What more evidence does the World Bank need that carbon markets are not working?

Rachel Kyte is Vice President for Sustainable Development at the World Bank. Her solution to climate change? Carbon markets. No surprises there, then.

Recently Kyte wrote an opinion piece for Climate Finance. Her argument is summed up in the first sentence: “Even as the first generation of the carbon market stutters, a robust price on carbon has never been more important if we are to avert dangerous climate change.”

And how do we set a “robust price on carbon”? Carbon markets.

The second part of Kyte’s sentence does not follow from the first part. It would make far more sense to write that leaving fossil fuels in the ground has never been more important if we are to avert dangerous climate change.

Kyte’s article describes what the World Bank is doing on climate change (none of which includes mechanisms for leaving fossil fuels in the ground). Kyte recognises that what the World Bank is doing is “not enough”. She argues that, “we need high-level political commitment and ambitious national emission reduction targets”. And then she’s back to putting a price on carbon:

A strong price signal in major economies is essential to establish the right incentives and to direct financial flows away from carbon-intensive growth to low-carbon investments.

A carbon price, as Kyte argues, can be achieved by markets or taxes. But then Kyte forgets that her beloved carbon markets are “stuttering”:

[M]arket-based mechanisms are likely to deliver large-scale emission reductions more efficiently and quickly – and with the climate problem, time is not our friend.

Kyte offers no evidence to back up this statement, because there is none. The more than 15 year long experiment with carbon markets has utterly failed to reduce CO2 emissions. If carbon markets reduced emissions, there would be a reduction in emissions over the last decade. This graph from The Guardian shows very clearly that this is not the case:

Kyte describes new carbon markets that are developing in China, Chile, South Africa, South Korea, and California. It is progress at the country level, Kyte writes, that “convinces us at the World Bank that carbon pricing is emerging and carbon markets have a future.” Kyte notes that some of the new carbon markets include “design features to manage extreme price volatility”. But carbon markets all have the same underlying flaw: They are not designed to reduce emissions.

David Levy, a Professor of Management at the University of Massachusetts Boston, recently wrote a commentary about the failure of carbon markets to address climate change: “Carbon Fiddles While The World Burns”. He points out that carbon markets were “deliberately designed not to disrupt our carbon intense economy and lifestyles”, and he explains that,

A few key players, such as Cantor Fitzgerald and Deutsche Bank, were central figures in forging the carbon markets, and not surprisingly, they shaped the rules and processes to suit their capabilities and interests. Carbon markets are therefore political and institutional constructs, relying on a vast legal and accounting infrastructure to commoditize carbon: to establish property rights, count and certify tradable units, and to enable exchange across different jurisdictions and gases.

The financial firms that helped create carbon markets, “have a vested interest in market instruments that are complex, opaque, volatile, and hard to value”, Levy writes, adding that, “there are legitimate grounds for concern that carbon markets were not designed to provide the clear and simple price signals needed to stimulate a broad transition to a low-carbon economy.”

Kyte writes that the World Bank hopes “to jumpstart a fresh debate”. But Kyte is not interested in debate. She acknowledges that “there are those who doubt that any form of carbon market could still work”, but doesn’t even attempt to deal with these concerns, instead claiming that, “There is evidence that carbon pricing can work if it is flexible and aligned with national policy initiatives, in particular economic priorities.” Of course Kyte doesn’t provide (or even link to) any of this evidence.

Funnily enough, a few days before Kyte posted her opinion piece on the World Bank’s website, Bloomberg interviewed Alex Kossoy, a senior financial specialist at the Bank. Kossoy explained that this year the World Bank will replace its annual “State and Trends of the Carbon Market” report which calculated the value and size of the global carbon market. Instead, the Bank will publish a new publication called, “Mapping the Carbon Pricing Initiatives”, at this year’s Carbon Expo in Barcelona.

Last year, in its report about carbon markets the Bank claimed that carbon markets were increasing in size, but a large part of the trade was due to “hedging, portfolio adjustments, profit taking, and arbitrage”. The trade in CDM credits (CERs) in 2011 fell to its lowest value since 2004.

This year, the markets are looking so bad that the Bank can’t fudge the figures. So it’s just stopping reporting them. Bloomberg reported Kossoy as saying that, “A quantitative analysis of the market “would be more risky as several of the contracts in the market have been terminated after the oversupply.” Even on their own terms carbon markets aren’t working.

But more importantly, carbon markets are not addressing climate change. David Levy and Rachel Kyte both believe that a putting a higher price on carbon is important. But Levy argues that carbon markets are not the way to achieve this. He concludes his commentary on carbon markets as follows:

Markets are not magic mechanisms that solve all problems, but political and institutional constructions that serve particular interests. As atmospheric carbon surges past 400 ppm, it’s clear that carbon markets have failed us, and a new strategy is needed.