Can Carbon Markets Help Stop Deforestation in the Amazon?

I spent the morning at a meeting in midtown on the subject of the nascent carbon markets in Brazil. They're tiny at the moment, and they're likely to remain tiny -- unless and until the US implements a cap-and-trade system with two key features: international offsets, and the acceptance of deforestation avoidance as a genuine reduction of carbon emissions.

Both these features are highly controversial. Looked at through European eyes, international offsets defeat the purpose of a cap-and-trade system, which is to cap domestic carbon emissions and make them expensive. If you allow domestic companies to pay for international rather than domestic emissions reductions, domestic carbon emissions become higher than they otherwise would be, and the cost of carbon credits lower.

On the other hand, global warming is, well, global -- which means that it makes sense on a global level to reduce carbon emssions in the first case where it's easiest and cheapest to do so. Offsets are a good way of doing that, but the problem is that they're very hard to ratify. In order to count as a true offset, reductions have to happen that wouldn't otherwise have occurred, and they can't just "leak" to some other part of the economy in question.

Given the difficulties in measuring and enforcing foreign offsets, they're not part of the EU's cap-and-trade system at all. But they are part of the Clean Development Mechanism set up under the Kyoto protocol, the world's second-largest carbon market. Brazil, it turns out, is the third-largest producer of CDM credits, behind China and India, and a few companies are making a few million dollars here and there by selling them.

Now the biggest environmental issue in Brazil is, without a doubt, the deforestation of the Amazon. Deforestation activities account for 75% of Brazil's greenhouse gas emissions, and remove from the planet a crucial source of carbon dioxide absorption capacity.

Under CDM, however, you can't get carbon credits for simply avoiding deforestation: you either need to replant previously-deforested trees (reforestation) or plant new trees in areas which never had them in the first place (afforestation).

So the big hope among the Brazilians -- which is probably an even bigger hope in other Amazonian countries like Colombia, Ecuador, and Peru -- is that a future American cap-and-trade system will not only allow foreign offsets but also allow credits for avoided deforestation.

This seems suspiciously like getting money for doing nothing, which in many ways it is. But nothing is a vast improvement on the deforestation which is going on right now and which is going to continue to go on unless and until someone stops it.

On the other hand, I'm not sure that a US cap-and-trade system is necessarily the best mechanism by which to start incentivizing Brazil to stop deforestation activities. I'd much rather see the US mechanism becoming fungible with the EU system. Once that happened, if permits were auctioned off, some of the proceeds from those auctions could then be used directly to pay for deforestation aversion projects in Brazil and the rest of the Amazon. Trying to do it with offsets seems to me difficult and prone to all manner of unintended consequences.

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