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Market Incentives Key To Fixing Carbon Pollution

By Nick Ferguson | 3 April 2008 – Finance Asia

Countries must find common ground on emissions before a global solution to carbon controls can be reached.

There is no silver bullet that will undo the effects of global warming, but markets can play a key role in encouraging businesses to use clean technologies. One of the cheapest ways to create such incentives is through so-called cap-and-trade schemes, said Paul Ezekiel, Credit Suisse’s global head of carbon trading. Ezekiel was speaking at the Credit Suisse Asian Investment Conference in Hong Kong yesterday.

Time is running out though. Floods, hurricanes and droughts are categorised today as extreme climate events, but Ezekiel believes it is time to start thinking of them as extreme economic events. Every day of inaction, as the Stern Review on the Economics of Climate Change argued, has a cost implication. If we act to reduce the worst effects of greenhouse gas emissions today it will cost less than 1% of global GDP a year. If we act later, the costs could range from 5% to 20% of GDP.

Just to keep greenhouse gases to a reasonable level requires a substantial commitment – a 25% reduction in annual emissions by 2030. If we carry on with business as usual, our annual emissions will double during the same period.

Asia’s role will be critical. “One of the issues we’re facing is that China and India are growing pretty significantly at the same time,” said Ezekiel.

Cap-and-trade systems provide a framework that comprises mandatory caps on emissions and a platform for trading carbon credits. The EU is already running a Kyoto-compliant emissions trading scheme and all three US presidential candidates have meaningful positions on cap-and-trade schemes, which bodes well for legislation coming on stream in 2009 or 2010.

One of the main planks of these schemes allows for developed-country polluters to offset their emissions by investing in clean energy projects in the developing world. Asia is a disproportionate beneficiary of these, with China accounting for more than half of all the world’s clean development mechanism (CDMs) projects. As the world’s biggest seller of emission rights, China has considerable power in the global carbon market.

Most of the projects in China and India are in renewable energy and energy efficiency, while projects in Malaysia and Indonesia are primarily waste and what is known as LULUCF (land use, land use change and forestation).

But as the Kyoto protocol nears expiry in 2012 there is still no policy to replace it. This uncertainty is already discouraging new CDM projects from coming on stream. “There are challenges and opportunities,” said John Shi, a managing director at Arreon Carbon. “Although CDM is becoming challenging in China, the notion that the future is going to be low-carbon has been driven home even to many state-owned enterprises. They’re now thinking about how they should position themselves in this future. To me, that represents a sea-change in the mindset of Chinese companies.”

Agreeing a successor to Kyoto is the next imperative and one of the most important things to address will be the stark disparity in emissions between the US and the emerging powerhouses of China and India. The average US citizen emits 12 tonnes of CO2 a year, compared to 1.8 tonnes for each person in China. “That’s a massive inequity in pollution per capita,” said Ezekiel. “There’s no way China and India are going to come to the table without some equity with respect to emissions.”

Ezekiel, an Australian, said his country’s new Mandarin-speaking prime minister, Kevin Rudd, could play a crucial role in negotiating an agreement between China and the next US president.

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