EMISSIONS TRADING: BOOM? WASTE?

A new study by emissions markets experts Point Carbon makes a pair of interesting and probably valid assumptions: (1) The U.S. will have joined an international cap-and-trade scheme by 2020, and, (2) the EU will have established a 25% emissions cut goal which includes the aviation industries.

Based on these assumptions, Point Carbon expects the global emissions markets to be worth 2 trillion euros by 2020. (That's $3.1 trillion.)

Meanwhile, weaknesses have been and continue to be exploited in the process by which projects are identified and approved as emissions offsets and win investment from Kyoto Mechanism-enrolled nations.

A Realistic Policy on International Carbon Offsets highlights the weaknesses: “…in practice, much of the current CDM market does not reflect actual reductions in emissions, and that trend is poised to get worse. Nor are CDM-like offsets likely to be effective cost control mechanisms…”

The United Nations (UN) Clean Development Mechanism (CDM), formed to issue Certified Emissions Reductions (CERs), is working to make the process more foolproof and effective. Unfortunately, that slows the process down.

The Realistic Policy study: “…the rate at which CDM credits are being issued today-at a time when demand for such offsets from the European ETS is extremely high-is only one-twentieth to one-fortieth the rate needed just for the current CDM system to keep pace with the projects it has already registered. If the CDM system is reformed so that it does a much better job of ensuring that emission credits represent genuine reductions then its ability to dampen reliably the price of emission permits will be even further diminished…”

Realistic Policy does not, however, recommend jettisoning cap-and-trade. Instead, it proposes alternative measures for the coming U.S. emissions cap-and-trade program: “…More explicit cost control mechanisms, such as "safety valves," would be much more effective…Offset caps as envisioned in the Lieberman-Warner draft legislation, for example, do little to fix the underlying problem of poor quality emission offsets because the cap will simply fill first with the lowest quality offsets and with offsets laundered through other trading systems such as the European scheme…Offsets can play a role in engaging developing countries, but only as one small element in a portfolio of strategies..."

The study calls for far more than just a trading system.

Realistic Policy: "...First, the U.S., in collaboration with other developed countries, should invest in a Climate Fund intended to finance critical changes in developing country policies that will lead to near-term reductions. Second, the U.S. should actively pursue a series of infrastructure deals with key developing countries with the aim of shifting their longer-term development trajectories…”

To propose such multilateral agreements suggests the study's authors don't remember the early years of the Bush administration very clearly. On the other hand, January 2009 is only 8 months off.

These critics are not the first to find shortcomings in the CDM process. The two most important failures so far, fluctuating market prices due to inadequate auctioning of allowances and failure to focus CERs precisely, are widely recognized.

Abuses arise from the question of “additionality.” (See EMISSIONS TRADING: WHAT IT'S ALL ABOUT and CAP-AND-TRADE: QUESTIONS ARISING) It is not at all clear projects funded through CDM would not have been done without CDM funding. This makes the mechanism more a form of financing than an emissions reduction and global climate change mitigation strategy.

Patrick McCully, director, International Rivers: "It would seem clear that a project that is already built cannot need extra income in order to be built…Judging additionality has turned out to be unknowable and unworkable. It can never be proved definitively that if a developer or factory owner did not get offset income they would not build their project."

Another problem with the mechanism is that it has financed greenhouse gas emissions reduction projects such as plant renovations in favor of building New Energy infrastructure.

It is important to remember that nothing as grand in scale as the UN CDM program - and the associated European Union (EU) Emissions Trading Scheme (ETS) - has been created in one ambitious move before. If critics have complaints, they would have had - absent this effort - nothing to complain about except rising greenhouse gas emissions and worsening global climate change phenomena.

Critics of the Kyoto Protocols, of the concept of offsets and of the concept of cap-and-trade are quick to take studies like these as a basis on which to reject the entire program. The UK government has a different attitude.

UK government spokeswoman: "We completely reject any assertions that [it] is fundamentally flawed…We've worked consistently for and seen improvement in CDM processes over the past few years of its operation. We believe the CDM is essentially transparent and robust, though we will continue to press for the environmental integrity of projects."

Even the authors of the Realistic Policy recognize that for a battery of practical and idealistic reasons, an international cap-and-trade system is coming. Though very important detail, indeed, the rest is detail.

From Reuters: The Big Board of Emissions Trading (click to enlarge)

Billions wasted on UN climate programme; Energy firms routinely abusing carbon offset fund, US studies claim
John Vidal, May 26, 2008 (UK Guardian)
and
Carbon market could be worth 2 trillion euros by 2020: Study
May 22, 2008 (AFP via Yahoo News)

WHO
Point Carbon; Michael Wara and David Victor, Professors of Law, Stanford University; Patrick McCully, director, International Rivers; United Nations (UN) Clean Development Mechanism (CDM)

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WHAT
- Point carbon expects emissions markets to reach a 2 trillion euro value.
- The Wara and Victor study A Realistic Policy on International Carbon Offsets and McCully’s Discredited Strategy both spotlight shortcomings in the UN CDM program which identifies emissions offset projects.

WHEN
- In 2020, Point carbon sees the U.S. representing 67% of the global emissions market and the EU to be 23%.
- The CDM market is presently valued at $20 billion and is expected to be worth $100 billion in 4 years.
- The UN CDM has slowed its approval process in an effort to ascertain whether a project really would not be funded without the Kyoto offset factor. Unfortunately, slowing the approval process also slows mitigation of climate change.

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WHERE
- Point Carbon’s evaluation also assumes participation by Australia, New Zealand, Canada, Japan, Korea, Mexico and Turkey.
- UN CDM projects are generally in the developing world. CERs for them are generally purchased by businesses and industries in the developed world to earn allowances for GhG emissions greater than they were given or could purchase from their own governments.
- The bulk of CERs have been purchased from Europe and japan.

WHY
- Point carbon’s predictions assume a E50/tonne price, twice what the price is at present.
- 1,000 offset projects have been approved by the CDM and 2,000 more are pending.
- The problem of additionality: (1) Almost every planned hydro, wind and natural gas-fired plant in China applies for CDM credits. The government would see to the building of these projects anyway; (2) 75% of all CDM projects were complete by the time they were approved for CERs, suggesting they already had funding.
- Additionality may encourage developing nations to postpone mandating emissions reductions strategies because that would incentivize limiting emissions that otherwise would generate CER revenues.

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QUOTES
- David Victor, Professor of Law, Stanford University: "It looks like between one and two thirds of all the total CDM offsets do not represent actual emission cuts…Traders are finding ways of gaining credits that they would never have had before. You will never know accurately, but rich countries are clearly overpaying by a massive amount…"
- Patrick McCully, director, International Rivers: Many observers had hoped that the CDM would promote renewables and energy efficiency. Yet if all projects now in the pipeline generated the CERs they are claiming up to 2012, non-hydro renewables would attract only 16% of CDM funds, and demand-side energy efficiency projects just 1%. Only 16 solar power projects - less than 0.5% of the project pipeline - have applied for CDM approval.
- CDM spokesman: "There is a responsible level of scrutiny. The process is in continual reform. All the projects are vetted independently and are then certified by third parties. There are many checks and balances and we can show how all projects are vetted."