GORE CALLS FOR CAP-AND-TRADE WHILE PLAYERS PLAY THE MARKET

In his impressive appearance before the Senate Foreign Relations Committee, former Vice President Al Gore strongly reiterated his urgent call for putting a price on greenhouse gas emissions (GhGs) through a market-driven system governed by effective emissions caps and facilitated by tradable emissions allowances.

Gore: “Not next year. This year.”

Gore said initiating such a national mandatory cap-and-trade system would allow the U.S. to take a crucial leadership role in the global climate change treaty to be finalized in December at Copenhagen.

Gore: “A fair, effective and balanced treaty will put in place the global architecture that will place the world – at long last and in the nick of time – on a path toward solving the climate crisis and securing the future of human civilization.”

The Gore presentation demonstrated why it would be “the nick of time” with dramatic images of the rapid disappearance of the perennial arctic ice cap and the emergence of very dangerous methane gases from the permafrost.

A lengthy excerpt from the Gore testimony. About 4 minutes in, there's a stunning visualization of the loss of permanent arctic ice. From StartLoving1 via YouTube.

In response to the material in Gore's presentation, the new Foreign Relations Committee Chairman was adamant.

Senator John F. Kerry (D-Mass.), Chairman, Senate Foreign Relations Committee: "Frankly, the science is screaming at us…A global problem demands a global effort, and today we are working toward a solution with a role for developed and developing countries alike, which will be vital as we work to build consensus here at home in tough economic times…"

In response to the question of whether the current economic downturn would allow the U.S. to incur the costs associated with efforts to reverse global climate change, Gore answered by asking whether we could afford NOT to.

On the possibility of “clean” coal technology allowing the world to continue to do business as usual by burning coal and "cleaning" it, Gore was unequivocal: "We must avoid becoming vulnerable to the illusion that this is near at hand. It is not."

Senator Richard G. Lugar, (R-Ind), the Committee’s Ranking Member, questioned the political possibility of getting Republican recalcitrants and dubious Democrats to join in the passage of a U.S. cap-and-trade system.

It is worth quoting Gore’s statement to the committee at length on this because he was unequivocal.

Gore: “Quickly building our capacity to generate clean electricity will lay the groundwork for the next major step needed: placing a price on carbon… Developing countries that were once reluctant to join in the first phases of a global response to the climate crisis have themselves now become leaders in demanding action and in taking bold steps on their own initiatives. Brazil has proposed an impressive new plan to halt the destructive deforestation in that nation. Indonesia has emerged as a new constructive force in the talks. And China’s leaders have gained a strong understanding of the need for action and have already begun important new initiatives. Heads of state from around the world have begun to personally engage on this issue and forward-thinking corporate leaders have made this a top priority.”

What the former Vice-President was saying was that the developing nations' willingness to join in the global pact gives the U.S. the domestic political cover to do the right thing. He went on to assert that the U.S. public is also ready.

Gore’s statement (continued): “More and more Americans are paying attention to the new evidence and fresh warnings from scientists. There is a much broader consensus on the need for action than there was…”

Mr. Gore enumerated the elements he considered crucial for a global treaty: “[1] Strong targets and timetables from industrialized countries and differentiated but binding commitments from developing countries that put the entire world under a system with one commitment: to reduce emissions of carbon dioxide and other global warming pollutants that cause the climate crisis…[2] The inclusion of deforestation, which alone accounts for twenty percent of the emissions that cause global warming…[3] The addition of sinks including those from soils, principally from farmlands and grazing lands with appropriate methodologies and accounting. Farmers and ranchers in the U.S. and around the world need to know that they can be part of the solution…[4] The assurance that developing countries will have access to mechanisms and resources that will help them adapt to the worst impacts of the climate crisis and technologies to solve the problem; and…[5] A strong compliance and verification regime.”

Both the passionately Democratic Gore and the loyal Republican Lugar stressed the economic value to rural landowners of earning marketable credits for sequestering GhGs through scientific soil management. This seemed to hint at a bipartisan agreement that may facilitate legislation.

Gore's last point (calling for a "strong compliance and verification regime") answers a recurring criticism of the European Union (EU) Emissions Trading Scheme (ETS), the world’s foremost existing cap-and-trade system.

Many have attacked the EU ETS as vulnerable to “gaming” and “manipulations” by the corporate entities it is intended to control. A new round of such criticisms is emerging in the wake of the global economic downturn. Power producers and emitters in the UK (especially steel, concrete and glass manufacturers and financial speculators) are accused of dumping emissions allowances (called European Union Allowances, EUAs, which are traded at a price per tonne of carbon dioxide equivalent, CO2e, emitted) to make back financial losses. The dumping is reportedly a factor in driving down EUA prices, which in turn makes emitting GhGs cheaper.

Mark Lewis, emissions analyst, Deutsche Bank: "This [ETS] was not designed as a scheme to give corporates cheap short-term funding options in the face of a credit crunch meltdown where banks are not lending, but that appears to be what's happening…"

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While some see this as an abuse of the cap-and-trade system, some see it as a legitimate use of the system. If the companies sell their allowances, it does not excuse them from the burden of capping their emissions.

They must either emit less or pay the penalty. If they emit less, the fight against global climate change wins. This would be a “rational” use of EUAs.

Henrik Hasselknippe, global head of carbon, Point Carbon: "Recession in Europe is bringing a slowdown in manufacturing meaning less production and less emissions. Companies are doing exactly what is the rational thing to do in these circumstances which is to sell if they are long on credits. It is right that if they are emitting less then they do not need the credits so much and the price of carbon will fall…"

When business picks up, the companies will have to buy GhG allowances later if they intend to resume producing and emitting. It will probably be via the same market where they are now selling, probably at a higher price. This money will, hopefully, go toward the building of New Energy infrastructure, so the fight against global climate change wins again.

If they do not purchase EUAs in the market, the monitoring system now in place will, hopefully, identify them as violators of their caps. This will cost them, in fines significantly greater than the cost of allowances. That money will also, theoretically, go toward the building of New Energy infrastructure, so the fight against global climate change wins even bigger.

It is not quite so simple, of course. The sell-off has flooded the market, driving the price of EUAs down, making it cheaper to emit and cutting into the building of New Energy infrastructure. Also, the situation will eventually challenge the "strong compliance and verification regime" the EU ETS is supposed to have in place.

Investment in New Energy projects is estimated to be off 30%, as reflected by a drop in the trading of United Nations (UN) Clean Development Mechanism (CDMs) Certified Emission Reductions (CERs).

Unnamed small New Eneregy project developer in China: "I'd say there is half the number of players now than there was a year ago. Banks have cut back considerably…"

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The EU ETS must (and will) do what it has done from its inception when businesses found ways to manipulate the market. It will make regulatory adjustments.

In 2006, the price of allowances collapsed because of an excess of permits. The EU had given away too many permits for the 2005 to 2007 phase of the scheme in order to draw companies in. This was instructive. There were short-term abuses but correctives were installed in the 2008 to 2012 phase of the scheme. Prices normalized last year, until the financial downturn.

The point of using a market system is that for better and for worse it attracts players. While this is no comfort to environmentalists who are less interested in market system dynamics than ecological system dynamics, it is the reason leaders like Gore, who must straddle the chasm between business and naturalists, see cap-and-trade as the best compromise.

James Thompson, finance director, EcoSecurities: "The short-term price will also recover when the flow of credits stop coming on to the market and long-term pressure will come from governments realising they need a strong carbon price for environmental reasons."

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Al Gore urges lawmakers to adopt a binding carbon cap; The former vice president presents new science to a Senate panel and pushes for an international climate pact by the end of this year in order to avert catastrophic global warming.
January 29, 2009 (Washington Post via LA Times)
and
Britain's big polluters accused of abusing EU's carbon trading scheme
Terry Macalister, 27 January 2009 (UK Guardian)
and
Statement to the Senate Foreign Relations Committee
Hon. Al Gore, January 28, 2009 (Committee Website)

WHO
Former Vice-President, Nobel laureate and academy award-winner Al Gore; Senate Foreign Relations Committee (Senator John Kerry (D-Mass), Chair, and Senator Richard G. Lugar, (R-Ind), Ranking Member); EU ETS; UN CDM; Lafarge, world's biggest cement maker; Henrik Hasselknippe, global head of carbon, Point Carbon; James Thompson, finance director, EcoSecurities

WHAT
Former Vice-President and Nobel laureate Al Gore reaffirmed his call for the U.S. to join an international emissions cap-and-trade market even as new ways for companies to use such a market to their own benefit, cashing in emissions allowances to offset losses, was emerging in the EU ETS.

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WHEN
- Recent months: A major sell-off of emissions allowances in the EU ETS, precipitating a drop in EUA prices as well as an associated fall in CER prices on the UN CDM
- January 28: Gore began his appearance before the Senate Foreign Relations Committee with a short slide show that updated his 2006 Oscar-winning documentary "An Inconvenient Truth."
- December 2009: Gore stressed the importance of committing the U.S. to a cap-and-trade system before the Copenhagen world summit.
- Next 12-to-18 months: Emissions permit prices and and CDM CER prices expected to come back with the global economy.

WHERE
- Gore and Kerry emphasized the importance of bringing big emerging economies (such as Brazil, China, India and Indonesia) into the international cap-and-trade system.
- Lafarge says it is not selling off its EUAs but moving them between countries to improve its financial position.

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WHY
- Gore told the committee that even if the world halted greenhouse gas emissions now, it could experience a temperature rise of between 2.5 to 7.5 degrees Fahrenheit by 2100.
- As a result of free emissions allowances made early in EU ETS development: A World Wildlife Fund study from Point Carbon, published in March last year, estimated that "windfall profits" of between €23bn (£21.4bn) and €71bn would be made under the ETS between 2008 and 2012, assuming a price of €21 and €32 for an EUA. Up to €15bn was expected to go to British companies.
- It is estimated as much as €1bn in EUAs have been sold off in recent months. Prices have dropped 60%, from €30+ to ~ €12 per tonne.
- CantorC02e, an EUA broker, is scaling back. The share price of EcoSecurities, a stock-listed emissions offsetting company, has dropped from £1.50 to less than 30p.
- Cement production is expected to drop 20% in 2009. Steel volumes may fall 15%.
- With the fall of EUA prices, there has been a 30% falloff of investment in emerging economy New Energy projects reflected in United Nations (UN) Clean Development Mechanism (CDMs) Certified Emission Reduction (CER) prices.

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QUOTES
- Gore, on the consequences of unchecked climate change: "[A temperature rise of 7.5 degrees Fahrenheit] would bring a screeching halt to human civilization and threaten life everywhere on Earth, and this is by the end of this century…"
Gore, on the politcal path to cap-and-trade: "I'm a recovering politician. I'm on about Step Nine…"
- Oscar Reyes, researcher, Carbon Trade Watch: "The ETS has bowed to corporate self-interest at every stage of its design and implementation, so there is no surprise that it is now being used as a cash cow to see firms through a difficult financial phase…"
- LaFarge spokesman: "We mainly sell our credits from one country to another, for example if we have too many in France then we might sell them to Romania if we don't have enough there. Very few credits are being sold on the [open] market…"