Ethical Issues Raised By Carbon Trading

I-Introduction

This post examines ethical issues raised by the cap and trade regimes that have emerged to solve the climate change crisis in the last decade. These regimes have emerged: (1) at the international level under the Kyoto Protocol, (2) at the regional international level including in the European Union and between US states and the Canadian provinces, and (3) at the sub-national level including among Northeastern U.S states. There is also a large voluntary carbon trading market that has emerged around the world that is not the focus of this post although these regimes raise many ethical issues considered here.

At the international level, under the Kyoto Protocol to the United Nations Framework Convention on Climate Change there are three different trading regimes. They are:

(a) Emissions Trading (ET) -A mechanism that allows a nation with a Kyoto target to buy d allowances from a country with a Kyoto target that does need all of its allowances.

(b) Joint Implementation (JI)-A mechanism that allows project financing by nation with a Kyoto target in another country with a Kyoto target.

(c) Clean Development Mechanism (CDM)-A mechanism that allows nations with Kyoto targets to finance projects in developing countries that reduce greenhouse gas emissions.

The goal of this post is to spot the major ethical issues raised by carbon cap and trade regimes that have emerged around world, not necessarily to resolve these issues.

Spotting ethical issues raised by cap and trade regimes will not necessarily lead to a consensus about what should be done about these issues because there are competing ethical theories that might reach different conclusions about these trading regimes including utilitarian, rights, virtue, relationship, and ecological based theories among others. However, for some issues there may be an overlapping consensus among ethical theories about what ethics requires. (Brown et al., 2006). For other issues there may be agreement among ethical theories that some positions on cap and trade issues are ethically problematic no matter what ethical theory is applied to analyze the issue under consideration. Therefore, spotting ethical issues raised by carbon cap and trade regimes may be practically valuable despite the inability on some issues to determine unambiguously what ethics demands, if spotting the ethical questions leads to eliminating from consideration some positions on these issues that fail to pass minimum ethical scrutiny. (Brown et al., 2006)

The purpose of this post is not to resolve all ethical issues entailed by cap and trade regimes but to encourage further ethical reflection about these issues. Cap and trade regimes have in a very short time reached wide support around the world with only very limited ethical reflection on the issues discussed in this chapter. Because uncritical acceptance of these existing regimes may lead to significant injustices and given that there may be opportunity to change and restructure existing regimes in the future, this post is meant to encourage ethical reflection on existing as well as future cap and trade regimes.

Although existing cap and trade regimes differ in many of their details, they all have the following common steps. First a government establishes an emission limitation for total emissions from the government’s jurisdiction and then permits or allowances are either given away or auctioned off and in this way create a society-wide “cap.” The cap is expected to be “tightened,” that is, reduced over the years, thus increasing the costs over time of future allowances. The permits allow holders to emit ghgs usually in tons of carbon for a specific period. To enable trading, rules are established that allow those entities with caps to meet their obligations either by purchasing unneeded allowances from others that have caps, funding projects that reduce emissions at places under the control of others, or purchasing off-sets created by carbon reduction projects somewhere in the world.

Cap and trade regimes are usually justified on several different grounds including:

• Trading provides a mechanism for making carbon emissions reductions at lowest possible cost. Because carbon is well mixed in the atmosphere, it doesn’t make any difference where reductions are made in the world to lower future atmospheric concentrations of ghgs. Therefore emitters of carbon can finance inexpensive projects to reduce carbon emissions and apply reductions achieved by these projects against their reduction obligations and in so doing reduce ghg emissions that cause climate change. In this way, cap and trade regimes maximize the efficiency of carbon reductions. And so cap and trade regimes are usually supported on the grounds that they provide the flexibility to achieve the greatest reductions at lowest possible cost.

• Proponents of cap and trade regimes often point to a successful program still in place in the US that has been declared to reduce 40% sulfur emissions (SOx) by coal-burning power plants in the period
1990-2004. (EDF, 2009)

• Cap and trade regimes provide economic benefits to developing countries through CDM credits and other “off-sets” thus helping developing countries economically.

• Cap and trade regimes keep high-cost emitters in the political game because they can reduce their emissions at low cost and thereby help minimize political opposition for climate change legislation.

This post next looks at the following ethical issues entailed by cap and trade regimes:

a. Justice of the Cap

b. Allocating Global Commons Resources as Property Rights.

c. Environmental Effectiveness

d. Distributive Justice

e. Procedural Justice

II-Ethical Issue One-Justice of the Cap

A cap and trade regime is just only if the cap is just both in the amount of the cap and how the cap is distributed among emitters. If the total society-wide cap, before it is allocated among emitters within the jurisdiction of the government allocating the cap, is less than the government’s fair share of safe global emissions, then the cap is not environmentally just particularly to those who are vulnerable to climate change. (Brown, 2009) Because each nation or government has a duty to reduce its emissions to its fair share of safe global emissions (Brown et al, 2006), justice requires that caps be consistent with the government’s ghg reduction obligations. Almost all nations have agreed that they should reduce their emissions at levels to prevent dangerous anthropogenic interference with the climate change system based upon equity under the United Nations Framework Convention on Climate Change. (UN, 1992) Yet many cap and trade regimes do not derive the quantity of the cap from these international obligations. (Brown, 2009)

A strong case can be made that the world is not currently on an emissions reduction pathway needed to prevent dangerous climate change. (Bear and Athanasiou, 2005) (Athanasiou and Bear, 2002). In fact some scientists are argue that is already too late to prevent catastrophic climate change. (Hamilton, 2009). Therefore an argument can be made that most existing and proposed cap and trade regimes are not sufficient to prevent dangerous climate change and therefore are unjust.

If the cap upon which the trading regime is based does not constitute a level of carbon reduction consistent with the nation’s duty to reduce emissions, the entire cap and trade regime is unjust. In such cases, the regime is particularly unjust to those who are most vulnerable to climate change because the regimes gives rights to pollute at levels above what justice requires. Since many parts of the world including sub-Sahara Africa, Bangladesh, small island developing states in the Pacific and Indian Ocean, large parts of South-East Asia among others are particularly vulnerable to climate change impacts, a cap that is not sufficiently environmentally protective is unjust to these vulnerable countries and peoples. (Argwal and Narain, 1991).

In addition to national governments, each individual sub-national government, business, organization, and entity also has a duty to reduce its emissions to its fair share of safe global emissions. If the allowances that entities are allocated by the government are not sufficient to assure that the entity’s emissions are no greater than its fair share of safe global emissions, an argument can be made that their individual allocation is unjust.

Because some emitters are often not included within the scope of a cap and trade regime, a strong case can also be made that those excluded from the cap are emitting at unjust levels if they are not emitting at levels less than the emitter’s fair share of safe global emissions. For this reason, the creation of a cap and trade regime that excludes classes or categories of ghg emitters should not necessarily be understood to satisfy what justice requires if some emitters within the government’s jurisdiction are allowed to emit at unjust levels because they are excluded from regime. However, a counter argument can be made that a regime is just if total emissions from the area within the jurisdiction of the government are below the government’s fair share of safe global emission regardless of whether some emitters are not covered by the government’s ghg allocation because governments have the right to make decisions distributing the burdens and benefits of government policies within their jurisdiction.

III-Ethical Issue Two-Allocating Global Commons Resources for Private Consumption.

Cap and trade regimes can be understood to give emitters of ghgs a property right to emit at a level consistent with their allocation. Yet the atmosphere is usually understood to be a global commons. One feature of global commons resources is that they are owned by all people and as a consequence no person or entity can acquire a private property right that excludes others from the use of that resource. (Ott and Sachs, 2000) It is also generally understood that governments have a duty to protect commons resources for the benefit of all peoples and that such responsibilities include obligations to prevent entities from using the commons for private uses. And so there is a potential conflict with assigning property rights to pollute in a carbon cap and trade regime and the duty of governments to protect commons resources for the benefit of all.

One way to reconcile the conflict between honoring the prohibition against allocating a commons resource for private interests and the need to give a ghg emitter some authorization to pollute for a specific amount of time is to make sure that the polluters right to emit at any time under the cap may be rescinded if it is latter determined that an existing allocation is not sufficiently protective of human health or the environment. That is, trading regimes should make it clear that rights to emit are temporary and can be adjusted for cause. Under such an approach, an allowance is understood to be only a temporary property right like a rent subject to specific conditions and reservations, not a permanent right to emit at the level prescribed by the allowance. (Ott and Sachs, 200) If this approach were taken the common practice of allowing those who have allowances to bank unused portions of the allowance indefinitely would need to be abandoned. Such an approach would also limit the ability of entities to purchase pollution rights that could be used at any future time as a credit against any future emissions obligations.

IV-Ethical Issue Three-Environmental Effectiveness

As we have seen, a cap and trade regime can be unjust if it is does not sufficiently protect those who are vulnerable to climate change. Many design features of cap and trade regimes can lead to inadequacies of the environmental protection effectiveness of the regime even if the cap is initially sufficiently protective. Some of these design issues follow:

      •  Conflicts. There are conflicts between minimizing transaction costs and maximizing environmental effectiveness in monitoring and verification of carbon projects. Because there is a tension between keeping the transaction costs low and the environmental effectiveness of the cap and trade regime, rules often fail to assure that carbon will be reduced at levels described in the trading proposal.  This is so because, for example, there are often huge scientific questions about how much carbon storage will be achieved by forests which are comprised of mixed species, given that it is virtually impossible to measure the carbon that will be stored in every tree or stored in forest soil in light of the fact that there are practical limits on how much measurement and compliance data can be obtained.  To have high levels of confidence of the carbon storage capacity of forests and other biological systems that are relied upon to sequester carbon is often scientifically challenging because of large amounts of sampling, monitoring, and verification data that are needed to reduce uncertainties. Yet monitoring and verification costs can be prohibitively expensive, and as a result rules have sometimes been created that err on the side of keeping transaction costs low by limiting the amount of data that will be required. This threatens the environmental effectiveness of the project.
  • Permanence. Many proposed projects for carbon trading raise serious questions about whether the carbon reduced by a project will stay out of the atmosphere forever. Yet permanent storage of carbon is needed to assure equivalence between emissions reductions avoided if no credits were issued and atmospheric carbon reductions attributable to a project which creates carbon credits. This is so because emissions reductions guarantee that some quantity of ghgs will not wind up in the atmosphere, yet some projects which are used to substitute for emissions reductions have difficulty in demonstrating that the quantities of carbon reductions projected will actually be achieved. For instance, carbon stored in forests, soils, or geological carbon sequestration projects could be released to the atmosphere under the certain conditions. For example, rapid temperature change could kill trees thus releasing back into the atmosphere carbon stored in the trees. This problem is usually referred to as the problem of “permanence” of carbon reduction projects. For this reason, only projects that assure permanent reduction of carbon in the atmosphere can be categorized as environmentally effective projects. 
  • Leakage. Many proposed projects for carbon trading raise serious questions about whether carbon reduced by a project at one location will result in actual reductions in emissions because the activity which is the subject of the trade is resumed at another location. For example, paying people to plant trees in location A is not environmentally effective if these same people that receive the money chop down trees at place B. This is the problem usually referred to as “leakage.” Forest and other kinds of bio-sequestration projects that sequester carbon in particular often create leakage challenges. Industrial projects can also create leakage problems if the industry gets credit for reducing carbon at one industrial plant while moving the carbon producing activities to another place. If leakage occurs, then the trade is not environmentally effective.
  • Additionality
    A project subject of a trade will also not be environmentally effective if the project would have happened anyway for other reasons. This is so because a trading regime assumes that a ghg emitter should get credit because of their willingness to invest in projects that reduce carbon emissions that would not happen without the incentive to get credit for carbon reductions. If the project would happen without the investment of the emitter, than the investment in the project is not “additional” to business as usual. This is the problem usually referred to as the “additionality” problem.
  • Enforcement of trading regime.A trading regime is environmentally ineffective if its conditions can not be enforced. Although enforcement of trading regimes is sometimes practical when the project on which the trade is based is within the jurisdiction of the government issuing the allowances, enforcement is particularly challenging when the project is located outside of allowance issuing government. In such cases, enforcements must be “out-sourced” to other institutions. In addition, while many hundreds of millions of dollars are being invested in setting up emissions trading schemes all over the world, virtually no resources are being channeled into their enforcement of verification. Although most cap and trade regimes have built in carbon reduction verification steps, verification remains extremely difficult for many types of carbon reduction projects for which credits are being issued because of the lack of enforcement or long-term verification potential. This enforcement challenge is exacerbated when projects for which credits are issued are in poor countries without the
    technical capability to enforce or verify. Because of this, a strong case can be made that those who desire to rely on projects that have dubious enforcement and verification potential should have the burden of demonstrating enforcement and verification potential before they may obtain credits generated from these projects.
  • Allowing Delay In Investing In New Technology. The ability to buy credits in a trade can create incentives to delay in making the transition away from fossil fuels that
    is likely necessary to avoid dangerous climate change. As emissions reductions pathways that stabilize atmospheric ghg concentrations at safe levels require that global emissions peak in the next few years followed by large reductions in emissions yearly, there is an immediate need to invest in sustainable energy. Yet the ability to trade for cheap emissions reductions credits reduces the pressure on high-emitting entities to change behavior now. In addition cap and trade regimes do not invest in sociological, political, and historical analysis of how to make historical change required to achieve the civilization challenging ghg reductions needed.

V-Ethical Issue Four- Distributive Justice

Cap and trade regimes can create many distributive justice
issues. They include the following:

Diminishing cheap
projects in developing countries.
Under the CDM international trading system established by the Kyoto Protocol, developed nations can fund carbon reduction projects in developing countries without targets. If developing countries in some future international climate regime are asked to meet targets, they run the risk of having sold their cheapest carbon reduction projects to developed country interests by participating in the CDM, thus making achievement of any national target more expensive. Over 4000 CDM projects have been funded in developing countries and these projects have often been selected by investors because they produce the greatest reductions at lowest cost. Some of these projects, such as hydroelectric dams, are now not options for developing countries to meet future domestic ghg emissions reductions obligations.

Diminishing ODA. Some countries have announced that they will move official development assistance monies (ODA) into CDM projects thus moving funds that would benefit the quality of life in the developing country to energy projects. This could have significant impact on monies that would be otherwise available to help poor nations with such dire emergencies such as health care or nutrition. As a result, a problem created largely by developed countries may lead to worsening human health problems in countries that are minor causes of climate change when ODA flows are applied to ghg emissions projects which largely benefit emitters in developed countries.

Distributive justice and internal allocation of government-wide cap. How a cap is allocated among entities within a government creates many potential distributive justice problems. Governments sometimes distribute a cap they have by giving away allowances, auctioning allowances, and other ad hoc considerations that often take into account political feasibility. Each of these methods of distributing a cap raises distributive justice issues that are often ignored for political reasons. For instance, both auctioning allowances and giving away allowances could be significantly regressive, making higher-income households better off while making lower-income households worse off. Auctioning could also be regressive if the most wealthy get the most permits forcing those without the financial resources into non- polluting options. Sometimes governments choose to allocate the cap by placing caps on “upstream” carbon users such as coal and petroleum companies and ignoring “downstream” carbon emitters such as coal fired industrial users. A decision to place a cap upstream makes the climate change regime easier to administer but could have regressive effects on those least able to afford increased fuel costs. An upstream cap also can create little incentives for those who can afford to waste energy to change behavior. In contrast, downstream caps puts responsibility on energy users. There is no ethically neutral way to decide these design questions.

Distributive justice and revenue from allowances. When allowances are auctioned or otherwise purchased, governments must make decisions about how to use allowance revenues. These decisions raise a host of distributive justice issues that are often ignored for political reasons. Some governments have chosen, for instance, to use allowance revenues to fund climate change technology research, to meet international obligations to fund climate change adaptation projects in developing countries, to fund programs to reduce deforestation projects in developing countries, to buy off politically powerful opponents to climate change legislation, to help those least able to cope with rising energy costs, or to subsidize nuclear power, geologic carbon sequestration, or renewable energy. Decisions about how to allocate revenues from distributing allowances raise distributive justice issues.

VI-Ethical Issue Five- Procedural Justice

Cap and trade regimes raise a host of procedural justice issues including the following:

The right to participate in cap decisions. Because carbon trading design has distributive justice implications, those whose interests may be affected by design considerations have procedural justice rights to participate in decisions on trading design. In representative democracies, an argument can be made that individual procedural rights are satisfied by duly elected representatives who participate in government decisions on cap and trade. However, some representative governments do not adequately represent some populations such as indigenous peoples. Even where governments are controlled by representatives of the people, procedural rights to comment on cap and trade rules as they are developed are often inadequate. Some developing nations have been accused of ignoring rights of local people when they permit carbon reduction projects which benefit only a small group at the expense of interests of citizens.

The technical ability to participate in cap and trade regimes. The Kyoto Protocol has
created a staggeringly complex system for those who seek to sell or purchase carbon credits. Only those who can hire consultants and experts can effectively participate in the creation of trading projects and the development of the rules of the trading regime. For this reason, design of trading regimes that have been created often reflect the economic interests of those with the financial ability to participate in the design of much more than the interests of those who cant afford to hire experts and lobbyists. Because of the complexity of cap and trade regimes, strong cases can be made that governments should fund capacity building of groups that don’t have the financial resources to hire experts.

VII-References

Agarwal, Anil, and Sunita Narain. (1991). Global Warming in an Unequal World: A Case of Environmental Colonialism, Centre
for Science and Environment, New Delhi.

Athanasiou, Tom, and Paul Baer. (2002). Dead Heat: Global Justice and Global Warming. New York: Seven Stories Press

Baer, Paul and Tom. Athansiou. (2005). Honesty About Dangerous Climate Change, Ecoequity, . http://www.ecoequity.org/2005/11/honesty/ (last visited, Nov 8, 2009)

Brown, Donald, Nancy Tuana. Marilyn Averill, Paul Bear, Rubens Born, Carlos
Eduardo Lessa Brandão, Marco Túlio S. Cabral,  Robert Frodeman, Christiaan
Hogenhuis, Thomas Heyd, John Lemons, Robert McKinstry, Mark Lutes,  Benito
Meulller, José Domingos Gonzalez Miguez, Mohan Munasinghe, Maria Silvia
Muylaert de Araujo, Carlos Nobre, Konrad Ott, Jouni Paavola, Christiano Pires
de Campos, Luiz Pinguelli Rosa, Jon Rosales, Adam Rose, Edward Wells, Laura
Westra. (2006) White Paper on the Ethical Dimensions of Climate Change, The Collaborative Program on the Ethical Dimensions of Climate Change, Rock Ethics Institute, Penn State University, http://rockethics.psu.edu/climate/whitepaper/whitepaper-intro.shtml, (last visited, Nov 5, 2009)

Brown, D., (2009), Minimum Ethical Criteria For All Post-Kyoto Regime Proposals: What Does Ethics Require of A Copenhagen Outcome, ClimateEthics.org
http://climateethics.org/?p=50 (last
visited, Nov 5, 2009)

Environmental Defense Fund (EDF). (2009). The Cap an
Trade Success Story,
http://www.edf.org/page.cfm?tagID=1085 (last visited Nov.08, 2009)

Hamilton, Clive,(2009) Is It Too Late To Prevent
Dangerous Climate Change.
http://www.clivehamilton.net.au/cms/media/documents/articles/rsa_lecture.pdf (last visited Nov.08, 2009)

Ott, Herman, Wolfgang Sachs, (2000). Ethical Aspects of Emissions Trading, Wuppertal Institute, http://www.wupperinst.org/uploads/tx_wibeitrag/WP110.pdf. (last
visited Nov.08, 2009)

United Nations (UN), (1992), United Nations Framework
Convention on Climate Change Nations, UN Document, A:AC237/18.

By:

Donald A. Brown
Associate Professor,
Environmental Ethics, Science, and Law,
Penn State University
dab57@psu.edu

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9 thoughts on “Ethical Issues Raised By Carbon Trading

  1. Hello,
    Reforestation is one contribution for a tropical country like the Philippines. The question is how will the community benefit from the fund?
    Thank you.

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  2. Hi, I read a lot of blogs on a daily basis and for the most part, people lack substance but, I just wanted to make a quick comment to say GREAT blog!…..I”ll be checking in on a regularly now….Keep up the good work!

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  3. Donald,
    Thank you for another thought provoking post. When I have the time I enjoy reading and mulling them over. You tackle an interesting topic, and in the hope of stimulating some debate and offering a different perspective on the issues you raise, I would like to make a number of comments and observations on the points raised in the post. You will see that in a few instances I pose an alternate proposal for the ethical status of emissions trading regimes, essentially arguing not pursuing cap and trade options creates moral hazards. I look forward to any replies or comments!
    Issue 1: Justice of the cap
    The first issue is justice of the cap. I agree with you that the world is not doing nearly enough to even put us on a pathway to avoiding catastrophic climate change let alone following that path. However, I don’t see a failure of caps being strict enough as an indication of the inherently unethical or unjust nature of cap and trade or emissions trading per se. Without having read any of the references you include on countries’ obligations, I am not sure I agree with the statement “many cap and trade regimes do not derive the quantity of the cap from these international obligations”. There is an international obligation under Article 2 of the UNFCCC to prevent “dangerous anthropogenic interference with the climate system”, and this is further articulated in the QELRCs set out in the Kyoto Protocol (see the first part of Art 2 of the UNFCCC which links into the KP, and also note the clarifying text at the end of Art 2 around also ensuring sustainable development). While I agree that the Kyoto caps are insufficient to meet Art 2 of the UNFCCC over the long term, the Kyoto caps do indeed reflect the most detailed set of international obligations with respect to GHG caps to date. I would argue these are the dominant obligations of countries under public international law, and the cap and trade system set up by the Kyoto Protocol complies with these obligations as does the European Emissions Trading Scheme. However, I also acknowledge that here you may be drawing a distinction between a countries legal obligations under public international law and some other sort of other (ethical?) obligations premised on cuts that are needed to avoid catastrophic climate change and some means of allocating these cuts amongst countries.
    Whether or not a cap and trade represents a “fair share” is another issue. The caps are the result of political negotiations, and if there was no cap and trade there may still be emission reduction commitments and targets but I don’t think they would necessarily be any fairer simply because they were not linked to cap and trade. If anything developed countries would be less willing to assume steeper cuts, making cap and trade an ethical imperative as the most likely means of achieving the steepest global reductions.
    Issue 2: Allocating Global Commons Resources for Private Consumption
    The first point I would like to make here is that in many jurisdictions allowances and credits are explicitly defined as not being a property right. This is true in the Kyoto trading mechanisms along with a number of national jurisdictions. The Kyoto Protocol rules states that “the Kyoto Protocol has not created or bestowed any right, title or entitlement to emissions of any kind on parties included in Annex I”. This is also expected to be the case in any future US emissions trading scheme. All the recent bills state this explicitly – for example see section 721(c)(1) of the American Power Act states: “An allowance or an offset credit established by the Administrator under this title shall not constitute a property right”. The reason for this is precisely so that the US government can take away or reduce this right in the future without paying any compensation to emitters. There are also limits on banking offsets in the Kyoto Protocol.
    While emissions trading has not privatized the atmosphere, I do agree that it has created certain rights to emit GHGs. In some instances these rights may amount to a species of property right in a number of national jurisdictions, but in many others they are not. However, even if rights to emit GHGs can be construed as a property right, this right is not held to the exclusion of others. The Kyoto Protocol and EU ETS do not prevent or restrict any rights of developing countries to produce GHG emissions. In fact the situation is quite to the contrary as there are no restrictions placed on them. On the broader argument of protecting the global commons, you indicate that it is the role of the government to protect this for the greater good rather than allocating use or access rights to private individuals. Looking at the analogous case of forestry, in many developing countries forests are owned by the national government even though indigenous and other local communities may be living in and dependent on the forest with bona fide claims of use rights if not ownership of the forest. There is ample evidence that recognition of these rights helps protect rather than damage the forest. This does not mean that we should privatize the atmosphere, but it does demonstrate that granting rights with respect to a global commons can have a positive rather than a negative impact on preserving that resource.
    Issue 3: Environmental Effectiveness
    There are a number of points under this heading that I will address in turn:
    3.1 Conflicts and permanence
    Both of these points are directed primarily at emission reductions or removals associated with forests and other land use projects, with some permanence questions directed to CCS. However, carbon credits from forests currently make up less than 1% of the cap and trade systems established under the Kyoto Protocol. The EU ETS prohibits them outright, so they do not form a part of that system at all. CCS is also currently excluded for all cap and trade regimes, though there are a number of groups lobbying for its inclusion. This technology is 20 years or so away for commercialization, so its ethical impact on current cap and trade systems is unclear. (Other ethical considerations around CCS have been raised elsewhere though.)
    I also disagree that the monitoring and accounting err on the side of reducing transaction costs – the monitoring and accounting for forest carbon is sufficiently robust and in fact errs on the side of being conservative. Any potential conflicts are further removed by third party verification of any carbon credits. The rules for forest carbon are also sufficiently robust to take into account any permanence risk. The Kyoto rules for developing countries does this through temporary credits that need to be re-verified by independent auditors every 5 years. If the forest is found not to exist, the credits are in effect cancelled and whoever has used them for compliance must replace them with other credits. For developed countries it is accounted in part of its national inventory obligations, though I would agree the rules for this are a bit of a mess! For the bulk of carbon credits traded in a cap and trade system it is relatively straightforward to do the accounting.
    3.2 Leakage
    Leakage within the cap is not an issue as it is picked up in national accounting. For example, if a steel factory moves from the UK to Germany this is captured in both the UK and the German national accounting systems. They are both within the Kyoto cap, so this leakage is captured within the cap’s accounting. The only situations where leakage comes into it is i) where you have a source moving from a capped to non-capped country (e.g. the UK to China) or ii) credits being created outside the cap that are imported into a capped country to meet emission reduction commitments in the cap, and there is leakage associated with those credits. Broadening the cap or national monitoring and accounting to include all major economies is one solution to the first issue. The CDM is an example where this is in theory a risk with ii), but where it is relevant it is addressed in the project accounting rules. In some carbon credit projects leakage is not a problem – e.g. capturing and destroying methane at a land fill or piggery will not lead to someone uncovering a landfill in another location. You are correct, however, that there is leakage potential with forestry projects but leakage is accounted for in the project design, monitored and discounted from the project’s credits. If the leakage cannot be monitored it is assumed to exist and discounted anyway based on principles of conservativeness to ensure environmental integrity in the system. I agree that if you can’t quantify leakage from a forest project let alone monitor it you don’t have a bona fide carbon credit project, but such projects would not be registered under the CDM. The cap and trade rules are such that these projects would never be formally recognized or admitted into a cap and trade system.
    This solution aside, as noted above forest projects form a fraction of a percent of the credits in cap-and-trade systems anyway (no Kyoto forest carbon credits have been issued or traded yet – the only ones would likely be in the NSW scheme in Australia).
    This may change if credits from reducing deforestation are included in a cap-and-trade system, but this is still undecided and as already argued – the rules are sufficiently robust to ensure environmental integrity. Given the huge number of social, biodiversity, and other environmental benefits that come from well designed forest projects, these types of activities should be encouraged wherever possible.
    3.3 Additionality
    Additionality has been argued back and forth in many other fora. It does not warrant a long discussion here other than to note that it is not so much of an issue in a capped system as it is for offsets from non-capped areas being brought into the cap. The biggest example of this is the CDM, but in the CDM the additionality testing is very strict. There may be the odd project that “beats the system” but far more bona fide projects are kicked out of the system than fraudulent ones admitted. Some voluntary systems such as the CCX have very weak additionality criteria and I agree these are problematic.
    3.4 Enforcement
    The discussion on enforcement seems to be based on a misunderstanding of cap and trade systems. In the Kyoto and European cap and trade systems caps are set for industrialized countries or industry in those countries, and it is the responsibility of those countries to enforce these laws. In both there are legally binding penalties for failure to meet the emission reduction targets. These are stricter in the EU system (which from memory is a fine of EUR 100 per tonne of emissions over the cap) than the Kyoto Protocol. While I agree that there is a general enforcement problem of public international law, this does not seem to be the point made in this section.
    In the offset segments of these systems “enforcement” is not an appropriate term. The verification of the validity of credits is conducted by independent third parties to ensure environmental integrity, that is then re-checked by regulatory authorities. If the auditors did a shoddy job and certified more credits than should have been the case, they are liable for this. There have been a couple of instances of the third party auditors being suspended by the Kyoto regulators where there was concern over their quality control procedures. This demonstrates that they system of checks and balances to ensure environmental integrity works.
    3.5 Delay in investing in new technology
    I agree that investment in new technology should not be delayed, and there should not be incentives in place to build new coal fired power stations or dissuade R&D in renewable energy, energy efficiency etc. However, if a long term cap is set that progressively tightens over time, this will send the long term regulatory and market signals that are needed to dissuade high carbon development. Emissions trading offers the least cost option to make the steepest cuts in emissions in the short term. A coal fired power plant built 5 years ago will be around for another 40+ years – it is politically and financially unrealistic to expect this to be shut down overnight. Claims that this be done have the potential to backfire and result in no constraints on GHG emissions rather than stricter ones, leading to significant delays in the investments we both think are necessary.
    Issue 4: Distributive Justice
    4.1 Diminishing cheap projects in developing countries
    I agree that some countries (such as China) have expressed this concern. The solution posed by China has been to limit approval of CDM projects to the first commitment period, thereby opening up the potential for the government to claim subsequent emission reductions. However, the point of the CDM is to help developing countries develop in a sustainable, low carbon manner that will help avoid them needing to adopt steep emission reduction commitments in the future. Is the logical conclusion of the issue posed here to allow developing countries to develop in manner that is damaging to the climate, just so the country can cheaply reduce these emissions in the future? This seems like an odd position to argue… Isn’t it better to support low carbon development now, and in the future?
    4.2 Diminishing ODA
    While it can be hard to accurately track ODA and any re-purposing of ODA, the Kyoto Protocol explicitly prohibits the use of ODA to purchase offsets in developing countries. The CDM rules explicitly state “public funding for clean development mechanism projects from Parties in Annex I is not to result in the diversion of official development assistance and is to be separate from and not counted towards the financial obligations of Parties included in Annex I”.
    4.3 Distributive justice and internal allocation of government-wide cap
    The first comment here is that current cap and trade systems do not allocate the cap at the household level. However, I do acknowledge that energy prices should increase with cap and trade which may place a disproportionate burden on low income households. That said, energy prices should increase no matter what system is put in place to capture the full cost of burning fossil fuel – this is the failure of current market forces that do not put a price on GHG emissions. The price increase of fossil fuel and energy in general would happen if there was a GHG tax or fee – cap and trade is no different. The draft US cap and trade bills, however, provided compensation to lower income households to offset this increased energy bill. I can’t recall the exact formula, but I think it was a tax credit or something similar. In any event, this potential problem is readily mitigated.
    4.4 Distributive justice and revenue from allowances
    This is an interesting thought, but why can’t it be raised for any government spending? Similarly, why can’t it be addressed through a democratic process, or is the logical conclusion of this issue that any government spending raises distributive justice questions and is therefore unethical and should not happen?
    Issue 5: Procedural Justice
    5.1 The right to participate in cap decisions
    This issue is premised on there being distributive justice issues, which I have raised questions over above. This aside, caps to date have only been applied to developed countries, so the concerns over marginalized groups in developing countries not participating in decisions is not quite accurate, unless it is raised in the context of everyone being able to participate in decisions on caps even if they are not subject to them. While this could be nice, it is not realistic to argue everyone should participate in the decision on, for example, what sort of cap the US should assume. This type of decision making process is likely to prevent rather than promote strong caps, so could arguably be seen as an approach that itself creates graver ethical considerations than the current process.
    That said, participation of women, indigenous groups, and other non-state actors has been traditionally weak within the climate change negotiations. This is perhaps in part over issues of standing in international negotiations, but in a number of developing countries these issues also exist even though standing should not be an issue in those fora. There is greater consideration of minority groups in the REDD debate which is encouraging, but I do agree that stakeholder representation in the climate change negotiations generally is weak. However, this criticism is not directed at cap and trade per se – it is applicable to all of the national and international climate change negotiations and would be true for most, if not all, international issues ranging from the environment, to trade, to security. As such its efficacy as a moral hazard peculiar to cap and trade that warrants the abandonment of this mechanism is questionable.
    5.2 The technical ability to participate in cap and trade regimes
    I also agree on this point – even many professionals and consultants don’t understand all the nuances of cap and trade. However, as with the last point, I think this problem is not peculiar to cap and trade – it is true of all the climate change and many other international negotiations. Additional support to developing country delegations to participate in the negotiations in an equitable manner is needed.

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  4. Very interesting piece. Substantive comment wait on further reflection about it. But for now, thank you very much for your blog, which I only recently discovered. It will be a wonderful resource for my students in environmental ethics this fall.

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  5. I’m very impressed with the breadth and depth of your analysis of the ethical dimensions pertaining to carbon trading. This is an area that I would like to become very adept in so thank you for hosting this blog. Do you have plans to write a book on the topic? What is the most comprehensive book on the ethics of carbon trading that you would recommend? Keep up the great work!

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