In May the National University of Kaohsiung put on the first "carbon neutral" athletics event in Taiwan's history, attracting 2600 students of environmental studies from 41 universities throughout Taiwan. The organizers weren't claiming that all participants reached the various competition sites in Kaohsiung on foot or in electric vehicles that drew their power from green energy sources. Instead, the event organizers purchased 50 metric tons of carbon credits to "offset" the CO2 that participants created in using transportation.

Those 50 tons of carbon credits came from the Xikou hydroelectric power plant of Chia Nan Enterprise, a company funded by the Chia Nan Irrigation Association. At the end of last year, the plant garnered international carbon credit certification, earning a total of 87,000 tons of carbon offset credits over the first period of certification.

South Pole Carbon Asset Management of Switzerland both helped the Xikou plant to obtain certification and was responsible for selling the carbon offsets. Jules Chuang, who heads the company's Taiwan office, explains that South Pole, one of five major carbon credit certifiers around the world, handles more than 8 million tons of carbon credits per year.

The credits were certified by the Taiwan branch of the French firm Bureau Veritas, and they obtained Voluntary Carbon Standard (VCS) certification from the VCS Association office in Washington DC. Chia Nan Enterprise was the first company in Taiwan to get its carbon credits certified. The more than 80,000 tons of credits were calculated based on the 0.6 kilograms of emissions savings per kilowatt hour for hydroelectric power generation as compared to Taiwan's average. Those credits accumulated over two and half years from the plant's opening until October of 2009.

Growth in value of global carbon trading market

Currently, most of Chia Nan's 80,000 tons of carbon credits have been sold. The two main buyers were a large European car rental company, which buys carbon offsets for the sake of its corporate image, and a Dutch NGO, which encourages people to live carbon-neutral lives and resells the carbon offsets to consumers.

More and more businesses and individuals are voluntarily purchasing carbon credits to offset their carbon footprints. For instance, since 2005 HSBC has purchased 900,000 tons of carbon credits to neutralize what its branches worldwide create by consuming electricity, taking business trips, and so forth. It now bills itself as a "carbon-neutral bank." Recently, Cathay Pacific and Qantas have begun to ask customers buying tickets whether they would like to pay an additional US$5 or US$10 to offset their share of the flight's emissions. And the 2012 London Olympics is billing itself as the first "carbon-neutral Olympics."

As opposed to these "voluntary carbon markets," the earliest, largest-scale emissions market was aimed at compulsory reductions. It emerged in 2005 after the Kyoto Protocol took effect.

In response to global climate change, more than 100 nations signed the United Nations' Kyoto Protocol in 1997 with the goal of putting a worldwide cap on greenhouse gas (GHG) emissions. A total of 39 Annex I countries-mostly advanced industrial nations and Eastern European nations-agreed to enforceable cuts in their GHG emissions. Under the treaty, their average yearly emissions in the period from 2008 to 2012 must represent a 5.2% reduction from 1990. It was originally planned that controls would go into effect for the remaining signatory nations in 2013, but talks to accomplish that fell through at the Copenhagen Climate Conference of 2009 due to Chinese opposition.

Humanity's reliance on automobiles is an important cause of the continual rise in GHG emissions. It's a piece of the puzzle that's readily controllable with a carbon tax but not so much with cap and trade. The photo shows a typical street scene in Bangkok.

The Kyoto Protocol outlined three mechanisms for cutting emissions, which have become the main drivers for pushing carbon trading among Annex I countries.

First of all, Kyoto's emissions trading plan uses a "cap and trade" mechanism. Every nation's government, after determining its overall cap, divides the total among major sectors and industries. Each is then granted a carbon allowance, which is divided among individual companies and organizations.

Yet although all Annex I nations committed themselves to cutting emissions, they have different carbon reduction goals, as well as different skills to employ and costs to bear in making those cuts. Emissions trading allows nations for which cutting emissions is relatively inexpensive to cut more than is required and then resell the difference as carbon credits on the open market (with a freely fluctuating price). On the other hand, nations facing high costs in cutting emissions can instead simply buy carbon offsets. This practice of "allowing some to do and some to buy" not only allows all to get what they need, it also creates business opportunities. The system demonstrates a belief in the capitalist view that "the market can solve everything."

Highly industrialized Western European nations, which already have emissions cutting and energy saving measures in place, will need to research new technologies to cut their emissions substantially, and that research will be very expensive. Consequently, the Kyoto Protocol also provides two "flexible mechanisms." The first is the Clean Development Mechanism (CDM), whereby wealthy nations can invest money or supply technology to help China, India and other developing nations develop clean energy and cut their carbon emissions. In that way developed nations can obtain credits to offset going over their caps.

Another flexible mechanism is Joint Implementation (JI). Its basic concept is similar to CDM, expect that it covers investment in developed economies or in "economies in transition." (A JI project, for instance, might involve a British company investing in solar power systems in Spain). A JI project would receive carbon credits in accordance with the amount of emissions reductions achieved.

Because 23 of the 39 Annex I countries are members of the European Union, the EU separately drew up the EU Emissions Trading Scheme to encourage its member countries to trade carbon credits among themselves. Consequently, trade of carbon credits within Europe represents 60% of the global total.

Several other compulsory carbon credit trading markets also exist, including one set up by the Regional Greenhouse Gas Initiative, which comprises 10 northeastern US states (an eleventh state and several Canadian provinces currently have observer status). A climate action plan aims to reduce emissions in those states by 10% in the 10 years beginning 2008. There is also the Chicago Climate Exchange, which focuses on reducing the emissions of major Midwestern companies, and a carbon trading program in New South Wales, Australia.

"The emissions trading market has grown quickly," notes Lee Chien-ming, an assistant professor at National Taipei University's Institute of Natural Resource Management. Lee explains that the global market has exploded in size from US$10 billion in 2005 to US$126 billion in 2009 (see graph, p. 41). The amount of CO2 traded likewise rose from a "yield" of 350 million tons (with all greenhouse gases converted into CO2) to 7.3 billion tons.

"The main advantage of cap and trade is that it facilitates control over the total amount of carbon emissions," says Lee. In this respect, it differs from other approaches to reducing greenhouse emissions, such as a carbon tax or mandated efficiency standards, he explains. And ultimately only a global cap can rein in carbon emissions around the world.

Although the "carbon tax," which is based on taxing the use of oil and coal, can stem the use of fossil fuels, if the tax is set too low, its impact on business will be insufficient. On the other hand, if it is set too high, then knock-on effects can damage the whole economy, dooming the scheme to failure.

What's more, "Cap and trade creates incentives for cutting emissions." Lee explains that once a market price is established, it provides incentives for companies that can cut carbon emissions at a low cost to make all the cuts they can. On the other hand, businesses for which cutting carbon is a high-cost proposition will choose either to slowly cut them or to cease operations. Furthermore, various carbon-cutting technologies, including green energies (such as solar, wind or biogas), clean coal, high-efficiency combustion technologies, factory pollution controls, and carbon capture and storage, can be commercialized faster as a result of market incentives, so that they won't remain reliant on government subsidies.

With market incentives pushing businesses to purchase offsets or seek emissions cuts, it is reasonable to expect greater momentum toward emissions cuts. Consequently, for several years international environmental organizations didn't raise objections to cap and trade.

"After the Copenhagen Conference, however, several NGOs, including Friends of the Earth, did an about face and began to oppose cap and trade as the main method for fighting carbon emissions," says Pan Han-shen, a spokesperson for the Green Party in Taiwan, who has been following the issue for a long time. Pan notes that since the EU began to trade carbon credits in 2005, most nations, apart from a few in northern Europe, have not been able to make good on their promises for reductions.

The producer Annie Leonard, who was selected as one of Time magazine's "environmental heroes" in 2008, pointed out several of the system's flaws in her video The Story of Cap and Trade.

First, she notes that after the EU instituted carbon trading, "The price of permits bounced around like crazy, the cost of energy jumped for consumers, and-guess what?-carbon emissions actually went up."

She believes that giving away carbon permits is at the root of the problem: If polluters are supposed to pay, then why are they receiving free permits from the government, which they can then sell for a profit? A more reasonable method, she argues, would be to let the government sell permits to polluters and then use that money to develop clean energies and compensate those most harmed by climate change.

In response, Lee, a strong supporter of cap and trade, explains that if you begin with the premise of limited natural resources, the most effective and fair system would indeed be to give all permits to the government to auction. Yet so doing would have a huge impact on existing firms. To overcome this obstacle, advanced nations typically provide free permits for businesses in the early stages of their emissions-cutting plans. The idea is to bring more firms into the system. Later, they can slowly begin to raise the proportion of permits they auction. An environmentally preferable system that started by strangling business interests would be very hard to implement.

"Cap and trade has time limits," Lee says. "The main point isn't about now but rather about whether future targets can be met." Lee cites the system for the Regional Greenhouse Gas Initiative in America. It's a 10-year plan: During the first five years the current rates of emissions are maintained, and then for the last five years there's a goal of 2% reduction in each year, with an ultimate goal of a reducing emissions by 10%.

Under the principle of a global cap, wealthy countries don't have to achieve their targets only by cutting their own emissions. A certain proportion (around 10%, but varying from nation to nation) can be attained by purchasing offsets from poor nations. The practice of acquiring carbon offsets has been ridiculed as being akin to a papal indulgence: a way for guilty parties to pay for absolution rather than reform their behavior. But if they could enable developing nations to adopt green energy and emissions-cutting technologies and keep them from repeating the environmental mistakes of developed nations, offsets would be making huge contributions.

"The problem is: Can offsets truly cut carbon emissions?" Pan has his doubts. The Kyoto Protocol's Clean Development Mechanism (CDM) is vulnerable to fraud or misrepresentation. And with additional concerns about authentication and inspection, the whole process is susceptible to corruption. "And who authenticates the authenticators?"

Jay Fang, chairman of Taiwan's Green Consumers' Foundation, who has participated in the development of numerous CDM projects in mainland China, explains that the Kyoto Protocol tries to ensure that CDM plans really go all out in pushing the envelope to reduce carbon, rather than simply picking the lowest-hanging fruit. Consequently, its regulations require that applications must clearly demonstrate "additionality"-how projects applying for CDM designation will reduce emissions more than would have occurred in the designation's absence.

Take, for instance, a wind power generation project: If a Chinese business plans to invest RMB100 million but will only receive an estimated RMB90 million in revenues, it wouldn't normally be a beneficial investment. But if it could receive an additional RMB20 million as a CDM project, then that would pull the project out of the red and into the black. The project would meet the criteria of "additionality." Industries are thus encouraged to invest in technologies to cut carbon emissions that are regarded as high-risk endeavors or for which economic returns are relatively low.

On the other hand, a cement factory could work to recover its waste heat and thus reduce carbon emissions. That investment would have represented a "high risk" in earlier years and met the criteria of "additionality." But industrial heat recovery has now become a standard practice with a high rate of return on investment. Consequently, it no longer qualifies as a CDM project.

"The problem is that according to the economic development systems of many developing nations, governments simply cannot approve loss-making ventures," Fang explains. Consequently, CDM projects in such countries are prone to fraud, with companies keeping two sets of books.

The most dangerous aspect of carbon trading is that it can make people believe that the problem of global warming has already been taken care of and make them forget that there are many other ways to help solve it.

Opponents have long held that the main "pathogen" in global warming is a reliance on models of economic development and ways of life that are dependent on the consumption of fossil fuels. And with cap and trade, nations aren't attacking the problem at its heart by changing their path of economic development or their reliance on these fuels. Instead they're pinning hopes on a market mechanism to solve the problem. "It's as if you were running a fever, and instead of trying to treat the illness causing it, you instead just continually sprinkled on cold water," says Fang.

What's even worse is that these compensation mechanisms may end up rewarding people for having created carbon emissions: "If you can just spend US$5 to "atone for your sins" and consequently believe that you've taken care of your responsibility for the environment, you can then ride as many airplanes as you like free from guilt," says a spokesperson for responsibletravel.com.

Apart from taking a fundamentally wrongheaded approach, the cap and trade system has also been attacked for national caps that are set too high and for toothless implementation controls. Consequently, critics deride the system as nothing but "smoke and mirrors."

To cite an example, Pan notes that Taiwan has declared that its aim is to cut carbon emissions 30% by 2020. The reduction, however, isn't from the 260 million tons it is actually creating in 2010 but rather from the 460 million tons it would "naturally" be expected to be using in 2020 without reforms. Imagine if someone who weighed 70 kilos wanted to lose weight, but lacked the willpower to diet, so instead said, "In three years I would naturally grow to 100 kilos, but I'm going to cut that to 80." In reality, he will have gained 10 kilos.

"Apart from setting the cap too high, the government hasn't drawn up an emissions reduction schedule." If there are no concrete numbers on the emissions cuts expected every year, Pan asks, then how can you go about trading carbon offsets? If the government is determined to avoid a carbon tax and only employ the tool of cap and trade, then based on the experience of the European Union, shouldn't it at least hold discussions about lowering the cap, devise a clear schedule, and move from giving away permits to auctioning them? Only by so doing, Pan argues, would Taiwan be able to approach the goals envisioned for the system.

"Turning carbon emissions into a financial asset is unavoidable and correct," says Niven Huang, the secretary general of Taiwan's Business Council for Sustainable Development. But that single tool is insufficient to accomplish the monumental task of cutting carbon emissions. He believes that the government ought to create a comprehensive national framework for cutting emissions as soon as possible and then get stakeholders (such as enterprises) to debate and revise the proposal.

Among the questions confronting policy makers: When the cap is set, how is the total to be divided? How much should be expected from raising energy efficiency, and how much from shifting to green energy? What allowances should be given to the transportation and manufacturing sectors, and what to consumers? If the proposed measures are still insufficient to bring Taiwan under the cap target, then additional steps must be taken. How much would carbon trading or a carbon tax be able to reduce emissions farther? But after discussing these issues for 10 years in Taiwan, the various entrenched parties are showing little willingness to budge, and the government still can't come up with an overall blueprint. It's really worrying.

In reality, this problem isn't just afflicting Taiwan. The whole world lacks experience in managing "carbon assets." The European Union keeps making mistakes and correcting as it goes, and Taiwan is likewise feeling its way forward. Let's hope all quarters can be tolerant of dissent, listen to each other and cooperate to achieve the most effective strategies. There's no time to waste.