Curbing the sale of ‘dead souls'

‘Hot air’ threat to Copenhagen agreement.

In Nikolai Gogol’s best-known
novel, an itinerant swindler called Chichikov lands on a get-rich-quick
scheme, buying up “dead souls”, the ownership deeds to dead serfs,
which he plans to use as collateral for a loan. Some analysts detect
echoes of the great Russian novel in the current international talks on
climate change. Credits that exist on paper as licences to emit
greenhouse gases are threatening the chances of reaching a global deal
at Copenhagen in December.

According to a paper* published by the Finnish
Institute of International Affairs (FIIA), which takes its title from
Gogol’s novel, the abundance of surplus credits – disparagingly
described as “hot air” by environmental campaigners – are “an extreme
threat to both the environmental and market integrity of the Copenhagen

Carbon trade

The roots of this particular story lie in the 1997
Kyoto Protocol. Kyoto created a multi-billion euro market in ‘hot air’,
in that it allowed countries to trade the right to emit carbon dioxide
(CO2). The right to emit one tonne of carbon dioxide is known in
climate jargon as an assigned amount unit (AAU). Countries of the
former communist bloc, including the EU’s ten central and east European
members as well as Russia and Ukraine, have accumulated billions of
unused AAUs, because the collapse of their industry in the 1990s made
it easier for them to meet their Kyoto targets.

The FIIA paper estimates that these countries have
up to ten billion surplus credits. If this accumulation were left in
the international system, emission-reduction targets would be
significantly less demanding. A paper published yesterday (28 October)
by the Climate Action Network, a non-governmental organisation, and
Point Carbon, an analysis firm, estimates that carrying over AAUs would
significantly weaken the current emissions pledges. They would be worth
no more than a 6% cut by 2020, instead of the 20% the EU is aiming for.

Commission worries

The European Commission is worried that a large
number of surplus credits sloshing around carbon markets could depress
prices in its emissions trading system (ETS).

“If it is not addressed we could have a collapse of
the ETS or the price of allowances,” according to Stavros Dimas, the
European commissioner for environment.

As host of the UN climate summit, Denmark is also
concerned. There should be no “hot air for sale”, Connie Hedegaard ,
Denmark’s environment minister, has insisted. “If surplus credits were
carried forward…the credibility and the legitimacy of the EU’s
position would be put at stake.”

But this is not just a technical row. Central and
eastern European countries firmly reject the ‘hot air’ label and talk
of the “big investments” to modernise their economies. “We earned
this…this is money. It is unacceptable to ask us to get rid of this,”
said one official.

But signs of a softening in the central and eastern
member states’ position have emerged. Earlier this month, their
environment ministers agreed that AAUs could “affect” the environmental
integrity of a Copenhagen deal, although they threw out more robust
language. Poland, the most vociferous defender of surplus credits, has
also proposed restrictions on how and when AAUs are sold, to ensure
that they do not flood the market. The Polish proposal, even if it has
been rejected by other countries, still shows that efforts to find a
compromise have begun.

Hot air

While EU member states have (just about) agreed that
‘hot air’ is a problem, they have not yet decided what to do about it.
One option, previously mooted by the Commission, is to mop up excess
credits with tougher emissions-reduction targets. But central and
eastern European countries have already rejected this option and it is
unlikely to fly in international negotiations.

Another option is a grand bargain linking surplus
carbon credits and the EU’s contribution to climate finance for
developing countries. A similar east-west split is evident on climate
finance, with Poland and some of its neighbours pressing for clarity on
how costs will be shared before the EU makes an offer. EU sources have
suggested that a possible deal could emerge from this week’s European
Council (29-30 October), but others think that the AAU problem may be
too technical to lend itself to a backroom deal at this meeting.

Swedish promises

Sweden, as holder of the presidency of the Council
of Ministers, has promised to steer the EU to a common position before
the Copenhagen summit, recognising that surplus credits could be a
make-or-break issue for international talks. Russia and Ukraine have
millions of AAUs – more gigatonnes of CO2 than covered by the EU’s ETS.

So far, Russia has had a low-profile role in
international negotiations, but analysts fear that it could launch
wrecking tactics in Copenhagen. “Russia is one of the potential
blockers of a deal in Copenhagen,” write Anna Korppoo and Thomas
Spencer, authors of the FIIA report. They urge developed countries to
engage with Russia so as to pre-empt a possible row over surplus carbon
credits that allows Russia to “hijack” Copenhagen in the final hours.

A Russian ending is not what climate-change
campaigners want from the current international talks – the last
sentence of Gogol’s “Dead Souls” is incomplete and the ending is
deliberately ambiguous. The EU will have to lay the ghosts of the
unused credits if it is to achieve something more than ambiguity and
uncertainty at Copenhagen.

*Anna Korppoo and Thomas Spencer: “The dead souls: how to deal with the Russian surplus”, FIIA (2009).