If you pollute, you pay - that’s the idea behind emissions trading. It's a scheme designed to tackle human-induced climate change and although it looks simple enough, its implementation is politically and economically fraught.

The presence of CO2, methane and other greenhouse gases in the atmosphere is the main cause of global warming. Efforts to curb it must involve lowering emissions fast – both in the industry and transport sector - all over the world.

But experience has shown that climate offenders need financial incentives to change their behavior. Controlling pollution by providing economic perks to cut greenhouse gas emissions is the core principle of international emissions trading as laid out in the 1997 Kyoto Protocol.

A not-so-clean business?

Under the legally binding global agreement, industrialized nations are obliged to reduce the amount of greenhouse gases being released into the atmosphere.

It’s up to the emitter to decide whether or not to cap its emissions. Once the cap has been fixed, companies buy permits allowing them to emit a certain share of carbon dioxide into the atmosphere.

Companies that exceed their individual limit are able to buy unused permits from firms that have taken steps to cut their emissions.

According to this market-based approach, the total number of permits in circulation will be gradually reduced, thereby making them more expensive. If the price of a permit rises, the incentive grows for a company to clean up its act and sell permits it doesn’t need.

The European Union’s Emission Trading Scheme (ETS) is the largest of its kind, geared to ensuring the EU meets its Kyoto targets. But cheap carbon credits are frequently available from developing countries, where they may be generated by local polluters at the expense of local communities. Sometimes, cleaning up the planet is a dirty business.

The United Nations' "Clean Development Mechanism" (CDM) allows companies to buy permits from climate protection projects in developing countries. It’s a lucrative business and one with significant scope for abuse.

One example is the trade in permits for the greenhouse gas HFC-22, released in the manufacture of cooling agents. It has a Global Warming Potential (GWP) of 11,700, hence its destruction under the CDM yields thousands of offset credits. In industrialized nations, its production has been banned for years, but developing nations have until 2040 to phase it out. So countries such as China and India continue to produce the gas on a large scale, primarily to earn money from then destroying HFC-22 through carbon trading.

GLOBAL IDEAS talked to Regine Günther, head of climate and energy policy at the World Wildlife Fund (WWF)Germany about just how efficient carbon emissions trading is.

GLOBAL IDEAS: The EU Emission Trading Scheme ( ETS) was introduced in 2005. How successful has it been so far?

Regine Günther: The WWF supported the ETS from the outset. Setting a clear-cut upper limit to greenhouse gas emissions, which is crucial if emissions trading is to work, is very welcome from an environmental perspective. That would not have worked by introducing a carbon tax. Moreover, the industrial sector essentially agreed to the introduction of such a system, whereas it was strictly opposed to a CO2 tax. One key step in the right direction is the decision to auction carbon permits from 2013 and phase out free allowances. You can already see that this change has been effective: far fewer CO2-intensive coal power stations are planned post-2012.

Starting 2012, all airlines taking off and landing in Europe will join the European Emissions Trading Scheme in 2012. The US is trying to use legal means to pressure Europe to exempt American airlines from the scheme. What do you think of this?

We see this EU measure as a very positive one. Transport is one of the fastest-growing causes of emissions. So far, the US economy has failed to boost its energy efficiency. Its political system is such that solving global issues is frequently hampered by vested interests. But if the EU caves in to US demands, it might as well never bother with this sort of plan ever again. It must remain firm and cannot allow itself to be swayed by threats.

What’s the situation in other parts of the world? Are there other emissions trading zones like the EU’s?

China is to introduce an emissions trading law for six provinces in 2015. Australia has just introduced a carbon tax. South Korea is also mulling joining emissions trading. Several industrial and developing nations have realized that they need to drastically slash their emissions to avoid hurtling headlong towards unchecked climate change.

Emissions trading puts a price on pollution which companies now have to factor in to their business plans. Is this is a way of assigning nature a financial value?

Yes, partly. Since the introduction of emissions trading I’ve noticed that right from the doormen to the CEOs of companies, everyone is talking about CO2 emissions. That didn’t used to be the case. Emissions trading has changed the way people think.

Some have criticized the trade in emissions permits as a "money-making market." Do they have a point?

This is a tricky debate. Despite reservations, the WWF supported the introduction of the CDM. We hoped that it would be instrumental to the technology transfer between north and south. But the reality is sobering. After ten years, we must conclude that very little of this technology transfer has taken place. Instead, many projects have been implemented that may be lucrative for all the parties involved but which contribute little to climate protection, and in fact cause additional damage. Urgent political action is needed to improve the mechanism.

Is there a risk that industrialized nations have no incentive to cut down on carbon emissions now that they can buy their way out, as it were?

If the system is sufficiently robust then this isn’t a risk. If there’s only a limited number of certificates available within the EU and only companies in possession of them are at liberty to pollute, then these companies have two choices – either they can buy a permit or they can cut emissions. Were emissions trading a closed system, no one would be buying themselves out. The problem arises when dubious permits are bought in en masse from outside.

Does emissions trading create greater climate equality between rich and poor countries?

One positive result is the approach taken by the German government, for example: in future, all proceeds from sales of permits will be funneled into efforts to protect the environment at home and abroad. It’s clear that we must support developing countries in the area of environmental protection.

Interview: Nele Jensch (jp)
Editor: Sonia Phalnikar