November 05, 2008
Is Waxman-Markey’s "Cap" and Trade System Full of Hot Air?
Is the cap and trade system at the core of the draft Waxman-Markey climate and clean energy bill full of hot air? That's what a new report from two environmental organizations warns.
Rainforest Action Network and International Rivers released an initial analysis (pdf) of the Waxman-Markey climate and energy discussion draft yesterday. The two environmental groups conclude that the cap and trade regulations established by the bill would be "blown to pieces" by the up to two billion metric tons of carbon offsets the bill allows polluters to use in lieu of pollution permits.
Despite all of the talk of establishing hard caps on global warming pollution, the use of so many offsets would stuff the cap full of hot air, making it not much of a cap at all. The report concludes:
Unfortunately the "firm" caps exist only on paper. In reality, the caps will be blown to pieces by allowing polluters to meet their emission reduction responsibilities through buying offset credits rather than reducing their emissions.
If the full amount of offsets allowed by the Waxman-Markey draft legislation were utilized by polluters, the report concludes that any actual emissions reductions in capped sectors of the U.S. economy would be delayed until 2026, allowing a full seventeen years of continued business as usual. (See figure below...)
"We tried to be even-handed, but somebody has got to point out there are huge holes in the bill," Rainforest Action's Mike Brune told SolveClimate. "And it will delay investments in the clean energy economy that the Obama administration wants."
The new report marks an honest and stark criticism from the environmental left of the offset provisions included in the Waxman-Markey bill. These provisions were included with the express approval of the mainstream green groups Environmental Defense Fund (EDF) and the Natural Resources Defense Council (NRDC) and the big business and industry interests they've joined with to form the United States Climate Action Partnership.
RAN and International Rivers are not alone in criticizing the cap-and-trade provisions of the Waxman-Markey bill. Their cry of alarm on offsets comes on the heels of a Friends of the Earth report warning that without new financial regulations yet to be established or tested, cap and trade systems would be rife with the same kind of financial shenanigans that brought on the current financial crisis.
The report, titled "Sub-prime Carbon," warns that cap and trade systems could create a carbon derivatives market even larger than the credit derivatives market before the financial collapse. Friends of the Earth concludes that the use of offsets in particular would create a market for "sub-prime" carbon derivatives just as risky as the sub-prime mortgage-backed securities at the heart of the financial meltdown.
Friends of the Earth says they have "concerns about "subprime carbon," risky carbon credits based on uncompleted offset projects (projects designed to sequester or reduce greenhouse gases)." They write:
Subprime carbon credits may ultimately fail to reduce greenhouse gases and, like subprime mortgages, could collapse in value, yet they are already being securitized and resold in secondary markets. The report recommends that lawmakers include carbon trading in current debates about financial reform, and warns against hastily creating carbon markets without proper oversight.
At the heart of concern over carbon offsets is the scale of offsets allowed by the Waxman-Markey bill. Two billion metric tons is enough to allow polluters to swap offsets for roughly 30% of all pollution allowances required to be held under the proposed cap and trade system. Those are "stunningly high levels of offsets" according to the RAN/International Rivers report, and would increase the global demand for carbon offsets by a factor of eight or more from today's levels.
Yet even at today's levels, global carbon offset markets supported by the Kyoto Protocol and cap and trade systems in place in Europe (as well as smaller markets for voluntary purchases of offsets by businesses and individuals) are under fire for including "hot air," offsets of dubious quality and questionable environmental benefit. As International Rivers explains:
The problem is that it is not possible to ensure the additionality of these credits - i.e. "that every credit represents real, measureable, and long-term reductions in emissions," as concluded by the Government Accountability Office in a November 2008 report [see previous BTI post]. Our analysis of the Clean Development Mechanism (CDM), the world's largest carbon offset scheme, suggests that upwards of 75% of projects that received offsets were not additional.
That conclusion is supported by a 2008 Stanford University study of the Clean Development Mechanism which also found that:
"between a third and two thirds" of emission offsets under the Clean Development Mechanism (CDM) -- set up under the Kyoto treaty to encourage emissions reductions in developing nations -- do not represent actual emission cuts.
This has led Climate Progress blogger Joe Romm to dub carbon offsets "rip-offsets" because of their questionable character (for once, we can agree with Romm on something!).
Defenders of offsets and the CDM say we shouldn't throw the baby out with the bathwater though, and that with stronger regulation and oversight, offsets can deliver credible and verifiable emissions benefits. Fair enough, but as even this defender of the CDM had to admit when I asked her at Grist:
You are right, I do not expect that the supply of offsets can be anywhere near the 2 billion annual mark that the legislation is foreseeing. Look at the CDM, after four years of real operation the potential delivery is only at 1.5 billion through 2012 and so far it has delivered "only" 277 million CERs ["certified emissions reductions" - aka offsets].
The heart of the problem is therefore this: there just isn't any way to supply anywhere close to 2 billion metric tons of offsets per year while ensuring that the large majority are anything but hot air. Real, verifiable offsets are possible to ensure, but they simply require significant oversight, regulation and monitoring, which adds to their cost and restricts their supply significantly.
That all means that if you want to allow a significant enough quantity of offsets in a cap and trade bill to serve as effective cost containment -- the main reason the bill relies so heavily on offsets -- you will by necessity be expanding the offset market to a scale far beyond which it can be credible by any stretch of the imagination.
Now, environmental groups like RAN, Friends of the Earth and International Rivers are hoping the offset provisions in the bill will be stripped and a true "hard" cap on emissions will be established. Unfortunately, that expectation is far from realistic. Cost containment is inevitable when it comes to carbon pricing policies. Policymakers in Washington -- or anywhere else that's tried to implement carbon pricing, for that matter -- simply aren't willing to let carbon prices rise unconstrained to whatever level is necessary to drive compliance with a truly hard cap on carbon. They know that would be political suicide with a public far more concerned about gas prices and the economy than global warming. EDF and NRDC know that, and it's why they recommended including so many carbon offsets in their USCAP blueprint, which serves as the inspiration for the offset provisions in Waxman-Markey.
So the issue isn't cost containment vs. no cost containment. The real question we need to be asking is this: what kind of cost containment do you want?
As I told Josh Nelson, a blogger at HuffingtonPost, when asked me about the offsets in the Waxman-Markey discussion draft:
"Allowing that many offsets pokes a giant hole in the carbon cap, stuffs it with plenty of hot air, guts the carbon price signal for sectors we actually need to transform and - most importantly - robs us of billions of dollars of auction revenue that can and should be reinvested to accelerate and smooth the transition to a clean energy economy."
And of course, along with a heavy reliance on offsets, the Waxman-Markey bill also includes complicated provisions that allow borrowing emissions permits forward from the future, another way to kick the can down the road and delay the need to truly accelerate capped sectors on their path to a new energy economy. Industry interests are also calling for (and some are already getting) guarantees of free permits to pollute as well, pretty much ensuring that the price signal truly felt by these sectors will be limited for some time into the future.
So the question I keep coming back to is this: why would these convoluted and complicated cost containment provisions be preferable to a simple and transparent upper bound on the price of carbon under a "cap" and trade proposal, or alternatively, a transparent and modest carbon tax? (I'm largely agnostic about those two options as long as allowances are auctioned under a cap and trade proposal).
Transparently setting an upper price on carbon would allow businesses to truly plan ahead for future carbon prices, rather than create the inherent uncertainty and risk involved in the kind of carbon trading markets Friends of the Earth warns about. And by setting a modest upper cost up front, climate advocates can silence once and for all - and with absolute certainty - the worst case, nightmare scenarios drummed up by status-quo forces opposing the transition to a clean energy future. Finally, by coming to terms with the reality of cost containment and the limits of carbon pricing, climate advocates themselves can design effective policies to overcome these limitations and truly drive the transition to a clean energy economy.
For now, leading climate advocates continue to push forward under the illusion that climate legislation will set a "hard cap" on carbon, despite all the evidence to the contrary. Time is short to come to grips with the reality that there's just no such thing as a "hard cap" on carbon coming down the pike and to design complementary and alternative policies to pick up where the limits of carbon pricing leave off.