Jul 17 2013

Carbon / Emission Trading

Problem: Is it as functional and beneficial for environmental concerns as it sound?

 

On my last post, I discussed some of the issues related with the Kyoto Protocol in regards of the developing nations. Today’s blog will be more focused on the carbon trading (also called emission trading).

What is Carbon / Emission Trading?

Carbon trading is either done through the cap-and-trade scheme or by the use of credits to pay for the offset of greenhouse gases – GHG – (Sarah Dowdey, 2007 “How Carbon Trading Works”; link).

In the cap-and-trade system (see example below), a carbon emission limit, the cap, is set in terms of Certified Emission Reduction (CER) unit. Emission allowances that total the cap are also distributed or auctioned off. The member firms that exceed their cap limit must buy allowances from other member firms that haven’t consumed all of their allowances. Theoretically, this system should eventually lead to a decrease in GHG over time. Setting the cap requires careful planning and it must be adjusted occasionally because it indirectly affects the price of allowances, which are functions of supply and demand.

Example of cap-and-trade system:

“Emissions trading: how Emissions trading works”.Art. Encyclopædia Britannica Online. Web. 2013; link.

The credits are similar to carbon offsets (more info); however, they are often used in conjunction with the cap-and-trade scheme. In contrast to the cap-and-trade schemes, carbon offsets are voluntary and are generally used by firms to build up their green image (Sarah Dowdey, 2007 “How Carbon Offsets Works”; link). These two systems are used as an alternative to carbon tax which consists of the members firms paying a very high fee if they surpass the cap.

How has it been viewed so far?

Fred Krupp, the Environmental Defense Fund president, speaks in favor of this trading scheme in a video posted on the Britannica website (Fred Krupp, 2008 – Credit: © FORA.tv, Inc. All Rights Reserved. (http://fora.tv); link). He states that it is the first environmental regulation that would eventually allow participating firms to earn some monetary benefits. Additionally he presses on the importance of regulation policies in the past. He believes that their implementation and observation by a great majority of people enabled the U.S. to reach their goal. One example he cited was the decrease in acid rain several years following the passing of the of the 1990 Clean Air Act.

On the other hand, Annie Leonard, an activist and a filmmaker, published a free downloadable video against the cap-and-trade scheme (Annie Leonard, 2009 Story of Cap and Trade; link). In that nine minute animated sequence, she underscored the uselessness of this system by pointing out its major two evils. The first one indicated by the name she gives the cap-and-trade system; cap-and-giveaway. She renames the system because allowances are handed out initially without a fee, so to her it seems that it rewards the major polluting firms for their excessive pollution. The second evil is the offset idea. Although it great to have a monetary incentive to encourage the participating firms to reduce their gas emissions, she asks a very good questions which is: How do we know for sure that they are actually trading a reduced carbon emission for the cash reward? There are other fallouts to this system but those are the most striking for Annie Leonard.

In her opinion, the whole trading system is a way to distract the public and local and federal government from doing something that will actually have a positive impact on the environment and our wallets. It was her hope that everybody would eventually catch on to the misleading hope that those advertising that carbon market promoted. Instead, concerned individuals could work together, away from those big corporate firms who only want to make money for themselves, and find a more adequate solution to the carbon emission challenge that is facing the world.

Similarly, representatives of GreenPeace and experts on the carbon market (Le Parlement européen approuve le gel de quotas de CO2 Le Monde Planète magazine, 2013; link) also believe that Europe’s attempt to resolve their crisis with the “backloading plan” is not going to change much. Since 2008, the flagging price of carbon decreased by 27 euro (35.80$) and was at a record low of only 4 euro (5.30$). Weeks after the initial parliamentary vote which negated the passing of this motion back in April 2013, the price fell even more to 2.80 euro (3.71$), according to Thomas K. Grose (Europe’s Carbon Market Crisis: Why Does it Matter? by Thomas K. Grose, 2013 in National Geographic; link).

In general, those still holding a pessimistic view regarding this minor change predict that if the plan goes smoothly, the carbon ton price will only peak to 6 or 7 euros (7.96-9.28$). As Thomas K. Grose stated in his article (Europe’s Carbon Market Crisis: Why Does it Matter? by Thomas K. Grose, 2013 in National Geographic; link), the main reason why the European Carbon Market is in a crisis situation is not due to a poor regulation of the carbon price but because of the excess of allowances that were given out the year before.

Furthermore, based on the carbon tracker data (“Unburnable Carbon” by Meinhausen et al 2009 on Carbon Tracker Initiative; link), if all the already accessible fossil fuel resources were to be burned by 2050, the emission of all that would equal more than 2/3rd of the set cap. As we know more research for underground and offshore sources are being sought and if all the world’s reserve of fossil fuels were combusted by 2050, we would exceed our global cap by almost 300% (see image below). The cap that was set to ensure that the world’s global temperature increased by no more than 2˚ Celsius.

Prospective Carbon Emission:

“Unburnable Carbon” by Meinhausen et al 2009 on Carbon Tracker Initiative; link

Light Gray: Reserve owned by companies listed on stock exchanges

Dark Gray: All the worlds fossil fuel Reserves

Screen shot 2013-07-17 at 1.15.47 AM

In all, like the Kyoto Protocol and the Doha agreements, environmental preservation progress seems great on paper. However, when you get to the thick of it, it all becomes a hodge-podge of fights between environmental activist and policy makers versus, bureaucratic politicians and economy-focused opponents.

 

Thanks again for reading my blog.

Feel free to comment with some feedbacks and insight.

Keep it real keep it green.

Hope you’ll be back for another round.

Sincerely,

Sandrine Charles

 

Citations:

Sarah Dowdey, 2007 “How Carbon Trading Works”; link

“Emissions trading: How emissions trading works”.Art. Encyclopædia Britannica Online. Web. 2013; link.

Sarah Dowdey, 2007 “How Carbon Offsets Works”; link

Fred Krupp, 2008 – Credit: © FORA.tv, Inc. All Rights Reserved. (http://fora.tv); link

Annie Leonard, 2009 Story of Cap and Trade; link

Europe’s Carbon Market Crisis: Why Does it Matter? by Thomas K. Grose, 2013 in National Geographic; link

“Unburnable Carbon” by Meinhaussen et al 2009 on Carbon Tracker Initiative; link

Unit conversion by coin mill.com, link

2 responses so far




2 Responses to “Carbon / Emission Trading”

  1.   Alfre Wimberleyon 25 Jul 2013 at 2:59 pm

    Alfrë Wimberley
    Lindsay Dubbs
    ENST 369
    July 23, 2013
    The Economic Façade of Cap-and-Trade Energy
    There are the two points of views on the idea of carbon emissions trading. Some believe it to be a wonderful way to limit our emissions of Greenhouse gases and others see it as only a political band-aid for not really fixing the true problem of our carbon addiction. Carbon Emission trading is a process that can only theoretically stand but in practice it has again and again failed.
    In the US, California is trying the carbon emissions trading system because of the Assembly 32: Global Warming Solutions Act which requires the state to come back to 1990 levels of emissions by 2020 among other requirements (more info: http://www.arb.ca.gov/cc/ab32/ab32.htm). The bill became active on January 1, 2013 and the responsibility of reaching that goal has mostly been placed on the California Air Resources Board (CARB). The CARB designed a system where the large point sources of carbon emissions are given carbon credits for free based on their current emissions levels and up to 8% of their compliance obligations can be done in offset projects. These offset projects must be in the United States and are, for example, buying a tract of land and leaving it as a carbon sink. The standards are supposed to be progressively harder to meet because the carbon obligations will decrease by 2% every year until 2015 where it will decrease by 3% until 2020 to meet the reduced carbon emissions goal. Eventually, smaller point source industries will be integrated into the market.
    There is a very complex system behind this trading and is held together by having soft market ceilings created by CARB and selling extra carbon emissions that, in total, compromise 4% of the 2020 goal of emissions. The companies are suppose to self-report their Greenhouse gas emissions and register that data to CARB for the emissions trading market. These emissions are supposed to be verified by independent, third-party entities. If companies are below their allowance, they can bank their emissions with CARB to keep market prices high per unit in the emissions market. If prices rise too quickly in the market, the values of the credits in the banks are accordingly raised in value. These principles were put to the test in June 2013 when the most recent auction was held and allowances were going for around $14.00 per ton (more info: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2281821). .
    This system like other cap-and-trade systems looks regulated and on track to make real change, but there are many issues with this system. The glaring issue is that real global change away from fossil fuels should be about keeping those conventional fuels in the carbon sinks. Additionally, the trading price of carbon has always been so low that companies will choose to buy more permits to emit more rather than change their infrastructure for the better, not to mention the fact that credits are originally given out for free! Additionally, these market models are based on a lot of speculating and artificial price ceilings and floors managing the market. Making parameters loose and speculative are some of the attributes that led the US to the 2008 financial crash and many environmental issues are swept aside for the market to manage. Abstracting demand into a financial market does not create the innovation for change that overcoming our addiction to fossil fuels will require. Finally, many of the numbers supporting the market are based on the companies’ honesty in reporting their emissions which are sometimes grossly inaccurate because of the dubious nature of the third-party, independent groups in finding inaccuracies combined with the difficulty of quantifying emissions (more info: http://www.climatecamp.org.uk/get-involved/get-educated/carbon-trading).
    Conclusively, the cap-and-trade program, again, puts our futures in the hands of privatized companies in a theoretical market driven by capitalism. If real change is to be made we, the people, must demand a better and cleaner future for ourselves, because those who profit off our addiction have no plans to break it.
    Bibliography

    N/A, 2006, “Assembly Bill 32: Global Warming Solutions Act.” CA.org. California Environmental Protection Agency, 2006. Web. 21 July 2013. < http://www.arb.ca.gov/cc/ab32/ab32.htm>.
    N/A, 2013, “What’s Wrong with Carbon Trading.” Camp for Climate Change. Camp for Climate Change, n.d. Web. 21 July 2013. <
    http://www.climatecamp.org.uk/get-involved/get-educated/carbon-trading>.
    Yang, Tseming, 2013, “An Introduction to California’s Greenhouse Gas Emission Trading Program.”Santa Clara Law School. Social Science Research Network, 1 July 2013. Web. 21 July 2013. <
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2281821>.

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