COPENHAGEN WILL DECIDE IF MARKETS OR GOV’TS HANDLE GHG CUTS

China, Greenpeace Challenge Kyoto Carbon Trading
Matthew Carr, June 19, 2009 (Bloomberg News)

SUMMARY
Copenhagen. The city’s name has come to represent what could be the most pregnant moment of the 21st century. The world’s hardest-hitting diplomats, representing some 180 nations, will convene there in December. They hope to hammer out a successor agreement to the Kyoto Protocol.

One of the most contentious of the controversies diplomats hope settle in Copenhagen is the role of the Clean Development Mechanism (CDM) certified emissions reduction (CER) program administered by the United Nations Framework Convention on Climate Change (UNFCCC). Through the CDM, European Union (EU) nation emitters, whose emissions are mandatorily capped under the terms of the Kyoto Agreement, can purchase CERs to offset their emissions instead of purchasing allowances to emit via the Emissions Trading Scheme (ETS).

Each CER covers the cost of technology or infrastructure that eliminates (offsets) 1 tonne of carbon dioxide (CO2) or its equivalent in greenhouse gas (GhG) emissions (CO2-e).

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According to the World Bank, CDM CERs accounted for 26% of the $126 billion 2008 emissions trading market.

Example of CERs at work: French water and energy company GDF Suez funded 2 Chinese hydroelectric projects in 2008 through the purchase of 1.6 million CERs, enough to offset its emissions almost 5 months.

Both the governments of emerging economies and environmentalists are dissatisfied with the UNFCCC’s CDM program.

China and Mexico advocate direct subsidies to their New Energy and Energy Efficiency programs rather than making them subject to the vagaries and unpredictability of the trading market. Direct investment gives the governments of the emerging economies much more control over where and how money is directed.

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Greenpeace International advocates for more public investment in emerging economies’ New Energy and Energy Efficiency industries and infrastructure because it would speed development. They argue that markets have been ineffective and emissions trading, especially offset purchasing, allows the continued use of emissions-intensive energies through the purchase of "emissions indulgences."

Market advocates say effective UNFCCC regulation of the CDM program prevents compromised local governments from corrupting investments in New Energy. They say market mechanisms will cut emissions as hard GhG caps are ratcheted down and the markets mature.

Both emissions markets fluctuated with the overall economy in the last 6-to-9 months. CER volume fell 30%, partially because of the economy and partially because the UNFCCC slowed the program to review and improve the certification process. The total dollar value fell 12% to $6.5 billion.

Both the emerging governments and the environmentalists would reduce private sector investment in the emerging economies’ energy and infrastructure development. Eliminating this part of the EU’s emissions reduction scheme would likely reduce the market’s value by as much as a quarter (25%).

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A contingent of nearly 170 companies, including many of the biggest financial players in the world (Goldman Sachs Group Inc., Morgan Stanley, Barclays Plc, JPMorgan Chase & Co.), objects. They say that taking the profit motive out of the climate change fight will hamper or even defeat it.

In the absence of a market in CERs, the buying and selling of European Union Allowances (EUAs) would be the venue by which the companies could invest in the fight against global climate change. An EUA permits the generation of 1 tonne of CO2 or CO2-e.

The Kyoto agreement expires in 2012. Some of the value lost in the emissions trading markets has been due to doubts about what happens to EUAs and CERs after 2012. A Copenhagen agreement will need to resolve that issue.

Creating an agreement in which the U.S. and China, the world’s 2 biggest GhG-generators, can participate will mean success.

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COMMENTARY
The companies advocating on behalf of the emissions trading markets will not disclose the value of their market participation – but it clearly is enough to make it worth their while to fight (and pay) for the opportunity to play.

Suggestive of the untapped potential in emissions trading, the number of EUAs and CERs traded doubled in 2008 over the 2007 volume. Even more suggestive of the scope of the emissions trading market's potential is that its doubled 2008 market value is matched by 2 days of trading in the oil futures markets.

Emissions market expert New Carbon Finance predicts the value of emissions trading will grow to $3 trillion by 2020.

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Whether the emerging economies and the environmentalists get their way or the money players win, an investment in New Energy and Energy Efficiency of $4.2 trillion will be necessary by 2030, according to the International Energy Agency (IEA) to cut back GhGs enough to prevent the worst impacts of global climate change.

After House passage of the Waxman-Markey bill, mandatory U.S. participation in emissions trading looks possible, though passage by the Senate remains in serious doubt. Much depends on domestic political events but President Obama has called the EU ETS a model for the kind of U.S. cap&trade system he and his Democratic party’s leaders are attempting to introduce. The Waxman-Markey legislation was designed with input from Richard L. Sandor, chairman and chief executive officer of the London-based Climate Exchange Plc, the world’s biggest GhG exchange.

Sandor predicts emissions trading will eventually be global and valued at $10 trillion per year.

China has strongly objected to any program that would hamper its economic growth but has been largely non-specific beyond matters that would directly affect it. Among its most stringent declarations is the insistence on some direct investment by developed nations to assist emerging economies in controlling emissions. China, which is setting the worldwide pace for New Energy development but still generates 70% of its electricity with coal, is particularly forthcoming in its call for rich developed nations to invest 1% of their GDPs in carbon capture and sequestration (CCS) technology for Chinese coal plants.

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QUOTES
- Henry Derwent, President, International Emissions Trading Association & former climate advisor to UK Prime Minister Tony Blair: “There is a growing fear that the whole low-carbon investment scene is being positioned toward the public sector…The public sector has no more than a tiny percentage of the money needed to solve the climate problem…”
- Richard L. Sandor, chairman/chief executive officer, Climate Exchange Plc: “Market forces will be incredibly effective [in GhG reduction…We’re going to see a worldwide market, and carbon will unambiguously will be the largest non-financial commodity in the world…”

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- Antoine van Innis, emissions trader, GDF Suez: “We have no certainty…”
- Yvo de Boer, executive secretary, UNFCCC: “There’s a risk the market falls victim [to direct governmental investment in emerging economies]…”
- Joris Thijssen, climate campaigner, Greenpeace: “The world should not rely [only] on offsets…We need to stop building coal-fired power stations [and waiting for emissions trading to reverse climate change]…”
- Milo Sjardin, head of North American research, New Carbon Finance: “Developing nations want more direct control…”
- Dirk Forrister, managing director, Natsource LLC and former climate change advisor to U.S. President Bill Clinton: “[Emerging-market investment for emissions reductions] needs to be built on a private-sector model…”