Cap and Tax, Don’t Cap and Trade
By David Morris, originally published on AlterNet, March 12, 2007
At the Oscars, former Vice President Al Gore and megastar actor Leonardo DiCaprio informed a billion viewers that this was the first “green Oscar,” at least with respect to global warming. The hosts had purchased sufficient greenhouse gas offsets to allow them to free the event of any responsibility for increasing greenhouse gases.
Two days later, Al Gore and emission offsets were again in the news when reports circulated that his Nashville house consumed 20 times more energy than a typical house. His spokesman responded: The Gore family had purchased green electricity and carbon offsets in sufficient quantities to render the house’s net contribution to global warming as zero.
Over the succeeding weeks, a flurry of articles appeared about the growing use of carbon offsets. According to USA Today, the market for voluntary offsets in 2006 was almost 20 times greater than it was in 2004. Dwarfing this market is the market for what might be called involuntary offsets — that is offsets purchased as part of the mandatory emissions reductions program agreed to by the 38 industrial nation signatories of the Kyoto Protocol. Nicholas Stern, former chief economist of the World Bank and a major player in the global climate change game, estimates the value of carbon credits currently in circulation as $28 billion and predicts it will climb to $40 billion by 2010.
The shortcomings of current carbon trading systems are clear. As a piece in Newsweek concluded, “So far, the real winners in emissions trading have been polluting factory owners who can sell menial cuts for massive profits and the brokers who pocket fees each time a company buys or sells the right to pollute.”
Currently, the link between the purchase of carbon offsets and the actual reduction of carbon emissions is highly controversial and almost impossible to verify. The process is easily manipulated. Measurement tools are remarkably primitive. Even the most basic calculations are subject to wide variations. The New Internationalist requested estimates from four reputable carbon trading companies for the number of credits a passenger would need to purchase to offset an around-the-world flight, starting and ending in London. The magazine received four answers: 4.3, 6, 8.68 and 11.63 tons.
Despite the criticisms, the concept of emissions trading continues to be vigorously supported by major U.S. environmental organizations. The Regional Greenhouse Gas Initiative, recently embraced by nine northeastern and mid-Atlantic states, allows for carbon trading, as does California’s new global warming initiative. Emissions trading is at the heart of the European Union’s strategy to meet its Kyoto Protocol goals. Several congressional bills embrace carbon trading to meet greenhouse gas-reduction goals.
Most environmentalists tend to agree with the assessment of Dan Esty, director of the Yale Center for Environmental Law and Policy: “Carbon trading is a promising strategy for reducing greenhouse gas emissions but the current structures have serious flaws.”
In other words, the system is new. As with all new systems, carbon offset trading is working out the kinks. Carbon trading 2.0 will be much better than carbon trading 1.0. Give it a chance.
I disagree. Carbon trading is not a promising strategy. Its costs outweigh its benefits. We don’t need carbon trading to reduce carbon emissions. Indeed, it is likely that we will reduce carbon emissions much more without carbon trading.
Unfortunately, policymakers and environmentalists have all but welded together the words, “cap” and “trade.” They talk as if a cap cannot exist without a trading mechanism. That’s not true. We can have caps without trade.
We should impose an immediate moratorium on carbon trading while imposing ever-more rigorous carbon caps. And stop the use of long-distance offsets. All offsets should be local or regional.
Why is carbon trading inherently problematic?
1. Buying offsets encourages complacency.
Those who purchase offsets believe they are doing something significant when they are not. Their sense of mission accomplished undermines their enthusiasm for real actions that require more sacrifice, which indeed, may be the key selling point for those selling voluntary offsets. As Mike Mason, Climate Care founder told the New Internationalist, “I would rather that 100 percent of people offset their emissions from flights than 50 percent of those people not fly at all.”
George Monbiot, author of the terrific new book, “Heat” (the U.S. edition will be published in April by South End Press) has likened the purchase of offsets to the purchase of medieval indulgences. We sin, and we buy absolution.
Even worse, the cost of absolution is so low, little incentive exists to dissuade us from sinning again, and again. For less than the cost of a single tank of gasoline, BP allows its Australian consumers to sign up for a program in which the company offsets any carbon emitted from cars using its gasoline all year long. Environmentally speaking, one might say that at a BP station you can fill and unfill a gas tank at the same time.
Using $10 per ton of CO2 as the average offset price (current prices are as low as $3 per ton), the United States, which generates about 20 percent of the world’s greenhouse gases, could buy complete absolution for about $50 billion a year. For that price it would announce to the world, as the Oscars did, that we are not responsible for any net new greenhouse gases. The cost is less than half the annual spending on the war in Iraq, a little over 5 percent of the Pentagon’s annual budget.
2. Carbon trading is inherently susceptible to fraud and manipulation.
Carbon trading systems are devised and managed by computerized brokers who buy and sell on a global scale. Their goal is to increase the volume of trades while buying low and selling high; that is, selling credits at a price higher than they buy them. Nothing necessarily wrong with that. But globalized, computerized trading is notoriously untransparent. We know that Enron and others manipulated the electricity market to create a crisis and steal billions of dollars from California households and businesses, primarily because we have tapes of Enron traders on the phone bragging about their manipulations. Yet to this day, investigators have had a hard time identifying the data trail that would prove malfeasance.
Some carbon traders guarantee to retire their credits, which is a step in the right direction. Far more will buy and sell them on a secondary market. As a secondary market emerges, as happened with currency trading in the 1980s and electricity trading in the 1990s, we will see the introduction of ever-more complex and abstract carbon-based financial instruments. And as with electricity and currency trading, an exceedingly handsome prize will go to those who can figure out how to game the system.
One large company announced its withdrawal from the Kyoto Protocol’s program of allowing signatories to buy carbon offsets from developing countries while predicting that current carbon-accounting methodologies “will create other Enrons and Arthur Andersens.”
The New York Times reports on a deal in which the carbon offsets for a $5 million incinerator in China were sold to European investors for $500 million. “The huge profits will be divided by the factory’s owners, a Chinese government energy fund and the consultants and bankers who put together the deal from a mansion in the wealthy Mayfair district of London,” the Times observes.
3. Carbon trading encourages cheating and rewards low-cost cosmetic changes while undermining higher cost innovation.
The greater the “baseline” emissions, the greater the payoff that can be derived from selling emission-reducing projects. Thus, there is a perverse incentive to emit as much greenhouse gas as possible today in order to make projects appear to be saving as much carbon as possible tomorrow.
The Dag Hammarskjold Foundation did an excellent analysis of carbon trading in its September 2006 Development Dialogue magazine. “With a bit of judicious accounting,” the report found, “a company investing in foreign ‘carbon-saving’ projects can increase fossil emissions both at home and abroad while claiming to make reductions in both locations.”
Carbon traders seek the lowest cost carbon offset. Which almost always means tree planting in some far off country, without regard to its long-term effects on the community or the environment, or a modest reduction in the emissions of a highly polluting factory in a developing nation. A company needing, or wanting, offsets may have to choose between investing a significant amount of capital that has long-term and very substantial savings, or buying much lower cost and short-term offsets. From a short-term economic perspective, the latter will always be the preferred choice. A study reported in Nature, the scientific journal, supported this proposition. It found that only 2 percent of the United Nations’ trading projects involving either renewable energy or communities that follow eco-friendly practices with regard to tree cultivation and harvesting.
4. Carbon trading separates authority and responsibility, undermining coherent, holistic community-based efforts.
Globalized carbon trading lends itself to similar criticisms of globalized trade agreements: the preemption of local and national authority, the separation of those who make the decisions from those who feel the impact of those decisions, the separation of those communities that receive the benefit from those who bear the cost.
Indeed, Michael Zammit Cutajar, ex-executive secretary of the United Nations Framework Convention on Climate Change has made the comparison explicit: “Establishing a robust global regime for addressing climate change is … comparable to the creation of the international trade regime under the World Trade Organization.”
The Hammarskjold Foundation offers a case study of one of the first international carbon offsets project, and its aftermath. In the late 1980s, Applied Energy Service, Inc. (AES), a U.S.-based independent power producer, had been looking for a cost-effective technique for reducing carbon dioxide emissions at a new 183-megawatt coal fired power plant in Connecticut in order to make the plant more acceptable to state regulators.
AES decided to “mitigate” the plant’s carbon emissions by offering $2 million to finance 10 years’ worth of “land-use activities and multiple-use forestry projects” in Guatemala. Some 40,000 small farms would plant 50 million pine and eucalyptus trees in the course of establishing 30,000 acres of community woodlots and 150,000 acres of agroforestry.
AES obtained permission to build the coal-fired power plant. But an analysis done 10 years later found that the offsets had fallen very far short of the level promised. More importantly, the project took access to the trees out of the hands of ordinary people. One result was that conflict grew between municipal and village authorities and individual landowners. Another result was increasing distrust of government forest offices. And finally, the Guatemala-based organization that was supposed to manage and monitor the project found that the level of monitoring required diverted its resources away from its more community-building projects.
As with the WTO, globalized carbon trading regimes are very susceptible to corporate influence. Which is why, despite strong opposition from environmental organizations, the EU allowed offsets to occur outside of Europe.
It is true that a ton of CO2 reduced in Africa has the same impact on the biosphere and global warming as a ton of CO2 reduced in Minneapolis. But there are other impacts that come with that reduction that have a more localized impact. Reducing carbon emissions invariably also reduces toxics that constitute a local and regional threat, like lead or mercury or benzene or arsenic or particulate matter or ground level ozone. An urban-based coal fired power plant that offsets its CO2 emissions by helping to plant trees in Africa continues to emit pollutants that adversely affect the health of local residents.
Where do we go from here?
Is there an alternative to carbon trading? Of course there is. Emissions trading itself is a relatively new policy tool. It was first used by the EPA in the late 1970s but became a key component of U.S. environmental policy in the Clean Air Act amendments of 1990 when the trading of SOx emissions was allowed.
By the late 1990s the Clinton and Gore administration and major environmental organizations were pushing the use of offsets internationally at the Kyoto negotiations. As Michael Zammit Cutajar, the former executive secretary of the United Nations Framework Convention on Climate Change has said, the carbon trading approach embodied in Kyoto was “made in the U.S.A.”
But the implementation of the Kyoto Protocol is only about a year old. The European Union Emissions Trading Scheme came on line only in 2005. The Northeast Greenhouse Gas Initiative and California’s low carbon initiative are still in the rule-making stage. There is plenty of time to step back from the growing reliance on the purchase and trading of long-distance offsets.
One alternative is good old regulation, which contrary to the popular wisdom, has worked very well, especially when the regulations are performance-based. The United States required 23 years to eliminate leaded gasoline, in part because it created a lead trading program. Without allowing trading, Japan eliminated lead in 10 years and China in three. The Corporate Average Fuel Economy regulation, enacted in 1975, did not allow trading but effectively doubled auto efficiency within 10 years. The 1970 Clean Air Act, without allowing trading, reduced emissions significantly through a regulatory approach.
Environmentalists almost always point to the experience under the SOx emissions trading a highly successful use of emissions trading, and that experience was highly influential in persuading nations to adopt emissions offset trading under Kyoto. It is important to note here that no one claims the SOx trading program reduced emissions more or even more rapidly than would have occurred without trading. The argument is that it achieved a given level of emissions cheaper.
SOx trading did reduce the costs of reducing emissions to 9 million tons. But it is unclear just how much the costs were reduced. The Hammarskjold Foundation estimates that at least 20 per cent of the SOx reductions were achieved before the emissions trading program began. Moreover, it argues that factors other than trading were far more important, such as the increased availability of low sulfur coal, and the plunging transportation prices in the aftermath of the railroad deregulation of the mid 1980s. In addition, the claimed cost reductions are from the initially wildly inflated estimated costs of cutting emissions developed by industry. In fact, after the trading scheme got under way, many installations managed to cut emissions without trading at all. Most of those who did trade traded only within their own firm. Interfirm trading amounted to only 2 percent of total emissions.
Thus the savings achieved through SOx trading were probably modest. And it represented a best-case scenario for savings. Measurement equipment was widely available. There was a single target chemical. Only a small number of installations were included in the program.
A greenhouse gas reduction program, however, targets at least half a dozen chemicals and encompasses hundreds of millions of targeted facilities. And measurement and monitoring equipment is unavailable.
Another program adopted about the same time as the SOx trading program might serve as a better model for implementing the Kyoto Protocol. The discovery of the depletion of atmospheric ozone led to the international Montreal Accord. Signatories agreed to phase out specific ozone depleting chemicals. The U.S. Congress coupled the phase-out requirement with a very high tax on chlorofluorocarbons, sending an important price signal it correctly predicted would accelerate phase-out.
Of course, most greenhouse gases can’t be phased out. They are part of the natural cycle. But a national and state carbon cap, ratcheted down every five years is similar. To provide a price signal for the market and to raise money for ameliorative investments and other public purposes (e.g., compensating low income households for price increases), impose a significant and increasing carbon tax. Or possibly, governments could auction off carbon allowances (while not allowing trading) and use the money raised for similar purposes.
Offsets should be allowed, but only if they occur on the local level and do not involve long-distance trading. Let me explain this further. For the past year, the Institute for Local Self-Reliance has been working with states and cities to encourage the enactment of climate neutral bonding initiatives and climate neutral building codes. Such codes would encourage architects and engineers to design energy efficient buildings. But rarely will they result in literally zero energy buildings. Thus even in the best cases some amount of greenhouse gases will be emitted. That amount will have to be offset. But the offset must come from a comparable reduction of greenhouse gases within the community. If Al Gore were operating under this standard, he would have to invest in greenhouse gas reductions within Nashville equal to the amount of greenhouse gases generated by his house.
Initially architects and builders will see this as an inconvenience. Far simpler to buy offsets from the Chicago Climate Exchange or other offset traders. But eventually, as communities develop an inventory of buildings that need energy efficiency investments, the overhead costs involved will be quite small.
There are psychological, political and economic reasons to favor investing in carbon reductions within the community. Psychologically, it builds self-awareness at the community level about the interrelationship of individual behavior and global environmental consequences. The community as a whole is taking responsibility for its behavior.
Politically, cities and counties have a great deal of authority over policies that affect energy use (e.g., building codes, land use regulations, transportation systems). Here, authority is married to responsibility. A community that decides, as a community, to adhere to the Kyoto Protocol or more rigorous guidelines has many policy tools to move it toward that goal.
Economically, local offsets may be viewed as investments while buying distant paper offsets are more of an operating expense. Offsets must be purchased every year. But an investment will repay itself in energy savings. In the first case, money flows out of the community. In the second case, money not only stays in the community, but after the initial debt is repaid from reduced operating costs, additional money is generated within the community.
Carbon trading makes us feel good. Investing in local carbon reduction strategies will also make us feel good. But unlike carbon trading, investing to reduce local carbon emissions strengthens the local economy, encourages real innovation, and is a long-term, durable strategy.
About ILSR: The Institute for Local Self-Reliance is a nonprofit organization founded in 1974 to advance sustainable, equitable, and community-centered economic development through research and educational activities and technical assistance. More at http://www.ilsr.org