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How to Repair the World’s Broken Carbon Offset Markets

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How to Repair the World’s Broken Carbon Offset Markets by Robert Mendelsohn, Robert Litan and John Fleming, in Yale Environment 360 is a story all about how to mitigate and/or slow down Climate Change as seen from the US. The above-featured image of the publication is obviously of a street scene in Asia. Here it is.

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Markets that connect businesses hoping to offset their carbon emissions with climate change mitigation projects have been plagued by problems. But an economist and his co-authors argue that carbon markets can be reformed and play a significant role in slowing global warming

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In the wake of the Glasgow climate summit, governments must now return to the daunting challenge of making good on their emissions-reductions pledges, which at this point remain insufficient to hold warming below 2 or even 1.5 degrees C above pre-industrial levels. Recognizing there are many political constraints that will make it difficult for countries to adopt policies that cut greenhouse gas emissions across the board, the agreement allows each nation to design its own individual national commitment. The United States is grappling with this very issue as it seeks passage of the Build Back Better initiative, with its ambitious goals to slow climate change.

Ideally, governments should reduce emissions with carbon taxes and efficient regulations. But most governments are reluctant to regulate or tax all emitters, such as power plants, electric companies, or forest managers. That means some low-cost mitigation opportunities — such as replacing coal-fired power plants with natural gas facilities, funding transmission lines to renewable energy sites, or letting trees grow for longer periods before cutting in managed forests — will invariably be missed by government rules and regulations.

One potential solution is to pay for these missed opportunities through voluntary and offset carbon markets. The Glasgow agreement encouraged voluntary carbon markets to operate in developing countries so that private entities could immediately support emissions reductions there, but it remains to be seen whether these markets will in fact help reduce emissions or whether the markets will turn out to be just greenwashing.

Voluntary markets collect payments from private donors, companies, foundations, and potentially even countries, and then pay emitters to reduce their CO2 emissions.The Chicago Board of Trade established a carbon market from 2003 to 2010, and the Task Force on Scaling Voluntary Carbon Markets, a private sector initiative, hopes to establish a large future voluntary carbon credit market.

Although carbon markets have great potential, they have often failed to show that they lead to a reduction in CO2 emissions.

Offset markets, in contrast, allow companies that must reduce emissions under a regulation to pay other firms to do the mitigation instead. A prominent example of a carbon offset market is the timber offset program of the California Air Resources Board, which was created in 2006 as part of the cap-and-trade program for greenhouse gas emissions in California. Companies that find it too expensive to make all of their required emissions reductions under the cap-and-trade program can buy carbon credits instead. The carbon credits pay selected conservation groups across the country and Alaskan Native Americans to conserve their forests. A large fraction of the carbon stored in these forests can be used as carbon credits.

The potential beauty of voluntary carbon markets is that they can identify and fund low-cost mitigation actions that government regulation and taxes will miss. For example, regulations may overlook some technologies, such as more energy-efficient combustion engines or more energy-efficient air cooling and heating equipment, that help reduce greenhouse gas emissions. The voluntary market could fund these technologies. The government may exempt some sectors, such as agriculture, from the regulations even though farms account for 11 percent of greenhouse gas emissions. The voluntary market could pay farmers to adopt practices that sequester more carbon or otherwise reduce CO2 or methane emissions.

Likewise, governments might choose not to regulate small companies. The voluntary carbon market could include those firms and pay them to mitigate. Finally — and maybe most important of all — voluntary markets could support mitigation in jurisdictions with governments that are unable or unwilling to mitigate. The Glasgow agreement specifically recognized that voluntary markets could lead to private funding of mitigation in developing countries, such as forest conservation projects.

Although voluntary and offset markets have great potential, both have consistently failed to show that they lead to a net reduction in carbon emissions — what is known as additionality. For example, the voluntary and offset markets have funded many conservation forests, and those forests store carbon. The problem is that these forests would have stored carbon whether or not they were in the carbon market program. The market did not lead to additional carbon being stored, but merely paid entities that were already committed to storing the carbon. So the funding did not result in any change in the status quo. There was little additional emissions reduction caused by this forest offset market —an example of well-intentioned greenwashing.

The Amazon rainforest near Manaus, Brazil. Past carbon markets involving forests have been criticized as greenwashing. CIFOR VIA FLICKR

A similar problem can occur with credits for investments in mitigation or energy conservation. Did the carbon payment cause the investment to occur, or is it just rewarding a company that would have made the investment in any case? If the carbon market simply rewards actors for doing what they were going to do anyway, the market is having no additional effect and is not leading to any emissions reductions. Past voluntary and offset markets have failed this “additionality” test. Some projects may have led to additional mitigation, but many did not.

If these markets are to make a measurable change in emissions and a meaningful contribution to mitigation, they must be organized differently, so that carbon market payments incentivize emitters to make verifiable — and additional — cuts in emissions.

The Task Force on Scaling Voluntary Carbon Markets argues that additionality can be readily handled by having an expert committee review each project. If the experts can see that the funds paid by the market led to the project being financially viable, then it passes the additionality test. However, to determine the answer for every small project and investment requires an enormous amount of research into local conditions and circumstances. It is simply too difficult and expensive to measure this on a project-by-project basis.

The result is that many of the carbon credits given out in both the voluntary and offset markets in the past have not led to a change in emissions. For example, as much as 80 percent of the California forest offset credits failed an additionality test because most of the alleged additional carbon being stored was going to be stored with or without credits. The Chicago Board of Trade’s carbon market eventually folded because a ton of carbon was selling for less than a dollar — far too low a price to have actually led to mitigation. This was mitigation in name only, not in reality. If this poor performance continues, offset and voluntary markets will remain ineffective. If the money being spent on offsets and voluntary credits would otherwise have been spent on actual mitigation, the markets would actually be reducing mitigation, not increasing it.

Markets must move away from funding small projects and toward paying entire companies to reduce emissions.

If markets are going to become serious about helping address climate change, they must move away from funding small, individual projects and toward paying entire companies to reduce emissions. When markets pay companies to change their emissions levels, it becomes much easier to measure additionality. First, it is relatively inexpensive to calculate company-wide emissions over time. Second, it is relatively simple to determine what a firm would have done in the absence of the carbon market. The market could rely on widely accepted models that predict the future emissions of industries as a baseline to judge what would happen without carbon markets. Companies would then get credit to the extent that they reduce their emissions more than the industry baseline.

For example, one might predict that the livestock industry would increase its emissions proportionally as it grows. If a livestock operation can reduce its emissions per head of cattle, it would get a credit for each ton of methane or CO2 reduced. The steel industry might be predicted to reduce its emissions by 0.3 percent per ton of steel each year just from energy savings. Any steel operation that can reduce its emissions by more than this industry prediction would get a credit. The baseline for each industry — and possibly for each industry in each part of the world — would be predicted for the coming decade. Companies could readily compare their performance against their industry baseline. Markets could reward companies that exceed industry predictions.

How difficult is it to predict industry-level emissions for a ten-year period? This task was readily accomplished by several teams for the Intergovernmental Panel on Climate Change’s 2014 mitigation report. Using existing energy-economic models, the teams made predictions of decadal carbon emissions by industry for different regions of the world. Based on predicted prices and economic growth, the models forecast the level of emissions by industry if there was no mitigation. Preparing such industry-emissions predictions is relatively straightforward.

Given an industry-predicted baseline, all the market has to do in order to prove additionality and verify credits is to measure company emissions. Although companies are not yet required to publish their annual emissions, this will eventually be necessary for government programs to implement carbon taxes or mandatory mitigation. Stockholders may also want to know company emissions in order to understand the mitigation liabilities of each firm. Measuring carbon emissions at the company level is becoming reasonably inexpensive, so mandating businesses to measure and report these emissions is a reasonable requirement.

A cow at a farm in Deerfield, Massachusetts. Agriculture currently accounts for 11 percent of global greenhouse gas emissions. LANCE CHEUNG / USDA VIA FLICKR

Verification of emission reductions and proof of additionality will go hand in hand. Markets that adopt this company-level analysis will encourage efficient mitigation. All companies with mitigation costs that are below the voluntary market price of carbon will effectively get paid to do whatever greenhouse gas reductions remain.

Of course, if future regulations are imposed on an industry, the market will have to change the predicted industry emissions accordingly. Fortunately, there is an answer to this problem as well. The energy models that predict industry emissions with no regulations can also predict industry emission with regulations. The regulations would change the baseline. The firm would only get credit for reducing emissions more than the new industry baseline based on the new regulation.

Utilities could also seek credits for reductions in emissions that might incentivize their customers to cut energy use and therefore reduce emissions. Given that utilities have monopolies over their customers, it could make sense to measure not only a utility’s own emissions but also the emissions of its customers. Utilities could encourage their customers to conserve energy. Companies could also create incentives for businesses in their supply chain to reduce emissions, or those firms could enter the carbon market themselves and earn credits. However, sometimes it might be more effective to have a large company create an incentive program for all of its suppliers to reduce emissions. The large company would organize the emission reductions among suppliers and the company would earn the credits.

Finally, companies in countries that have weak mitigation programs, or no mitigation, could apply directly to the voluntary market for funds. As suggested by Glasgow, this might be an excellent mechanism to obtain private funding for mitigation in developing countries, with the money coming largely from private entities in rich nations. In addition, companies in nations with little mitigation could participate in the offset markets and become compliant with international standards on CO2 reductions. This might be particularly advantageous for firms that export their product to the world at large, thus exempting them from any future border taxes on carbon.

By establishing reliable, verifiable benchmarks for greenhouse gas reductions — both for individual companies and industries as a whole — voluntary and offset markets could take their place alongside government programs to move the world toward a low-carbon future.

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Robert Mendelsohn is the Weyerhaeuser Davis Professor of Forest Economics at the Yale School of the Environment. Robert Litan is a non-resident senior fellow in the economic studies program at the Brookings Institution, a program he formerly directed. John Fleming is a business consultant and entrepreneur who works at the nexus of finance and climate change.

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UAE must learn from UK’s COP26 when it takes climate leadership

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It should not be any surprise to witness first-hand that the good destiny of the planet appears to be postponed from COP to COP because of the obvious preponderance of petrodollars over any agreement, even at the now well-proven cost of jeopardising the planet’s Climate. The UAE must learn from UK’s COP26 when it takes climate leadership by Jonathan Gornall who rightfully forehears “voices will be raised protesting that handing control of COP28 to the UAE is akin to asking a fox to beef up the security of a chicken coop”.

One of the world’s biggest producers of fossil fuels will be in charge of negotiations to wean the world from its addiction to fossil fuels

With hindsight, it seems incredible that, until now, ever since COP1 in 1995 the words “coal” and “fossil fuel” have failed to make the cut in the final reports of any of the Conferences of the Parties to the UN’s Framework Convention on Climate Change.

That would be like a report by the World Health Organization on the global response to Covid-19 failing to mention the SARS-CoV-2 virus – unthinkable.

As every schoolchild in the world surely knows, the climate-change catastrophe looming over the planet has been generated by the unfettered burning of fossil fuels – coal, oil and gas – since the dawn of the coal-powered Industrial Revolution in the 18th century.

The annual failure of COP delegates to acknowledge the fossilized elephant in the room has, of course, been the product not of ignorance, but of the myriad social and economic pressures, experienced by multiple countries at different stages of development.

Forget elephants, the animal present at every COP for the past quarter of a century has been a giant ostrich, with its head buried deep in the ground. At Glasgow, the ostrich was finally allowed to raise its head, albeit only for a brief peak at reality. Even then, attempts to overthrow King Coal were watered down by last-minute interventions from its loyal subjects, China and India.

What the world needs now, more than anything else, is compelling leadership.

One announcement to come out of Glasgow was that COP28 in 2023 would be staged in the United Arab Emirates, home to the UN-created International Renewable Energy Agency (IRENA). This isn’t the first time the COP roadshow has traveled to the Middle East – in 2012 COP18 was held in Doha – but a decade on the climate-change landscape has changed utterly.

Doha was not insignificant. It was one of a series of dull but necessary COPs that paved the way toward the Paris Agreement in 2015, and it was the first time that developing countries signed up to a legal obligation to reduce their emissions.

The Paris Agreement was to limit global warming to 1.5 degrees Celsius above pre-industrial levels. To achieve that, the world needs to cut global greenhouse-gas emissions by more than 26 billion metric tons every year between now and 2030. To say that the total emission-reduction pledges scraped together in Glasgow of just over 6 billion tons fell short is to understate the huge gap between ambition and commitment.

It highlights the monumental scale of the challenge for the country presiding over these conferences. That the UK’s COP26 president Alok Sharma was almost in tears as he announced the watered-down deal goes some way to illustrate the personal and institutional commitments required by the host.

The kind of leadership needed to rally the world’s nations and their disparate interests to commit to an agreement often appears beyond possibility. Then there is the task of making sure the outcomes and expectations of any COP event are stuck to.

The UK had to draw deep on its resources and global leadership experience just to make Glasgow happen. With more than 25,000 delegates descending on the city, the policing bill alone was estimated at the equivalent of more than US$300 million.

The pandemic brought big challenges to hosting the event, but it also gave Sharma’s team an extra year to prepare after COP26 was pushed back from 2020. The UK won the bid to host the event in September 2019, but Sharma was only appointed president in January 2020 after Prime Minister Boris Johnson fired his predecessor Claire Perry O’Neill.

The jostling showed the escalating importance placed on the herculean task of cajoling global powers into alignment on saving the planet.

While many have called the COP26 outcomes a failure, Sharma won praise for his balanced leadership that involved building relations with small island states most at risk from rising sea levels while handling tricky meetings with Chinese officials in Beijing.

It is some of these skillsets that the UAE will have to draw upon as it prepares to take the reins in 2023. The Emirates has been entrusted to host the event based on its existing commitments toward the environment and renewable energy, including investing heavily in the new sciences of carbon capture, utilization and storage (CCUS), and nuclear energy.

Yet the UAE has more to lose than many countries from the inevitable transition to sustainable fuels, but much more to gain than most in shaping the elements of tomorrow’s energy market – and, thanks to its oil and gas revenues, it has the necessary funds to invest in the future today.

But forging its own path is very different to consensus-building between nations with conflicting interests. What lessons can be learned from previous COP hosts and how the UAE can build on their efforts yet bring its own style of leadership is yet to be seen.

Doubtless many voices will be raised protesting that handing control of COP28 to the UAE is akin to asking a fox to beef up the security of a chicken coop. Fingers will also be pointed at comments this week from the group chief executive of Abu Dhabi National Oil Company (ADNOC) that “the oil and gas industry will have to invest over $600 billion every year … until 2030 … just to keep up with expected demand.”

But to express alarm at this is to misunderstand the nature of a global energy system undergoing dramatic change.

None of the world’s countries can “simply unplug” abruptly from fossil fuels. The world is recovering from the Covid-19 pandemic and demand for oil and gas is rocketing – in the process creating the essential wealth in the Persian Gulf region necessary to fund and drive the transition to renewables.

For the UAE and countries such as Saudi Arabia, much of the profit being drawn out of the earth now is being plowed directly into the type of research and development that ultimately will save the planet.

The UAE is working hard to curb its own domestic consumption of fossil fuels. Last month, it announced it was aiming for net-zero carbon emissions by 2050 – an ambitious target on a par with those of the UK, the US and the European Union.

How? Well, it turns out that oil was not the only economic blessing bestowed on the fossil-fuel-producing countries of the Middle East.

Sunlight is the resource that gives on giving and, in the Gulf, is available for the greatest part of the year. The UAE is already leading the way with domestic solar power plants and investing in solar technology. 

COP28 in 2023 will put one of the world’s biggest producers of fossil fuels in charge of negotiations to wean the world from its addiction to fossil fuels. It will put the UAE under a global spotlight that will require an exemplary level of leadership and diplomacy if the climate negotiations will continue to move forward.

And as the outcome of the UK meeting demonstrated, progress is incremental. 

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Jonathan Gornall is a British journalist, formerly with The Times, who has lived and worked in the Middle East and is now based in the UK.

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