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A flagship European scheme designed to fight global warming is set to hand hundreds of millions of pounds to some of Britain's most polluting companies, with little or no benefit to the environment, an investigation by the Guardian has revealed.

Dozens of multinational firms stand to benefit from the windfall, which comes from the over-allocation of carbon permits under the European emissions trading scheme.

The permits are given to companies by the government, and are supposed to account for their carbon pollution over the next five years. But figures published by the European Commission show that many companies have been allocated far too many permits, which they can sell for cash.

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Pollution trading in the USA has saved industry a lot of time, money and trouble. However, pollution trading has also created ‘toxic hotspots’ in poor areas and in communities of colour, reinforcing existing environmental injustices.

When a polluter buys credits in a trading scheme, this enables them to continue, or even increase, their own pollution. On a global scale credits generated in the trade in greenhouse gases will come from dubious projects in countries far away from the source of the original pollution. Not only are credits enabling pollution to continue at home, but the generation of those credits is highly suspect as well. Communities living with factories on their doorstep will continue to suffer the effects of pollution indefinitely.

In the USA, the main traded pollutants in the schemes are sulphur dioxide (SO2) and nitrogen oxides (NOx). These pollutants are the main sources of smog, acid rain and have adverse impacts on human health. Particulate pollution (NOx and SO2 in the air) cuts short the lives of an estimated 30,000 Americans each year. The US Environmental Protection Agency (EPA) claims that its pollution trading schemes are a success and have achieved low cost reductions far beyond its expectations. The model for the national acid rain schemes is often cited as a smaller local program - the Regional Clean Air Incentives Market (RECLAIM), which is centred in the Los Angeles area.

Sulphur trading in Los Angeles

The RECLAIM program “includes 370 facilities from various industrial sectors, including oil refineries, power plants, aerospace companies, asphalt batch plants, chemical plants, cement plants, and many more.” The EPA state that “the major benefit of RECLAIM is that air quality goals necessary to protect public health and the environment are met in a more cost-effective manner.” It was introduced in 1993 and trading began one year later. However prior to its introduction, there was a lengthy dismantlement of the previous ‘command and control’ programme. This all added up to a loss of up to 10 years in pollution control legislation in the LA area. LA is one of the most polluted regions in the USA and with each year of inaction during the slow implementation of RECLAIM, thousands of people died.

Trading programmes in effect privatise the problem of air pollution. Government and communities lose control over environmental protection, placing it in the hands of the polluters. When the incentive to reduce emissions is profit and cost-effectiveness, there is an incredible pressure to cheat by overestimating reductions, while underestimating emissions. This can lead to fraudulent claims of reductions, inaccurate reporting of emissions and general gaming of the system as demonstrated by the citations issued in March 2002 to Anne Scholtz. Scholtz, prominent architect of RECLAIM and CEO of the emissions broker ACE, was caught filing false trading reports. If fraud is prevalent in a small local scheme such as RECLAIM, it will almost certainly be rife in the international trade in greenhouse gases where it is impossible to properly monitor and enforce accurate reporting of emissions reductions and honest filing of trades.

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Trading programmes in effect privatise the problem of air pollution. Government and communities lose control over environmental protection, placing it in the hands of the polluters.

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MIT study praises European Cap and Trade

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While the EU ETS has attracted broad interest from policy makers crafting national cap-and-trade systems, it is also playing another less-noticed role: as a model or prototype for a global CO2 emissions trading system. A key achievement is its ability to balance centralized and decentralized control. The EU ETS is centrally administered, but it gives participating nations—including some relative newcomers to economic markets and institutions—significant control over setting their emissions caps, distributing allowances, and overseeing trading and monitoring procedures. "We may be talking 20, 30 years down the road, but that's the sort of basic architecture towards which some sort of global climate regime would tend," said Ellerman. "Looking beyond the US, I think the EU ETS has a lot to tell us about how a global system might actually work."

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I tend to think countries with carbon tax regimes could undermine a future global carbon trading scheme. It might even create greenhouse gas pariahs for multinationals to transform into greenhouse gas sanctuaries offering kick-back and graft as a way of avoiding international limits on carbon production.

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"There's no example of an air pollution problem anywhere in the world that has been solved without a cap or legal limit on how much of that pollution can be dumped into the sky. A cap gives you that legal limit, where a tax allows people to potentially keep on paying a modest amount and keep on polluting" - EDF President Fred Krupp

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[ 13 September 2008: Message edited by: Fidel ]