The Carbon Offset Sausage Factory

For quite a while, I have been arguing that cap-and-trade schemes are inferior to straight carbon taxes because of their susceptibility to rent-seeking and manipulation.  At the top of the list of problems is the carbon offset issue, the notion that someone can create and sell an offset to cap limits by reducing CO2 emissions in some novel way.  The offset products that exist to day are tremendously suspicious, as I wrote here and here.  In particular, the ability to resell the same emission reduction multiple times is a real danger.

The Guardian has an interesting look at the offsets being created by that bastion of good governance and management science, the United Nations.

The world's biggest carbon offset market, the Kyoto Protocol's clean
development mechanism (CDM), is run by the UN, administered by the
World Bank, and is intended to reduce emissions by rewarding developing
countries that invest in clean technologies. In fact, evidence is
accumulating that it 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 in the US, 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. Those pollution cuts that have
been generated by the CDM, he argues, have often been achieved at a
stunningly high cost: billions of pounds could have been saved by
cutting the emissions through international funds, rather than through
the CDM's supposedly efficient market mechanism.

The key problem, as I have pointed out before, is how do you know the reduction is truly incremental?  How do you know that it would not have occured anyway:

The world's biggest carbon offset market, the Kyoto Protocol's clean
development mechanism (CDM), is run by the UN, administered by the
World Bank, and is intended to reduce emissions by rewarding developing
countries that invest in clean technologies. In fact, evidence is
accumulating that it 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 in the US, 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. Those pollution cuts that have
been generated by the CDM, he argues, have often been achieved at a
stunningly high cost: billions of pounds could have been saved by
cutting the emissions through international funds, rather than through
the CDM's supposedly efficient market mechanism....

One glaring signal that many of the projects being approved by the
CDM's executive board are non-additional is that almost three-quarters
of projects were already complete at the time of approval. It would
seem clear that a project that is already built cannot need extra
income in order to be built.

LOL, yes that might be a good indicator something is amiss.  The other problem, beyond the staggering amount of outright corruption one would expect from any UN-operated enterprise, is this oddity:

Any type of technology other than nuclear power can apply for credits.
Even new coal plants, if these can be shown to be even a marginal
improvement upon existing plants, can receive offset income. A massive
4,000MW coal plant on the coast of Gujarat, India, is expected soon to
apply for CERs. The plant will spew into the atmosphere 26m tonnes of
CO2 per year for at least 25 years. It will be India's third - and the
world's 16th - largest source of CO2 emissions.

So nuclear plants, the one proven economic and scalable power technology that is free of CO2 emissions is the one technology that is excluded from the program?  But 4,000MW coal plants that can proves they are marginally more efficient than they might have been are A-OK?

  • John Anderson

    URL for the Guardian article?

  • Brad

    Hey.....shhhhhhhh. Not so loud. How are we s'pose to make the real "green" with people like you mouthin' off?

  • http://www.boingboing.net/2008/05/09/graduation-present-a.html AnnoyedCapitalist

    Interesting. BoingBoing recently put in a post advertising some awful donation/credit scheme. The employees of TerraPass and WorldChanging actually took the time to post on a blog during the day, in order to answer a lot of people's questions. (Including mine)

    One thing struck me: Even the people getting money from these credits don't understand the financial movements behind them. Multiple times, they conflated carbon credits with charity. And they did not seem to understand that the additional cash flows from a project belong to the original investor.

    So this is when it dawned on me: The only way to legitimately offset credits with those projects is to establish a separate company that reinvests its entire profits into further carbon reductions. Otherwise you are going to end up with wealth transfers to people who a) want the project anyway, b) benefit from reduced costs of the project, or c) otherwise siphon off the cash flows from the capital investments. I cannot believe I'm the only one who's realized this, so I have to assume there are some restrictions in actually creating such a company. I'm curious whether you have any further insight as to why the inefficient and corrupt model has succeeded where this one has not.

  • morganovich

    annoyed-

    i think you are looking at this the wrong way. everyone knows that that is what is going to happen. they are counting on it. it's how they built their "consensus". you give paper companies tax breaks for replanting forests they were going to replant anyway. in exchange, they support your carbon policies and you get to say "even the paper companies agree". the same is true in finance. goldman sachs has been a huge supported of carbon trading? why? because they have pole position to establish the carbon market. so "even wall st agrees".

    this sort of spreading the filthy lucre around for conforming to the issue du jour is nothing new. "big green" has become a HUGE business. they buy off the opposition (generally using government money or regulation) to keep the gravy flowing.

  • Mesa Econoguy

    Morganovich is exactly correct, and it’s plain to see (if you have the experience) that these people selling so-called carbon-offsets have little or no clue about how and why financial markets operate.

    Case in point: the Chicago Climate Exchange.

    This appears to be a rent-seeking market, nothing more.

    There is little to no translation from price of a "contract" to the underlying instrument. I'm unable to identify an underlying instrument, other than "anti-carbon," for which there is no uniform method of accounting or audit, despite claims to the contrary on their website. There are also many problems hedging the underlying mechanisms of supposed CO2 sequestration.

    It is extremely illuminating that the benefits of the exchange are:

    Be prepared: mitigate financial, operational and reputational risks
    Reduce emissions using the highest compliance standards with third party verification
    Prove concrete action on climate change to shareholders, rating agencies, customers and citizens
    Establish a cost-effective, turnkey emissions management system
    Drive policy developments based on practical, hands-on experience
    Gain leadership recognition for taking early, credible and binding action to address climate change
    Establish early track record in reductions and experience with growing carbon and GHG market

    Notice that carbon reduction is not the first and painfully obvious raison d'etre (supposedly) of this "exchange," rather it is reputational protection, as though smear campaigns are somehow worse than actual CO2 emissions/global warming.

  • http://www.boingboing.net/2008/05/09/graduation-present-a.html AnnoyedCapitalist

    Morganovich - I don't believe that those are their intentions, though. From the comments in the thread I linked to, it seems as though its just sloppy thinking and financial naivite. Maybe it's just discovering a way to play with other people's money without scrutiny: "I get to reduce carbon AND the farmer has to pay less."

  • http://www.tinyvital.com/blog John Moore

    I just finished reading the biography of Russia's assistant Rezidant for the SVR's (formerly KGB) Washington office. He states that another "well intentioned" UN program, Oil for Food, was controlled by the SVR. The resulting profits transferred $500,000,000 to Russia. As we know from other reports, OFF also allowed Saddam Hussein to place bribes all over the world, and to pocket huge amounts of money.

    Even if we needed to reduce carbon emissions (we don't), and we needed government to do it, the UN would be the worst possible choice. It is an utterly corrupt organization, using the naive faith of internationalists (such as Obama supporters) and the coercive power of member governments, to generate profit for companies, individuals, employees and countries.

  • will

    Beam me up Scotty, take me to a planet where intelligent beings runs the place, for surely it not on Earth.

  • Yoshidad1

    Once again the "conservative" commentators appear to throw the baby out with the bath water. The shocking $.5 billion transferred to Russia, or the malfeasance associated with carbon trading are peanuts compared to the subsidies enjoyed by the biggest carbon producer -- the petroleum industry in the U.S.

    The World Resource Institute (wri.org) estimated this domestic subsidy was $300 billion annually -- before Gulf War I. This figure includes things like the depletion allowance (a write-off for oil producers), road not paid for by gasoline taxes, and the military protection provided for oilfields and pipelines overseas (estimated at $50 billion pre-Gulf War I). This last item is essential since the U.S. imports nearly 70% of what it consumes.

    For those of you without calculators, $300 billion is 600 times larger than $.5 billion

    I'm open to alternatives to the U.N., but it would be a huge improvement just getting rid of current subsidies to U.S. petroleum producers. I'm not sure the U.S. government qualifies as more or less corrupt than the U.N., but so far, U.N. is not nearly as corrupt as a public policy apparatus that would give petroleum producers a gift orders of magnitude larger than anything the Russians managed to steal from the U.N.

    But here's the real question: How would you manage reducing global carbon emissions without a public policy apparatus of some kind? You know, a government, a United Nations, etc. I have no easy answers, but know that dismissing all such things because "the U.N. is corrupt" is straining at a gnat while swallowing a camel.

    So keep the indignation -- it's certainly deserved. Just don't suggest no collective action is possible. That may be true, but if it is, then we're all sunk, and we might as well stop rearranging the deck chairs, 'cause this baby's goin' down.

  • Srekwah

    Yoshidad1, Check the graph on the link below: that Big US Oil is actually small oil.

    With 94% of the world’s oil supply locked up by foreign governments, most of which are hostile to the United States, the relatively puny American oil companies do not have access to enough crude oil to significantly affect the market and help bring prices down. Thus, Exxon Mobil, a small oil company, buys 90% of the crude oil that it refines for the U.S. market from the big players, i.e, mostly-hostile foreign governments.

    http://www.powerlineblog.com/archives2/2008/05/020589.php