading System that came into being in 2015 and became the pioneer in East Asian cap-and-trade agenda.

The project also constitutes an important stepping stone in the development of a Strategic Partnership between the EU and the Republic of Korea, which has been gradually upgraded since 2010.

An endorsement of the new trading scheme came from Miguel Arias Cañete, EU Commissioner for Climate Action and Energy: “I hope that China’s and now Korea’s experience can be a trigger to expand emissions trading systems across the region. We need resolute action by all countries to keep climate change in check as we agreed in Paris and the ETS [emissions trading system] is a proven, cost-effective tool to cut emissions.”

What is a cap-and-trade scheme and how does it work?

Cap-and-trade scheme, otherwise known as quantity instrument, is a market-based mechanism. It determines a maximum level of pollution (a cap) and issues emissions permits to polluters. Each unit of pollution must be covered, and companies acquire permits through initial allocation, auction or trading. While pollution quantity is non-negotiable and static, prices are subject to fluctuation depending on demand.

The European Commission is a mastermind behind the International Carbon Action Partnership, uniting countries with binding cap-and-trade schemes. The number of similar projects is on the increase, with Canada, China, Japan, New Zealand, South Korea, Switzerland and the United States either having set or yet developing their own emissions trading systems.

The unshakeable belief in the robustness of international carbon markets, however, deserves greater scrutiny.

Doubts over the international carbon markets

Cap-and-trade scheme has been often questioned on the grounds of its “grandfathering” approach, i.e. issuing permits for free based on historical emissions shares. This strategy results in no significant emissions cuts: it can prove beneficial for small cuts, but ambitions put forward during the recent Conference of the Parties in Paris clearly do not fit the “small cut” mould. If the temperature target is 1.5 degrees, the global carbon budget will be too tiny to allow trading.

Energy trading scheme is also thought to favour big industrial polluters, by creating little incentive for changing “business-as-usual” model. Occasionally the energy costs are passed onto consumers and industrial polluters keep maximising their profits. The Czech energy corporation CEZ, for instance, obtained a third of the country’s permits, sold them riding on the tide of high prices and bought them back when the market crashed, directing the profit into the coal extraction and increasing energy prices for consumers.

The effects of business interests over environmental and climate regulation

On top of that, business interests have a propensity for overpowering well-meaning environmental and climate regulations, if the latter are not deemed profitable.

In 2013 the European parliament struck down an emergency withdrawal of some of the carbon permits. The proposition aimed to save the ailing energy allowances market that spiralled down into devaluation because of the low carbon price. An economic study found that taking the climatic tipping points into account the cost of carbon should be 200% higher than it is today.

Instead of pricing carbon dioxide fairly, carbon-intensive businesses first lobbied the politicians to raise the supply of permits (which sent the individual permit price to plummet), and later lobbied for keeping, rather than withdrawing, redundant permits. The latter means that polluting corporations and crucial players in financial markets hold sway of climate or, alternatively, the global atmospheric commons.

The need to intervene and offer a regulatory framework

To break through the current inertia, more incentive should concentrate in the hands of people. One of such scenarios can develop as follows: an annual carbon cap will be set together with personal carbon ratio, giving every citizen an annual quota of carbon dioxide; in case of exceeding their quota, citizens can buy more from each other; with citizen share covering around 40% of all emissions, the rest will be auctioned to companies, with the scheme working in the same manner as it does now. Such a citizen-friendly approach is claimed to be fairer and more empowering.

Even if one takes the market logic of cap-and-trade mechanism on board, the necessity to regulate it is evident. The state needs to intervene and offer a regulatory framework, reining in polluting corporations and businesses. The corporate self-regulation does not and will not deliver a quick and efficient response to climate change challenge and will not enable the transition to a renewably powered economy. The approach needs to be overhauled to accommodate governments and citizens and discontinue treating ecosystems and global commons as commodities.

Katerina Gladkova