Ethical Controversies behind the Carbon Trading Mechanism: Business Ethics

  1. Carbon trading had the potential to act as a source of social inequality

Carbon trading would eventually create a new means of forming divisions among the workers in an industry. Workers will begin to oppose climatic policies calling out for social justice, due to changes in wages, benefits, jobs, and work conditions. In this regard, climatic change mitigation will lead to unemployment and even more competition among workers. For example, Arcelor, a steel company in Belgium, decided to shut down and relaunch two years later. However, Arcelor did not have enough quotas left to do so and they opted to gain the same by threatening to cancel the project in a bid to get the workers to coerce the government to give the company more quotas. The government achieved this by selling their Kyoto units, which will be absorbed by the public.

  1. Emissions trading could turn into a source of North-South inequality

The carbon trading mechanism under the clean development mechanism provided that carbon credits can be provided to the EU from investments outside the zone, but functioning within the requirements of the mechanism. In its new proposals for 2013-2020, the Commission allows polluters to bank credits from Phase 2 to Phase 3. If any post-Kyoto treaty is signed the EU is expected to settle for an emission reduction of 30% against 20%. However, 50% of this additional reduction can be comprised of carbon credits. The Stern Review proposed to cancel any quantitative ceiling on the CDM and to extend CDM eligibility to the building of nuclear plants and to the protection of existing forests against deforestation and degradation. Under this scenario, 50% of the global mitigation effort would be done in the South, even though the South is responsible for no more than 25% of global warming. Investors from the North will reap considerable profits and cheap carbon credits.

  1. Carbon trading involves too many perverse incentives

Some provisions in the mechanism meant that polluting firms would usually be given permits for emissions for free, and as a result encourage them not to cut down n their emissions. This would usually occur because once the firm makes massive cuts in emissions, they would receive fewer permits in the future. This argument in favor of allocation of permits has been used in the EU ETS, where industries that have been judged to be internationally exposed, e.g., cement and steel production, have been given permits for free.

  1. Carbon trading is a source of windfall profits for polluting sectors

The over-allocation of quotas in the phase 1 of the EU-ETS provided the steel sector a windfall profit of 480 million Euros at the end of 2005. In the same period, RWE, a German utility, made a huge profit of 1.8 billion Euros. Little or none of these windfall profits were invested, in low carbon technologies or research. The European steel industry, for instance, invests only 45 million Euros/yr in the research programs, which is financed at 50% by the Commission. The German RWE, number 3 in power production on the EU market but number 1 in GHG emissions, is building the biggest lignite power plant in the world.

  1. The allocation of emission rights was socially and geographically unfair

Allocation of emission rights amounts to allocation of property rights in the emission and absorption of carbon, in other words in the carbon cycle. These rights are not permanent but semi-permanent. Nevertheless, this poses another important political, ethical, and even “civilizational” problem. The chemistry of carbon is the basis for life on Earth. Consequently, control of the carbon cycle is control of life itself, and to appropriate the regulation of the carbon cycle is appropriation of the regulation of life.

  1. Companies are allowed to pay their way out of environmental responsibility

Emission trading expresses an impoverished conception of environmental responsibility by allowing agents to continue to emit large amounts of GHG so long as they purchase emissions allowances. The ability to buy their way out of any direct measures to reduce the emissions arising from daily activities means that these agents are effectively exempted from the duty under the United Nations Framework Convention on Climate Change (UNFCCC’s).

  1. Determining the supply of emission credit can be problematic

Regulatory agencies often experience some difficulty when it comes to determining the proper amount of emission permits to issue. Regulatory agencies run the risk of issuing too many emission credits, which can result in a very low price on emission permits. This reduces the incentive that permit-liable firms have to cut back their emissions. However, issuing too few f these permits will cause the permit price to skyrocket.

  1. Cost-effectiveness cannot take into account the qualitative aspects of the essential energy revolution

The qualitative objectives can be summarized as an energy revolution, in other words the transition from a centralized, inefficient and energy-wasting system based on fossil fuels to a decentralized, highly efficient and conservationist energy system based on solar energy in different forms. This has implications for all society, not only industry and the utilities, but also for many other economic sectors. The problem here is that quality cannot be taken into account by cost-effectiveness, which is a purely quantitative measure.