Just Putting a Price on Carbon Isn't Enough

Angela Johnson Meszaros

Director of Policy and General Counsel

California Environmental Rights Alliance

angelajm [at] envirorights.org

This week, the CBO released a new brief called “Climate-Change Policy and CO2 Emissions from Passenger Vehicles .“ The brief’s findings call into question, again, the often chanted mantra that all we need to do to address climate change is put a price on carbon. The CBO’s Executive Director, Peter Orszag, summarized the new brief writing in his blog:

Discussions about addressing climate change (e.g., through a cap-and-trade program or a carbon tax) often focus on the transportation sector. The brief argues, however, that most of the reduction in CO2 emissions would occur in other sectors (e.g., the electricity sector) and that the effects on vehicle emissions would be modest, especially in the shorter run.

Interesting, no? Maybe we should be focusing on how to increase the use of renewable, non-nuclear energy to meet our electricity goals since about two-thirds of our electricity comes from burning fossil fuel—the number one contributor to greenhouse gases. But I digress.

Director Orszag’s blog gets even more interesting as he explains:

To be sure, a cap-and-trade system or a carbon tax would raise the price of gasoline, encouraging consumers to drive less and to buy more fuel-efficient cars– but the magnitude of these effects would be relatively small. For example, CBO has estimated that a price of $28 per metric ton of CO2 in 2012 would lead to a reduction of about 10 percent in total U.S. emissions compared with a no-action scenario. Vehicle emissions, though, would remain relatively constant in the short run, and even over time they would decline only by around 2.5 percent — much less than the 10 percent reduction in overall emissions.

Several factors account for the relatively small influence that a price on CO2 emissions would have on passenger vehicles and driving behavior. First, a CO2 price of $28 per metric ton would raise gas prices by about 25 cents per gallon, far less of an increase than consumers have recently born with little behavioral result. (Between 2003 and 2007, gas prices increased from $1.50 to more than $3.00 per gallon. Vehicle miles driven, driving speeds, and the purchase of larger vehicles have all responded only modestly despite the dramatic increase in prices.) An increase in gas prices of 25 cents or so per gallon is unlikely to generate massive changes in driving behavior.

So, first, let’ recognize that the new east coast trading scheme, RGGI, just auctioned carbon allowances and the market clearing price was $3.07 per ton (see my previous blog entry about that). Not even close to $28. I know, I know, that’s a totally different thing. My point is it is unclear if or when carbon markets in the U.S. will get to $28 per ton.

Second, in California, the Air Resources Board has done some number crunching and decided:

the modeling results presented for the cap-and-trade program of the Preliminary Recommendation reflect a carbon price of slightly less than $10 per ton. It is important to note that the $10 per-ton figure does not reflect the average cost of reductions; rather, it is the maximum price at which reductions to achieve the cap are pursued. (page 13, emphasis in the original.)

That means we could expect even fewer reductions from California/WCI’s scheme than the one the CBO was imagining. I can’t wait to hear the explanation of why this is a good idea anyway.

All this means, is simply just “putting a price on carbon” isn’t going to get us the kind of reductions in green house gas emissions we need to avert climate catastrophe. The appeal to the “free market” to get us out of the climate crisis cannot work; and this is especially true when the “price on carbon” isn’t actually high enough to cause changes necessary to reduce greenhouse gas emissions.

That’s why we really need to focus on a policy approach that uses as its foundation regulations and standards, incentives, and a price on carbon established by a fee that funds incentives, supports carbon reduction efforts, cushions price shock from energy increases, encourages innovation, and supports mitigation and adaptation efforts.

Leadership from decision-makers. Is that too much to ask for?

“Rip-offsets,” I LOVE it!

Angela Johnson Meszaros
Director of Policy and General Counsel
California Environmental Rights Alliance

I’m going to (try to) coin a new term here, “rip-offsets,” since I can’t think of a better word for the rip-off offsets the Chicago Climate Exchange is peddling to a gullible public and media.

So says Dr. Joseph Romm, who holds a Ph.D. in physics from M.I.T. I think that’s pretty darn impressive. He’s also a Senior Fellow at the Center for American Progress, where he oversees the blog ClimateProgress.org.

I’m jumping on the bandwagon—but I’m extending the phrase beyond rip-offsets on the Chicago Climate Exchange to all offsets.

[Really, you should read his blog entry Q: What is the difference between carbon offsets and mortgage-backed securities? It’s great.]

Rip-offsets are a serious and important issue since California is planning to buy into rip-offsets as a central part of our efforts to reduce greenhouse gas emissions. This Administration has committed California to being part of the Western Climate Initiative (WCI). WCI includes California, Montana , New Mexico, Oregon, Utah and Washington, as well as the Canadian provinces of British Columbia, Manitoba, Ontario, and Quebec . On September 23, the WCI published its Design Recommendations for the WCI Regional Cap-and-Trade Program, which states:

The WCI Partner jurisdictions will limit the use of all offsets, and allowances from other GHG emission trading systems that are recognized by the WCI Partner jurisdictions, to no more than 49% of the total emission reductions from 2012-2020 in order to ensure that a majority of emissions reductions occur at WCI covered entities and facilities. (page 10)

First, the notion that “the majority of emissions reduction will occur at WCI” facilities is funny. It’s true, obviously, but the 51-49 split feels a bit contrived, just to allow proponents to say “the majority of reductions will occur within WCI” without lying. As a practical matter 49% of rip-offsets occurring outside the WCI’s leaves a lot of room for, well, rip-offs. Secondly, under this construction, any individual facility could have 100% of its “reductions” occur “off-site”—that is away from the community that is sucking down the emissions from the facility.

I know, I know, carbon is global. Let’s remember that, really, no facility emits only carbon—the carbon comes from burning fossil and other fuels and all combustion processes generally produce PM2.5 and other pollutants that negatively impact public health and the environment. Those pollutants are local and the choices we make about how to reduce carbon will have serious impacts on public health.

So, where could all these emissions occur since they don’t have to happen at the facility causing the pollution? The WCI document explains that:

WCI Partner jurisdictions may approve and certify offsets projects located through out the United States, Canada, and Mexico…WCI Partner jurisdictions may accept offset credits from developing countries though the Clean Development Mechanism (CDM) of the Kyoto protocol (page 11)

The CDM was created under the Kyoto Protocol and claims to be considered a trailblazer. Abuses of the offset system are well documented. Such information, I’d guess, is what led Patrick McCully, Executive Director, International Rivers to write in June 2008:

The world's biggest carbon offset market, the Kyoto Protocol's Clean Development Mechanism (CDM), is a global shell game that is increasing greenhouse gas emissions behind the guise of promoting sustainable development. The misguided mechanism is handing out billions of dollars to chemical, coal and oil corporations and the developers of destructive dams -- in many cases for projects they would have built anyway.

According to David Victor, a leading carbon trading analyst at Stanford University, as many as two-thirds of the supposed "emission reduction" credits being produced by the CDM from projects in developing countries are not backed by real reductions in pollution.

This kind of abuse doesn’t happen only in the CDM—it’s here in the US, too. As Dr. Romm points out in his blog:

Buried at the very end of the article is a description of just how worthless many Chicago Climate Exchange offsets are. The article describes an offset so pathetic, so questionable, that it shocked even me, and I already thought most offsets are no better than mortgage-backed securities:

In the western Virginia town of Christiansburg, the operators of a landfill sell carbon offsets tied to a project that captures methane, a powerful greenhouse pollutant, and burn it in a tall orange flare. They’ve made $43,000 on the Chicago Climate Exchange in just a couple of months.

But that project was put in long before the offsets were sold and for a different reason: to keep dangerous gases from accumulating in a capped landfill. So if the offset market dried up completely?

Nothing would change.

The money “is gravy to us right now,” said Alan Cummins, executive director of the regional authority that runs the landfill. Even without it, he said, “we would always continue to flare.”

I was trying to come up with a better word than fraudulent to describe such an “offset,” and “rip-offsets” is what came to mind, since this has got to be the biggest climate rip-off since China crashed the Clean Development Mechanism party with its own brand of fraudulent offsets that don’t offset anything.

People are actually paying the Chicago Climate Exchange tens of thousands of dollars to pay this landfill to keep doing what they would do anyway — and what they are doing anyway isn’t even particularly good for the environment.

So what’s my point—well there are three, 1) I’m continuing my theme of “cap and trade won’t work” and I’m asserting here that offsets won’t work, either; 2) this failure is a big problem for communities who host the facilities that will be trading and offsetting out of any obligation to reduce their emissions under the fiction of effective action; and 3) Points 1 and 2 are sub-points for a broader issue: this is very troubling since we’ve really got a very short time to get a handle on carbon emissions and time we spend messing around with this is time we aren’t spending implementing real solutions like changing the way we make and use energy.

But some folks are big fans of offsets—like Goldman Sachs wrote during the WCI development process:

We have extensive experience developing offset projects under the Kyoto Protocol and for the voluntary market, and hope that our insights will assist the WCI in developing design recommendations for a proposed cap-and-trade program.

Goldman is a leading global investment banking, securities and investment management firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high net worth individuals. Founded in 1869, it is one of the oldest and largest investment banking firms. The firm is headquartered in New York and maintains offices in London, Frankfurt, Tokyo, Hong Kong and other major financial centers around the world.

Hummm, I wonder what those guys are doing these days?

Cap and Trade Won't Work and the "Free Market" Ain't Free

Angela Johnson Meszaros

Director of Policy and General Counsel

California Environmental Rights Alliance

angelajm@envirorights.org

“Cap and Trade” won’t work.

Don’t want to take the California environmental justice movement’s word for it? Think that environmental justice organizations from around the country got it wrong?


How about taking the word of Steve Rayner, a lead author in Working Group III of the Intergovernmental Panel on Climate Change, who recently wrote in Wired Magazine:

Cap and trade won't work. The market for carbon offsets is widely touted as the best way to curb greenhouse gases. This would be fine if time were unlimited. However, the best available science suggests that we need to stabilize emissions by mid-century. That's too soon for carbon prices to rise enough to drive the R&D necessary to enable cleaner alternatives to compete with fossil fuels.

It doesn't help that the cap-and-trade approach relies on underdeveloped monitoring and accounting systems that inevitably leave plenty of wiggle room for unscrupulous speculators to work the system, amassing fortunes while achieving nothing for the atmosphere.

This September 22, 2008 article is just one of the newer statements regarding “cap and trade.” There is actually very robust opposition to “cap and trade.”

For example, in November 2007 the New York Times reported:

Most economists consider a carbon tax a more effective instrument for reducing greenhouse gas emissions than the other major policy alternative, a cap-and-trade system that would require plant-by-plant emission measurements and could prompt companies to cheat.

As we watch the United States' whole financial system melt down, the notion that California is planning to put into place a system to address greenhouse gas emissions that “prompt[s]companies to cheat” is something we should take very seriously.

Look at what has already happened in the European Union’s Emissions Trading Scheme (also referred to as the EU-ETS) adopted under the Kyoto Protocol. Under that Scheme, companies can claim reductions in their emissions if they purchase “offsets” from the “offset market.” This is a very popular option because these “offsets” are cheaper than actually reducing emissions at a facility by updating equipment or reducing fossil fuel use (which, by the way, is actually what needs to happen to reduce greenhouse gas emissions).

Two researchers at Stanford studied this “offset market” and wrote an article about their findings. They wrote:

This article reviews the actual experience in the world's largest offset market-the Kyoto Protocol Clean Development Mechanism (CDM)-and finds an urgent need for reform. Well-designed offsets markets can play a role in engaging developing countries and encouraging sound investment in low-cost strategies for controlling emissions. However, in practice, much of the current CDM market does not reflect actual reductions in emissions, and that trend is poised to get worse.

Sadly, California's administration is proposing--right now--that we buy into this failed system for our effort to reduce greenhouse gases.

And it is not just the polluting companies we have to worry about. We also have to worry about the market traders—the ones who create the financial instruments that fuel the secondary trading market. In the EU-ETS reporters have discovered abuse of the system from the beginning and reported, for example, “Factories in China and carbon traders are exploiting a loophole in climate change regulations that allows them to make big profits from greenhouse gas emissions trading.”

Yes, factories and carbon traders.

The Los Angeles Times raised this issue in a May 2008 editorial, writing:

Also hoping to profit, honestly or not, would be carbon traders. Large financial institutions would jump into the exchange to collect commissions on carbon trades, just as they do with crude oil and wheat. This presents opportunities
for Enron-style market manipulation.

And the traders are lining up. Back in December 2006, months after the Governor signed California's Global Warming Solutions Act of 2006 (also known as AB 32) the New York Times reported:

"The U.S. market will be the mother lode of carbon trading, so we want to start getting up our brand now," said Marc Stuart, director of new business development at Ecosecurities. Ecosecurities, which has spent seven years investing in the reduction of greenhouse gases in Europe, is setting up a New York office to expand into the United States.

All this in the face of greenhouse gas emissions raising at a startling rate as reported in November 2007:

According to the U.N. panel of scientists, whose latest report is a synthesis of three previous ones, enough carbon dioxide already has built up that it imperils islands, coastlines and a fifth to two-thirds of the world's species.

As early as 2020, 75 million to 250 million people in Africa will suffer water shortages, residents of Asia's large cities will be at great risk of river and coastal flooding, according to the report.

Europeans can expect extensive species loss, and North Americans will experience longer and hotter heat waves and greater competition for water, says the report from the U.N. Intergovernmental Panel on Climate Change, which shared the Nobel Prize with Al Gore this year.

The panel portrays the Earth hurtling toward a warmer climate at a quickening pace and warns of inevitable human suffering. It says emissions of carbon, mainly from fossil fuels, must stabilize by 2015 and go down after that.

Cap and trade won’t work and “Free markets” ain’t free.

And maybe that is the broader lesson of the debacle: Don't rush into a market solution when there are serious questions about whether the market will work. Both economic analysis and British experience should have rung warning bells about California's deregulation scheme; but those warnings were ignored — just as similar warnings are being ignored by enthusiasts for market solutions for everything from prescription drug coverage to education.

So said economist and Op-Ed columnist Paul Krugeman in the New York Times on December 10, 2000, discussing California’s other failed “free market” experiment—electricity deregulation.

When will we learn?

Then it was just money— as the entire electricity system in California collapsed under the weight of the "free market."

Today it is just money—a proposed $700 billion in addition to the more than $300 billion we’ve already thrown into the current “free market” mortgage and banking meltdown.

Tomorrow, if we allow this “cap and trade” scheme to go forward, it won’t be money—it’ll be catastrophic climate collapse.

To learn more about our effort to implement true greenhouse gas emissions solutions in California, visit http://www.ejmatters.org/