Caspar Henderson explains how 'carbon credits' could be used in climate negotiations
For at least as long as there have been markets, people have had a taste for exotic goods. But no ancient Phoenician trader could have dreamt that there might one day be an international market in a constituent of the atmosphere. Now that may be turning into reality. Under the auspices of the United Nations Commission on Trade and Development, a pilot scheme to trade permits for carbon dioxide emissions is being created.
The aim is to establish by the middle of 2000 a mechanism to help nations find the most cost-effective way to reduce their emissions of this gas, thought to be the principal contributor to climate change. Critics, which include business interests and environmental groups, say the Unctad scheme will face difficult if not insurmountable problems. The extent to which rich and industrialising countries should co-operate has been a stumbling block on the road to the Kyoto conference on climate change. Amid this uncertainty the government of Costs Rica has seen an opportunity. It has created environmental bonds called Certified Tradable Offsets (CTOs), each of which corresponds to one ton of carbon "fixed" by Costs Rican forests (as trees grow they absorb carbon dioxide, release oxygen and use the carbon to build up their mass),
In the first publicly traded scheme of its kind, Norway has bought $2m worth of CTOs at $10 each. If the scheme takes off, countries that buy the bonds would use these carbon credits as a bargaining chip in international climate negotiations. Norway's aim, however, is to kickstart the market.
Money from the sale of CTOs will go to a revolving fund - also topped up by a domestic fossil fuel tax - for regeneration and protection of Costs Rica's forests. Reforestation is a central plank of the nation's sustainable development strategy; Costs Rica is one of the most deforested countries in Latin America. In the 1970s and 1980s tree felling was, ironically, supported with foreign aid.
Frank Joshua, head of the Unctad greenhouse gas emissions trading programme, welcomes the Costa Rican experiment: "It is quite valid...but there are difficulties." A great deal of resistance remains to including carbon forest "sinks" in a basket of offset measures, he says. Some environmentalists, such as Bill Hare, of Greenpeace International, have expressed doubts that CTOs could ever be credible. Up to now, he explains, there has been no international certification system to ensure that any extra trees planted will remain standing.
But Pedro Moura-Costa, managing director of Eco-Securities, a pioneer in offset brokering and management, says this concern is outdated. The CTOs will be guaranteed under a newly-created independent verification service for forestry offsets, he says. Eco-Securities developed the system with SGS Forestry, a division of the largest inspection, testing and monitoring organisation in the world.
In the Costs Rican scheme, "small farmers are provided with aid to maintain and harvest sustainably from forest land, and there are new mechanisms to make forestry more attractive than cattle ranching," says Mr Moura-Costa. Support will also go to improved demarcation and fire prevention for Costa Rica's national parks. It is too soon to say whether Costa Rica's initiative will succeed, and whether it will stimulate other such carbon-trading schemes. David Harrison, a US economist, says the toughest challenge for any proposed carbon market would be how to allocate emissions allowances in a manner acceptable to both developing and developed countries.
But there has been a great deal of behind-the-scenes interest from other forested countries, according to Richard Sander, chairman and chief executive of Chicago-based Centre Financial Products, which is helping to develop the Unctad scheme. A small but viable market is possible, he says.
"Once trading is going on I think we will see three things happen: prices [per ton of carbon offset] will fall below what models forecast; second, perceptions will change; and third, the market will motivate people to come up with additional cost-effective programmes. Perfection is impossible, but delay is unacceptable. Let us start now and improve as we go."
Financial Times 3dec97