A recent article in Scientific American makes a lot of good points about carbon markets and emission trading. Perhaps most important among them is the recognition that the simple existence of a market cannot ensure good environmental outcomes: there must be strong and appropriately designed institutions backing it up. Otherwise, well-connected firms will be able to wriggle through loopholes, fraud will occur at an unacceptable level, and cheating will be endemic.
The article points out some of the big failures in carbon markets so far. Within the European Union Emission Trading Scheme, far too many permits to emit were distributed for free. As a result, their price collapsed in April 2006. Even worse, coal companies in Germany and elsewhere were given free permits to pollute, able to sell some of those permits for cash, and willing to charge their customers for carbon costs that never existed. Also problematic has been the prominence of HFC-23 (trifluoromethane) projects within the Clean Development Mechanism of the Kyoto Protocol. Getting rid of HFC-23 entirely should have only cost about $136 million. It has an absurdly high global warming potential (12,000 times worse than CO2), and is easy to destroy and replace with less problematic chemicals. So far, firms have been able to earn $12.7 billion for partial elimination. The authors of the article suggest that simply paying for the $136 million worth of equipment would be far more sensible than allowing firms to exploit the price difference between the value of emission reduction credits and the cost of eliminating HFC-23.
Other problems with markets include the difficulty of working out what emissions would have been in the absence of some change (the approach used for many carbon offsetting systems) and the way markets can encourage incremental approaches to emission reduction rather than the fundamental overhaul of industrial sectors and energy infrastructures.
None of this is to say that markets are not important. Indeed, carbon pricing is an essential component in the fight against climate change. What it shows is that participants in markets cannot be implicitly trusted, and neither can the governments operating them. There must be mechanisms for oversight and enforcing compliance and a constant awareness about possibilities for cheating or gaming the system. Insofar as it has helped people to develop a better sense of these things, the Emission Trading System of the EU has been a valuable front-runner.
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Shouldn’t the cheapness of getting rid of HFC-23 reduce the price of CDM credits to the marginal abatement cost of HFC-23? You would then expect all HFC-23 production to be eliminated, at that price, before the price of CDM credits shifted up to the marginal abatement cost for the next cheapest option.
Green protectionism
Nov 15th 2007
From The Economist print edition
A dangerous flaw in a bill to control carbon emissions
FOR those (such as this newspaper) who argue that the only way to avert dangerous climate change is to set a price on CO2 emissions, what’s going on in America’s Congress is excellent news. A bill to set such a price has achieved a remarkable degree of cross-party support (see article). Federal emissions controls in America are essential to tackling climate change globally. So it is especially unfortunate that the bill includes a provision that would turn the fight against climate change into a tool for protectionists.
Global warming
Getting the message, at last
Nov 15th 2007
From The Economist print edition
Congress is now taking climate change fairly seriously
Cap-and-trade in the north-east
Embracing Reggie
Nov 15th 2007
From The Economist print edition
A scheme that tries to avoid Europe’s mistakes
“COULD America’s first experiment with a cap-and-trade scheme for greenhouse gases go awry? That is the fear of some observers of the Regional Greenhouse Gas Initiative (RGGI), an agreement among ten north-eastern states to cut emissions from power plants by 10% between 2009 and 2018.
The states in question formed RGGI (pronounced “Reggie”) out of despair at the federal government’s failure to tackle emissions growth. Some states in the West and the Midwest are working on similar schemes. But RGGI will be the first to start up: emissions will be capped from January 1st 2009.”
“RGGI’s designers hope to avoid some of the flaws that have dogged the Emissions Trading Scheme (ETS), the European Union’s ongoing experiment with cap-and-trade. European governments handed out emissions permits to existing power plants and factories free of charge; that turned out to be a windfall for big polluters, who were able to sell on unneeded permits for huge profits. Moreover, it gradually became clear that governments had handed out too many permits, causing their price to fall to almost nothing in the first phase of the scheme, which ends this year. If permits are so cheap, why cut emissions?”
HFC-23 is a by-product of the production of HCFC-22: a refrigerant.
The concern is that creating a market for HFC-23 destruction encourages HCFC-22 production.
HFC-23 is destroyed by incineration.
Eliminating HFC-23 projects from the Clean Development Mechanism could significantly increase the cost of Certified Emission Reductions.
At present, HFC-23 projects produce about 41 Mt of certified CO2 reductions. By 2012, they are expected to be 502 Mt.
A carbon tax will never be high enough to do the job.
A low carbon tax would create the illusion of action without changing business as usual.
Indian chemical company SRF is also receiving substantial numbers of CDM carbon credits for eliminating an obscure industrial waste product known as HFC23, a highly potent greenhouse gas.
HFC23 is a by-product of manufacturing refrigerant gases used to cool fridges and air conditioners.
It is nearly 12,000 times as toxic as carbon dioxide in its climate impact if it enters the atmosphere.
But getting rid of HFC23 is quite easy and relatively cheap.
The solution is to burn it off in an incinerator.
SRF has installed an incinerator for burning off HFC23 at its plant in Rajasthan.
The project has been registered with the CDM and is receiving up to 3.8 million carbon credits a year.
These are currently worth $50m to $60m a year.
SRF is likely to receive the credits for a period of about 10 years, so it is in line for a total windfall in the region of more than $500m, a gigantic sum for a smallish chemical plant located in rural India.