More Carbon Trading Double Counting

From the Guardian:

Leading academics and watchdog groups allege that the UN’s main offset fund is being routinely abused by chemical, wind, gas and hydro companies who are claiming emission reduction credits for projects that should not qualify. The result is that no genuine pollution cuts are being made, undermining assurances by the UK government and others that carbon markets are dramatically reducing greenhouse gases, the researchers say.

The criticism centres on the UN’s clean development mechanism (CDM), an international system established by the Kyoto process that allows rich countries to meet emissions targets by funding clean energy projects in developing nations. Credits from the project are being bought by European companies and governments who are unable to meet their carbon reduction targets.

A working paper from two senior Stanford University academics examined more than 3,000 projects applying for or already granted up to $10bn of credits from the UN’s CDM funds over the next four years, and concluded that the majority should not be considered for assistance. "They would be built anyway," says David Victor, law professor at the Californian university. "It looks like between one and two thirds of all the total CDM offsets do not represent actual emission cuts." . . .

The Stanford paper, by Victor and his colleague Michael Wara, found that nearly every new hydro, wind and natural gas-fired plant expected to be built in China in the next four years is applying for CDM credits, even though it is Chinese policy to encourage these industries.

"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," said Victor.

A separate study published this week by US watchdog group International Rivers argues that nearly three quarters of all registered CDM projects were complete at the time of approval, suggesting that CDM money was not needed to finance them.

"It would seem clear that a project that is already built cannot need extra income in order to be built," said Patrick McCully, director of the thinktank in California. "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."

It’s not like this was not predictable or anything.

  • Maybe I’m not understanding this, but isn’t the core problem that they are counting reductions in emissions as credit for offset, rather than only counting actual removals of CO2 from the air? It’s like counting the 10% off coupon for dish soap as income. They may look the same to your bottom line as long as you have actual income and don’t change your buying habits, but buying extra dish soap as a plan to save up for a new car is not going to work like you think it will. And if you lose your job, planning to live off the proceeds of buying dish soap at 10% off is not going to work either.

  • Stevo

    It’s like going on a diet by asking for extra chocolate fudge cake with cream and then not eating it. You don’t actually eat any less, but can still feel virtuous for denying yourself.

  • Mesa Econoguy

    From a “conventional investment banking/trading” perspective, there are a couple of things going on here:

    1) It’s like (not) owning 1000 shares of CDM, then writing 10 calls against that stock. Here, someone else would own that stock too, and could write covered calls against it as well, so an actual price of the options contract could never truly be known, because ownership & price of the underlying (on which the price of the options contract are based) can never be known.

    2) Imagine CDM (company) was a quasi-governmental entity, and received direct payments for all their activities, effectively subsidizing the company. Now CDM would receive “credits” for each of their (government-funded) projects completed, which they could go out into the marketplace and redeem for some value, even though the source of these credits was already guaranteed. So this credit would effectively be a tax on whomever “purchased” it from CDM, because it was generated by government and paid to CDM (by government, via project completion), who collects credit value from its buyer.

    These are somewhat imperfect analogies, but you can see how difficult it is to align ownership rights & obligations, and how screwed up this “market” really is…

  • Mesa Econoguy

    While we’re on it, here’s a damning indictment of cap-and-trade:

    Climate Reality Bites
    May 27, 2008; Page A20

    The global warming debate arrives in the Senate next week, and it’s about time. Finally, the Members will have to vote on something real, as opposed to their buck-passing to courts and regulators, and their easy trashing of President Bush.
    The vehicle is a bill that principal sponsors Joe Lieberman and John Warner are calling “landmark legislation.” They’re too modest. Warner-Lieberman would impose the most extensive government reorganization of the American economy since the 1930s.
    Thankfully, the American system makes it hard for colossal tax and regulatory burdens to foxtrot into law without scrutiny. So we hope our politicians will take responsibility for the global-warming policies they say they favor. Or even begin to understand what they say they favor. For a bill as grandly ambitious as Warner-Lieberman, very few staff, much less Senators, even know what’s in it. The press corps mainly cheerleads this political fad, without examining how it would work or what it would cost. So allow us to fill in some of the details.
    * * *
    Almost all economic activity requires energy, and about 85% of U.S. energy generates carbon dioxide and other greenhouse gases. For centuries, these emissions were considered the natural byproduct of combustion. As recently as the 1990 Clean Air Act amendments, they were consciously not even described as a “pollutant.” But now that the politicians want to decrease those emissions, the government must create a new commodity – the right to create CO2 – and put a price on it. This is an unprecedented tax that would profoundly touch every corner of American life.
    The policy preferred by the environmental lobby is called cap and trade. The government would set a limit on emissions that declines every year. The goal of Warner-Lieberman is to return to 2005 levels by 2012, and to reduce that by 30% by 2030.
    “Allowances” for emissions would be distributed to covered businesses – power, oil, gas, heavy industry, manufacturing, etc. If they produced less than their allotment, the companies could sell the allowances, or trade them. Cap and trade limits on energy are thus sometimes misleadingly described as a “free market” policy that would create the flexibility for CO2 reductions how and where they are least expensive. But the limits are still a huge tax.
    And for the most part, the politicians favor cap and trade because it is an indirect tax. A direct tax – say, on gasoline – would be far more transparent, but it would also be unpopular. Cap and trade is a tax imposed on business, disguising the true costs and thus making it more politically palatable. In reality, firms will merely pass on these costs to customers, and ultimately down the energy chain to all Americans. Higher prices are what are supposed to motivate the investments and behavioral changes required to use less carbon.
    The other reason politicians like cap and trade is because it gives them a cut of the action and the ability to pick winners and losers. Some of the allowances would be given away, at least at the start, while the rest would be auctioned off, with the share of auctions increasing over time. This is a giant revenue grab. The Congressional Budget Office estimates that these auctions would net $304 billion by 2013 and $1.19 trillion over the next decade. Since the government controls the number and distribution of allowances, it is also handing itself the political right to influence the price of every good and service in the economy.
    The Environmental Protection Agency estimates that this meddling would cause a cumulative reduction in the growth of GDP by between 0.9% and 3.8% by 2030. Add 20 years, and the reduction is between 2.4% and 6.9% – that is, from $1 trillion to $2.8 trillion.
    These estimates assume that electricity prices will increase by 44% above what they would otherwise be by 2030. They also assume that existing coal-fired power plants, which currently provide about 50% of U.S. electric power, will be shut down – to be replaced with at least 150% growth in new nuclear facilities, plus other “alternatives.” Yet there are only 104 current U.S. nuclear plants, and the industry itself says it’s optimistic to think even 30 more can be built by 2020.
    In fact, it is pointless to project so far out over multiple decades, since no one knows how markets and consumers would respond, whether the rules would remain constant, or what new technologies might come along. While moralizing about America, most of Europe has failed to meet its mandatory cap and trade goals under the Kyoto Protocol. But the U.S. isn’t Italy; we will enforce our laws. So our guess is that these cost estimates are invariably far too low.
    In a bow to this reality, California Democrat Barbara Boxer last week introduced 157 pages of amendments to Warner-Lieberman. Most notably, she sets aside at least $800 billion through 2050 for consumer tax relief. So while imposing a huge new tax on all Americans, she vouchsafes to return some of the money to some people. Needless to say, the Senator will be the judge of who receives her dispensation.
    Ms. Boxer’s amendment shows that cap and trade is also a massive wealth redistribution scheme – all mediated by her and her fellow Platonic rulers. Oh, and she also includes an “emergency off-ramp,” should costs prove too onerous. This is really a political “off-ramp” to make Warner-Lieberman seem less dangerous, but you can imagine her reaction if some future Republican President decided to take it.
    The upshot is that trillions in assets and millions of jobs would be at the mercy of Congress and the bureaucracy, all for greenhouse gas reductions that would have a meaningless impact on global carbon emissions if China and India don’t participate. And only somewhat less meaningless if they do.
    * * *
    Warner-Lieberman has no chance of becoming law this year with President Bush in the White House. But the goal of this Senate exercise is political – to get Members on the record early, preferably before the burdens of cap and trade become more widely understood; to give Democrats a campaign issue; and to pour the legislative foundation that the next Administration could cite as it attempts to regulate carbon limits while waiting for Congress to act.
    So by all means let’s have this debate amid $4 gasoline, and not only on C-Span. If Americans are going to cede this much power to the political class, they at least ought to do it knowing the price they will pay.