By
Liz Bossley
Instead of trying to force rapidly developing economies such
as China and India to accept a cap on their greenhouse gas
emissions from 2013, the UN negotiators should be pushing for
such countries to meet a quota of green development projects.
These economies are going to grow, regardless of attempts to
constrain them: it may be more realistic to incentivize them
to expand in the most environmentally friendly way possible.
Furthermore, regulatory restrictions placed on the use of credits
from green projects in developing countries are skewing the
economics of mitigating climate change at least cost.
The
world has set itself a target date of December 2009 to reach
agreement
on what will happen after the Kyoto Protocol
expires in 2012. The big issue is whether or not the US will
join the international agreement and cap its greenhouse gas
(GHG) emissions at a level witnessed during a historic period.
The US is the largest GHG emitter in the world, although China
is catching up fast. And therein lies the problem. The US did
not ratify the first version of the Kyoto Protocol because
it did not include in its ‘cap-and-trade’ system
a limit on the growth of GHG emissions from rapidly expanding
economies such as China and India. The US senate is unlikely
to approve a new 2013+ agreement that continues to exclude
developing countries. The developing economies are equally
unlikely to sign a post-2012 agreement that involves a perceived
cap on their economic growth. Some radical thinking will be
required by the negotiators if this deadlock is to be broken.
Two Categories
The root of problem is that the Kyoto Protocol only recognizes
two categories of country: those that have accepted a cap on
their emissions; and those that have not. But the economic
and political reality is that not all countries can fit easily
into one category or the other. China and India, for example,
cannot realistically be expected to accept the constraint on
their economic growth that an emissions cap implies while so
many of their population live in poverty. Carbon intensity
is a proxy measure of economic development. The World Resources
Institute reports that in 2000 the average per capita emissions
of GHG in developed countries was 14 tons whereas in developing
countries the comparable figure was three tons.
But developing countries are as worried about the environmental
consequences of their development as the rest of the world
and are not hostile to cap-and-trade in principle. Together,
China and India have hosted 50% of the Kyoto Clean Development
Mechanism Projects (CDMs) registered to date. CDMs are one
of three key planks of the Kyoto Protocol designed to promote
sustainable development, reduce GHG emissions and help developed
countries meet their Kyoto commitments cost-effectively. CDMs
are rewarded by the UN with Certified Emissions Reduction (CERs)
allowances, each of which is equivalent to 1 tCO2e. CERs can
be traded in the market for cash. A developed country can buy
and surrender CERs to the UN in compliance with its GHG cap
as an alternative to reducing its emissions by domestic action.
Instead of accepting a cap on their emissions and constraining
their growth, CEAG strongly recommends that developing countries
should accept a quota of CDM projects to be completed during
each environmental compliance period. If the country were to
fail to fill its quota domestically it would have the option
of buying the shortfall of allowances in the international
market. Such a quota could not be mistaken for a limitation
on economic growth and would ensure that every unit of investment
would be tested for its environmental integrity.
When
a CDM project is proposed the host government developing
country
negotiates a share of the CER reward with the project
investors. If the host country had a CER quota to fill it would
concentrate its attention on proving the ‘additionality’ of
each project, ie how many tons of emissions the project saved
compared with a ‘business as usual’ scenario. The
quota could either be set in relation to the CERs retained
by the host government from each project or by the total number
of CERs generated by the project.
Emissions caps fit more easily on countries that have already
achieved a certain minimum standard of living. A combination
of developed country caps and developing country CDM quotas
would be one way of achieving the common objective of cutting
GHG emissions compared with a business as usual scenario. With
both developed and developing countries competing to buy allowances
in the market their price would rise, making more projects
economic and justifying investment in green technologies that
are not currently cost effective.
Whether or not this or any other suggested revision to the
Kyoto model would do enough to encourage the USA to agree a
realistic cap is difficult to judge in the run-up to the US
election when the front-running candidates are competing to
out-do each other in green rhetoric. All three have expressed
a willingness to adopt the cap-and-trade model, but that falls
far short of supporting a robust UN cap that will engender
emissions prices high enough to affect US businesses and modify
the behavior of the average US consumer.
Bali Background
At
the Meeting Of Parties to the Kyoto Protocol, COP 13/ MOP
3,1
in December 2007 the so-called ‘Bali roadmap’ was
agreed. A key component of it was a commitment made by an Ad
Hoc Working Group to reach a post-2012 agreement for adoption
at COP 15/MOP 5 in December 2009 in Copenhagen. The Kyoto Protocol
committed 37 countries, 38 if the US had agreed, to cut their
greenhouse gas emissions by an average of approximately 5.2%
below their 1990 levels during the period 2008-12. It is silent
on what happens after that.
Post-2012
Ad Hoc Working Group Meeting
| 31
Mar – 4 Apr 2008 |
Bangkok, Thailand
|
Jun 2008
|
- |
Aug/Sep 2008
|
- |
1-12
Dec 2008
|
Interim
Report to COP 14 in Poznan, Poland
|
Dec 2009
|
Outcome
Report, COP 15 in Copenhagen, Denmark
|
What Is Cap-And-Trade?
The
concept of cap-and-trade is simple. A central authority,
in the case
of the Kyoto Protocol the UN, sets a limit on level
of GHG emissions that it will permit during a specified period,
ie 5.2% below the level seen in 1990. The central authority
grants a number of allowances, ie rights to emit, to the capped
countries that is intended to be below their current emissions
levels, thereby creating a shortage of allowances. The emitters,
in this case the 37 capped, or so-called Annex B, countries
must have sufficient allowances to cover their actual emissions
levels over the target period, in this case 2008-12. They must
surrender to the UN by 2015, the Kyoto accounting or ‘true-up’ period,
enough allowances to cover what they actually emitted during
2008-12. The emitter, faced with an allowance shortage, can
cut its production, invest in cleaner technology that emits
less carbon per unit of production, or buy in the market sufficient
allowances to cover its shortfall.
For Kyoto to achieve anything there must be a shortage of
allowances such that their traded price is high enough to incentivize
change. A positive allowance price will encourage countries
that can cut their emissions cheaply to do so in order to generate
a surplus of allowances to sell to those countries for which
emissions cuts are less easy or more expensive.
So
far, so good, except that George W Bush would not accept
the 2008-12
emissions cap conceded for it by Bill Clinton in
Kyoto negotiations – 7% below 1990 levels – because
it saw this as potentially damaging to its economy. Furthermore
the fact that the fastest growing economies, like China, India
and South Korea, are not capped Annex B countries was seen
by the US as giving those countries a competitive carbon cost
advantage in international trade.
Alternative To Cap And Trade
The
statement issued by the UN after the Bali meeting in December
2007
was carefully worded not to limit discussions to the cap-and-trade
concept or to mention the need for the US, China and India
to accept caps. It simply referred to “enhanced national/international
action on mitigation of climate change, including, inter alia,
consideration of… various approaches, including opportunities
for using markets, to enhance the cost-effectiveness of, and
to promote, mitigation actions, bearing in mind different circumstances
of developed and developing countries.”
Cap-and trade is not the only model for a post-2012 deal.
For example, in July 2005 the US, Australia, China, India,
Japan, and South Korea created a new Asia-Pacific Partnership
(APP) on clean development, energy security and climate change.
Canada joined the partnership in October 2007. These seven
countries account for about 50% of global GHG emissions. Australia,
Canada and Japan are Kyoto Annex B, or capped, countries. China,
India and South Korea are Kyoto non-Annex B, or uncapped, countries.
The
APP is not a cap-and-trade system. The vision statement of
the
APP said that “the partnership will collaborate
to promote and create an enabling environment for the development,
diffusion, deployment and transfer of existing and emerging
cost-effective, cleaner technologies and practices, through
concrete and substantial cooperation so as to achieve practical
results.” In practice, this statement is translated into
action by eight private-public task forces that have so far
announced 110 collaborative projects.
The current objective of the post-2012 discussions is to bring
the USA, China and India into the Kyoto capped Annex B group.
Unless the negotiating stand-off can be resolved, the new deal
for 2013+ might not be a cap-and trade scheme at all. It may
instead build on the APP model. It is debatable if this would
be a better outcome than buying the agreement of the US, China
and India to become Annex B capped countries at the cost of
caps that are set unrealistically high. That would lead to
a surplus of allowances on the market and a carbon price that
was too low to incentivize change or support the adoption of
new low-emission technologies.
The
first Kyoto commitment period is under threat from a surplus
of
allowances in Russian hands. This surplus is larger than
the expected shortages of all the other capped countries put
together. This is because of the choice of 1990 as the base
year against which emissions caps were set: in 1990 the USSR’s
economy was much larger than that of the countries that emerged
when it broke up. This surplus will exert downward pressure
on prices during 2008-12. Russia can choose to carry forward
some of its surplus into 2013 and beyond, if a new post-Kyoto
deal is agreed, when caps should be set lower. Furthermore
the countries that are short, notably Canada and Japan, have
said they will not buy ‘hot air’ from Russia, ie
surplus allowances that have been generated without any effort
to cut emissions levels. Nevertheless, the existence of the
Russian surplus should put a psychological ceiling on prices
in the first commitment period.
The longer it takes to reach a 2013+ agreement the more likely
it is that Russia will sell its surplus in the first commitment
period: if the second commitment period looks uncertain, or
veers towards a solution other than cap-and-trade, the more
likely it is that Russia will take what price it can get to
sell its surplus now. This would lead to a price collapse and
give ammunition to those who argue that cap-and-trade is an
unworkable model.
CDM Slowdown
Already the delay in agreeing a post-2012 deal is undermining
the Kyoto cap-and-trade principles. After an initial rush to
register CDM projects the stream of new ones has slowed to
a trickle. This is because the concept of CDM relies on the
ability to sell the CERs given as a reward to green project
investors over the life of the project to achieve payback on
the extra cost of making a project environmentally friendly.
If Kyoto comes to a full-stop in 2012 projects undertaken now
would have to achieve payback in an unrealistically short period
of time.
The
slowdown in CDM registrations also reflects the fact that
all the ‘easy’ projects were done first and new
projects require higher CER prices to make them economic. CERs
that have already been issued by the UN’s CDM executive
board, and are therefore no longer subject to project delivery
risk, trade at about a €5/ton discount to comparable European
emissions allowances (EUAs). This is because EUAs are guaranteed
to continue to trade under the EU emissions trading scheme
after 2012, even if a new Kyoto deal is not agreed. The fate
of CERs after 2012 is questionable. There is a limit on the
number of unused CERs that can be ‘banked’ or carried
over for use post-2012, even if a new international cap-and-trade
deal is achieved. That too depresses the relative price of
CERs.
Furthermore, CERs are second class allowances under the Kyoto
and European schemes. There is a so-called supplementarity
limit under the Kyoto Protocol that restricts the number of
CERs or other project-based allowances that can be used by
countries in compliance with their Kyoto cap. This is designed
to ensure that capped countries are obliged to undertake green
investment at home as well as in cheaper locations abroad.
Phase 2 of the EU emissions trading scheme places specific
supplementarity limits on the use of CERs on a country-by-country
basis.
The concept of supplementarity is unhelpful. While the scientists
may not agree on everything concerning climate change, there
is no argument over the fact that there is no difference between
the global warming effect of a ton of carbon dioxide emitted
in China or India and one emitted in the US or Europe. So by
placing a limit on the use of CERs the Kyoto Protocol obliges
developed countries to undertake domestic projects that may
be less economic than those undertaken overseas. If we have
a high carbon price the projects will all get done. If the
successor to the Kyoto Protocol were to permit the unrestricted
use of foreign project credits like CERs then the same number
of global projects would still be undertaken, but strictly
in order of economic merit.
The deadlock in post-2012 negotiations must be broken. This
is why CEAG is recommending the introduction of a CER quota
system. If the CDM project flow continues to dwindle as the
post-2012 negotiations drag on, as it inevitably must as the
payback period shortens by the day, more ammunition will be
placed in the hands of the anti-cap-and-trade lobby.
1.
COP stands for ‘Conference of Parties’ to
the UN Framework Convention on Climate Change, a meeting
which
takes place in December each year. Since 2005 the COP has
coincided with an annual Meeting of Parties, or MOP,
to the Kyoto Protocol.
CEAG - Consilience Energy Advisory Group Limited
WORKSHOP
Foundation Emissions Course: Regulation, Risk Management and
Carbon Pricing
12-13 June 2008
11-12 September 2008
20-21 November 2008
BOOK
One Climate Change and Emissions Trading: What Every Business
Needs to Know, SECOND
EDITION 2007
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