Carton trading, offsets, and derivatives

CARBON TRADING, OFFSETS AND DERIVATIVES

7 December 2009

Research by Larry Lohmann and publications of the carbon watch organization show how the cap-and-trade system thinking emerged from the neo-liberalist philosophy in the 1990s. According to the former executive secretary of UNFCCC, Michael Zammit Cutajar, it is “not an exaggeration to brand the mechanisms of the Kyoto Protocol as ‘Made in the USA.’ . . . The sensitivity of the Protocol to the market was largely instigated by the negotiating positions of the USA”.

But it was not only the USA who pushed for the ineffective carbon reduction methodology. It was the OECD and UNCTAD who also played an important role. They both accepted the sulphur trading example as a successful model for emission trading notwithstanding their significant differences. They both set out the terrain for international negotiations. The OECD investigated the US SO2 emissions trading experience and considered the scope for international emissions trading.  UNCTAD, meanwhile, engaged in an extensive work programme to promote a global CO2 trading system. At the same time, the US-based NGO Environmental Defense Fund (which is now called Environmental Defense) was an early promoter of emissions trading, and published a 1991 study advocating emissions trading to protect the rainforest – a notion whose afterlife can be seen in current market-based proposals for Reducing Emissions from Deforestation and Degradation (REDD). The authors of this paper were UNCTAD consultants at the time, and had recent experience advising the US EPA on sulphur trading. It was the forerunner of the offsets program under the Kyoto Protocol, one of the so-called flexible mechanisms, that contributes very little in the reduction of emissions. It was in 1996 that this kind of ‘flexibility’ would be ‘the key requirement for accepting binding targets’ the U.S. government’s position.

It is not surprising that the Rio Earth Summit of June 1992, notwithstanding its being an important bench mark in the history of humanity and of the Earth, was also based upon that neo-liberalist philosophy. It defended an ‘open economic system’ based on economic

growth and it also considered TNCs as positive agents of ecological change – ‘promoting

sustainable development through trade liberalization’.

What is less well known is that several of those authors in the EDF and UNCTAD emission trade system became involved in the design of derivatives, the major cause of the financial crash of 2008.

Frank Joshua, head of greenhouse gas emissions trading at UNCTAD from 1991 to 2000,

went on to become global director for emissions trading services at Arthur Andersen,

the accountancy firm at the centre of the Enron scandal, before joining NatSource, an

environmental services firm specializing in emissions trading. In the early 1990s, Joshua

collaborated on an UNCTAD initiative entitled ‘Building a Global CO2 Emissions

Trading System’ with Richard Sandor, a former head of the Chicago Board of Trade,

and one of the originators of the interest rate derivatives. Sandor went on to head UNCTAD’s working group on carbon market design. He later set up the Chicago Climate Exchange (CCX), which today commands a small but growing segment of the carbon markets.

Alice LeBlanc, another key figure in the UNCTAD initiative, was an employee of

Environmental Defense at the time. She later joined Sandor at the Chicago Climate

Exchange, before becoming head of the climate change office of insurance firm AIG,

where she devised the firm’s carbon market investment strategy. Besides creating problems of conflicts of interests these interconnections of the revolving doors variety hint at broader links between the rule-setting process for carbon markets and the agencies that established the derivatives markets.

The urgency of both the economic and climate crises demand that a new sustainability philosophy be developed. The Tierra Monetary Paradigm with its two pillars of Cap & Share and its transformational monetary approach of a carbon-based international reserve currency wants to make a contribution to such sustainability philosophy that integrates economic, social and ecological challenges involved in both crises.

Atmospheric occupation, carbon debt and the Tierra

The first time I encountered the phrase ‘atmospheric occupation’ was today when reading Andrew Simms’ Ecological Debt. The Health of the Planet & the Wealth of Nations (Pluto Press 2005). We are all aware of terrestrial occupations during the colonial times and present ones such as the Israeli occupation of the West Bank. They are visible dominations and their social, economic and ecological impacts are measurable.

Atmospheric occupation, on the other hand, is a kind of domination that is less visible, particularly at its origin. It started when coal became the main source of energy in the middle of the 19^th century to power the explosive expansion of the railways in Europe and North America. It has been growing when oil was added at the end of 19^th century and natural gas a little later. These three fossil fuels are now driving about 80% of all energy sources in the world economy.

It is the industrialized North, constituting about 20% of the world’s population, who is responsible for some 80% of the carbon pollution by the use of these fossil fuels. They are basically occupying the atmosphere and using this global commons without indemnifying the 80% of the world population who suffer the main consequences of this pollution and are constrained in using these nonrenewable energy sources for increasing their standard of life.

This ecological, specifically carbon, indebtedness has to be reversed on ethical, social and economic grounds. It is to be connected with the financial indebtedness of the majority world. Agreement has to be reached between the ecological debtor countries in the global North who are the financial creditors and the ecological creditor countries in the global South who are the financial debtors.

There are many ways to balance both the ecological and financial indebtedness of the global North and South. One of them is to use the proposed new non-national international reserve currency of the Tierra as a major, institutional way to balance both the economic and financial accounts in modified balance of payments. By basing the Tierra on carbon emissions permits and having a UN World Monetary Board administer the new balance of payments we are dealing in an equitable, democratic and sustainable way with the climate crisis. The present allocation of SDRs to developing nations is a way station to this superior setup where the atmospheric occupation by a small group of nations is ended in a negotiated process among equals. The Earth and her atmosphere is a patrimony entrusted to all humans equally. In last instance, the Earth is not owned by humans. She is self-possessed and self-organizing. In religious terms, the Earth is the Lord’s.

Two parallet universes and humanity's hope

About six months ago during the acute global economic crisis and the ongoing climate crisis I set out with the determination that I as a sustainability sociologist with experience in international relations and development should be able to come up with a plausible direction forward.

I think I found that plausible direction in the pursuit of carbon based international reserve currency, called the Tierra. It is a demanding direction that represents a transformational change in the international monetary system.

Transitioning from the present national international reserve currencies system of dollars, euros, and yen is being advocating by the UN GA President's Commission on Monetary and Financial Crises and also pushed by China as part of the G20 process. We will see nations changing their nationally-based reserve currencies into Special Drawing Rights (SDRs). However, we need a second transition from these SDRs to Tierras. That transition is transformational and, ipso facto, difficult, demanding, but necessary if we want to resolve the economic crisis through resolving the climate crisis.

In his New York Times column “The Perfect, The Good, The Planet of May 18 economist Paul Krugman thinks that “It’s decision time on climate change.”  He supports the Waxman-Markey bill on cap-and-trade, arguing that the pursuit of a perfect bill should not prevent the good of an imperfect bill to emerge. Cap-and-trade is a start and better than a carbon tax. However, the Tierra is a transformational carbon reduction methodology that would provide an institutional mechanism via the carbon account of a nation’s balance of payments to transfer funds from ecological debtor nations in the global North to ecological creditor nations in the global South.

Transitioning to the Great Transformation of the Tierra and its Tierra International Monetary Union (TIMU) Architecture is where the two parallel universes and humanity's hope comes in. There is the Questionable Quad universe and the universe of humanity's hope’.

The Questionable Quad universe is the universe that is supported by the G8 and, by extension, the G20. This universe is questionable and has to be challenged. In its reformist economic proposals it still is on a road that does not consider the economic and climate crises simultaneously. The universe of humanity's hope, the United Nations, is on a road that starts considering the two crises simultaneously. If the UNFCCC, the UNGA President’s Commission and UNCTAD and other UN organizations were to go for the Tierra and its TIMU Architecture we would have a transformed international monetary system where a World Central Bank would start administering the carbon accounts of the nations and become the instrument for the financing for development and the necessary climate mitigation and adjustment measures.

Presently, the Questionable Quad and the UN universes are still parallel universes which, with some minor linkages, are to be brought into the one universe that represents humanity’s hope, i.e. a reformed UN. It is a UN that is able to measure up to the integrated social, economic and environmental vision of the Earth Charter, the value base of the sustainability revolution and its sustainable communities development paradigm. The latter paradigm expresses itself in a bioregional economics approach with frugal trade structures that replaces uncontrolled corporate globalization with its market fundamentalism and privatization philosophy.

This Tierra proposal may not seem plausible because it reaches beyond the   general bounds of present thinking on either the economic or climate crises. Start thinking in solving the two crises simultaneously, the proposal becomes more plausible. People are asked to think outside the box, in other words to think transformationally. Here is proposal which may seem far out and it is, because it is not re-formist, but trans-formist or transformational. It does not use the present form; it goes beyond the present form of the international monetary system. It is radical, because it goes to the root of the monetary, financial, economic systems by making a small change with big consequences in the international monetary system which is the glue that binds those three systems together.

 Details about the context and constraints, the six components of the TIMU Architecture and the challenges of the global community, the UN and the US are presented in TIMU: The Transformative Approach to Monetarily Solve the Economic Crisis by Solving the Climate Crisis which is to be published at end of the summer of this axial year 2009. For a summary see the various versions of the Tierra Manifesto of 2009 on www.timun.net  

The FInancial Stability Board ( FSB) of thd BIS and the Tierra

The FSB is the successor of the Financial Stability Forum which was “convened in April 1999 to promote international financial stability through information exchange and international co-operation in financial supervision and surveillance.” In its many meetings before the London Summit on April 2, it has managed with its close collaborator IMF to secure a position of unparalleled monetary and financial power. It is an integral part of the Bank of International Settlements (BIS).

From its humble beginnings in the early 1930s in a closed down hotel it now dominates the skyline of Basel. Though its beginning was marred by its banking for the Hitler regime and though its abrogation was advocated by the US government during the Bretton Woods Negotiations in 1944, it survived and now is the most powerful financial institution in the world, particularly after the G20 London Summit. Rather than going for a transformed international monetary system, the G20 voted for reassertion of the global privately owned banking system.

How is the FSB and the BIS run? This Central Bank of Central Banks is a privately owned institution like almost all of its member central banks. Though it has a membership of 55 institutions, the main members of the G20 make up its executive committee. Through its Based Accords I and II it has managed to keep control of international finance in the name of “financial stability.” Their two websites and Ellen Brown’s article in Global Research of April 18 tell their sordid story of profit over people.

The March 19 Stiglitz UN Commission report posits a completely different framework within the UN that would be representative of the G192. The Tierra may become part if its proposed new global reserve currency if it is going to be carbon-based and part of its proposed global economic coordination council if it is going to evolve into the World Central Bank as proposed in the TIMU Architecture.

The TIERRA and the SDR

 Since Keynes proposed the “bancor” in 1944 as the new international reserve currency, about half a dozen other proposals have been made. One of them was the issuance of Special Drawing Rights (SDRs) in the late sixties, the issuance of which would be decided by the governors of the IMF and be distributed to their members.

It was in the late 1990s that Irish economist Richard Douthwaite proposed to have such international reserve currency based upon emissions. His “ebcu” proposal together with its FAESTA Noordwijk Aan Zee Draft Treaty was discussed in a 2000 conference organized by ODE Magazine.

In the first quarter of 2009 the Tierra international reserve currency and its TIMU Architecture was launched by the International Institute of Monetary Transformation. Like the “ebcu” proposal it is to compete with the IMF’s synthetic currency of thirds. New life was put into the SDR when, last month, the governor of China’s central bank proposed a “supersovereign currency” to replace the dollar, euro and other national currencies and when G20 un-imaginatively strengthened the IMF with channeling a trillion dollars through it without demanding real reforms. It is against this SDR that the Tierra has to compete: it is a fight of a David versus Goliath.

If realism, boldness and imagination had prevailed at the G20 Summit on April 2 the world’s leaders of the major economies and their IFIs could not only have discussed China’s proposal (that is supported by Russia, Brazil and India), but would have also followed the recommendation of the UN GA President's Commission on Monetary and Financial Crises to adopt a global reserve currency. Then they could have proceeded in setting up a commission to study whether that currency would be carbon based or not given that the climate crisis and its funding cannot be separated from resolving the economic crisis.

Fred Bergsten, director of Peterson Institute of International Economics, has suggested in his article of April 8 in www.ft.com that the US and other reserve currency countries adopt the more limited proposal made by Governor Zhou to create “an open-ended SDR-denominated fund” into which dollar balances could be exchanged for SDRs. I consider this fund a responsible way to transit to a global reserve currency and, later on, to the carbon-based international reserve currency of the Tierra. Bergsten also suggests that the US and China use this reserve currency issue in forging a G2 partnership that “is needed to provide economic leadership to pass needed reforms at the existing multilateral institutions. Since China advocates currency consolidation, the US could insist that it contribute substantially to the IMF’s new lending facilities as a quid pro quo. The Europeans would have to concur, since the agreement would include a large increase in China’s voting rights at the IMF, where Europe is so heavily over-represented, but  China-US agreement would go far to seal the deal.”

Would it be possible for both nations to make an enormous step forward by basing the new global reserve currency on carbon emissions, of which both nations are the major producers? Such bold approach would preempt the difficult and less efficient use of the cap-and-trade and carbon-taxes methodologies to reduce GHGs, since they do not include the perspectives of and justified funds for the ecological creditor countries in the global South.

G20, IMF, WTO, bioregionalism and frugal trade

The G20 which decided to channel a trillion promised dollars to an unreformed IMF missed a major chance to place the world economy and trade on a new trajectory. Its main intent is to restore through some regulatory reform rather than recover through transformation.

Basically, the establishment US media are also captive of this unquestioned market fundamentalism that wants restoration through reform rather recovery through transformation. This was evident in this morning’ Morning Edition where Tom Gjelten spells outs the effects and dangers of dramatically reduced trade are spelled out, and interviews like so many other main media do members of the Peterson Institute of International Economics many of whom have close past or present ties with the IMF. 

The Tierra Solution squarely presents an alternative economic philosophy which is based upon the sustainable communities development paradigm. It combines theories and methods of the ecological economics field, the sustainable communities and the bioregional movements. Within that economic and social planning framework that is based upon the organizing concept of contextual sustainability and the vision of Earth Charter, it argues for the preeminence of frugal trade over free and fair trade. To a great extent, frugal trade is fair trade because it places the wellbeing of people and planet in a particular bioregion central.

Without engaging in autartikal activities frugal trade reduces international trade which is dominated by nationally loose transnational corporations and its WTO architecture which still demands deregulation from banking and insurance services.

Frugal trade for consumers means becoming locavores—eating locally to reduce food miles. Frugal trade for local authorities and national governments means policies and programs that emphasize local agriculture and manufacture without engaging in financial or commercial protectionism. Frugal trade for transnational corporations and the IMF and WTO means corporate deglobalization and greater public regulatory oversight, fostering accountability and transparency.