To me the most striking element of McCain's just-released carbon cap-and-trade plan is that it would, at least at the outset, allow regulated entities to achieve 100 percent of their emission reductions through the purchase of domestic or international offsets. By way of comparison, the Lieberman-Warner climate bill headed for the floor of the Senate caps the contribution of offsets at 15 percent, and requires that all the offsets be from domestic projects.
This is a genuinely radical feature of McCain's plan, and it isn't getting nearly enough press.
The offsets provision does give McCain some cover with conservatives and coal state legislators. What they want is for mandatory emission reductions to wait on the development of technology to capture and sequester carbon -- that's the only hope the coal industry has in a carbon-constrained economy. They say: don't make us reduce emissions until we have a way to do it, or we'll get jammed with huge costs. In short, they want the coal tail to wag the climate policy dog.
McCain thinks he's devised a way to mollify them. For the time being, coal utilities can meet their emission obligations through the purchase of offsets, which are, relatively speaking, cheap. The easy availability of cheap offsets will keep the price of a ton of carbon low for the foreseeable future, allowing coal utilities time to develop sequestration technology -- or more precisely, allowing the federal government time to subsidize the development of the technology.
It's a pretty sweet deal for Big Coal. How sweet? The EPA analysis of the Lieberman-Warner bill said that if the use of offsets were unlimited, the price of a pollution permit would fall by over 70 percent from the bill as written. A study from the carbon market analysts at New Carbon Finance predicted that a cap-and-trade program could hold carbon prices to $15/ton if it allowed compliance via offsets from developing countries.
Naturally carbon traders like JP Morgan and Natsource are lobbying Congress furiously to allow offsets into the plan. But the promise that prices could be held down, sectors not directly covered by the cap-and-trade program could be incentivized to reduce emissions, and developing countries could see a sustainable development aid stream has generated qualified support even from some progressives (see, e.g., this report from the Center for American Progress).
What could be wrong with a measure that a) holds prices down while b) reducing emissions and c) funding sustainable development in developing countries?
The problem is that there's good reason to believe the use of offsets would do none of the above. A new report out of the Program on Energy and Sustainable Development at Stanford, by long-time carbon market analysts David G. Victor and Michael Wara, argues that "the theoretical benefits of lower costs and broader engagement of developing countries through the extensive use of offsets are an illusion. They are based on the assumption that it is possible to administer an offsets system so that it rewards only bona fide reductions. This assumption is valid for only a fraction of the real offsets market."
The basic tension Victor and Wara identify is between quality and quantity. Of the emission reductions that have been secured thus far under the CDM -- which vastly outweigh direct domestic reductions undertaken in Europe -- Victor and Wara argue "that many of these reductions could have been accomplished at a far lower price; that many credits are probably not backed by real reductions; and that the promise of such a massive supply of credits is extremely unlikely if even the current (poor) level of environmental quality of the program is to be maintained." McCain's plan would allow offsets to come from international sources like the CDM, so the U.S. would be buying into a program that's already overtaxed and of dubious utility in reducing emissions.
How would a McCain administration ensure that domestic offsets are verifiable and additional? It would establish a private-public organization called the "Climate Change Credit Corporation," which would (among other things) vet offsets. This would mean:
- many wealthy, politically connected industries would be highly desirous of inexpensive offsets -- demand for cheap offsets would be enormous;
- a partnership between private industry and a Republican administration would be in charge of applying rigorous standards to offset projects;
- rigor would mean moving slowly, but immense pressure -- from coal legislators, coal utilities, and coal ratepayers -- would be levied on the CCCC to hurry up and increase supply to meet demand.
Under those circumstances, it is difficult to imagine a system free of rent-seeking, back-room arm-twisting, or outright corruption.
McCain's plan stipulates that a) offsets would help keep carbon prices down, and b) all carbon offsets will be verified and real. But it might as well stipulate a magic pony. Under the dynamic that would be created, it's highly unlikely that enough offsets could be verified to usefully smooth out price spikes, and those that are verified will have been approved under enormous pressure and persistent suspicion of chicanery.
McCain's carbon policy will create a system that begs to be gamed and manipulated. The result will likely be many years of delay in generating the far-reaching changes the climate crisis requires.
N.Y. Sen. Kirsten Gillibrand answers Grist’s questions on the Kerry-Boxer bill
Kerry-Boxer muddies handling of international offsets
Comments
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Gar Lipow Posted 12:57 am
13 May 2008
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amazingdrx Posted 1:33 am
13 May 2008
Let us imagine, how would a hedge fund set up a scam to incorporate the McCain plan? Following the past models of hedge fund bubble inflation market manipulation. Mainly the most recent bubble, that caused the global credit ctisis and our present economic problems here in the US.
I think contractors would be set up to contract, sub-contract, sub-sub-contract...all the way down to the farmer burning jungle and planting trees, for instance as in other offset scams.
Contracting companies set up in in multiple levels by corporate cronies (as in iraq contracting and sub-contracting), then "profits" would be accrued at each stage. These companies would be easily manipulated in terms of "earnings expectations", depending on contracts with each other. One company would get a big boost for "offset management fees", to coin a likely scam phrase.
Inside information on these chains of companies could be used to manipulate trading. A bubble, ultimately feeeding on consumer electricity prices, for instance, could reap huge windfall profits for the scammers. As it did in the subprime mortgage scam.
Would any trees be planted or jungle burned? As a worse than fake "offset"? Probably a few demonstration projects for politicians to junket ..in some tropical paradise? Yep.
The jet fuel they would use to junket producing 100 times the GHG that the jungle burning/tree planting does.
I would rather see any money charged for GHG emission spent paying people to produce power from their home solar panels. At the rate of 10 cents per kwh. No scams, no trades. Just the cash for the GHG free grid power.
Take the cash from industry subsidies, write a check to a homeowner, to help pay for their solar panels. Or farmers to pay for biogas power plants to back up the grid. Or wind farms on their farm.
OPEC meet farmer Brown, he is going to be eating your lunch from now on, hehey.
http://amazngdrx.blogharbor.com/blog
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Tasermons Partner Posted 3:43 am
13 May 2008
I mean, I know there are plenty of possible offset projects, both domestic and abroad, but we're talkin' some serious polluters here...like in the billions-of-tons-of-GHGs-range big.
One would think that'd fill up the available credits fairly quickly and costs for new credits would rise as demand outstripped supply (temporarily, at least).
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amazingdrx Posted 4:00 am
13 May 2008
http://amazngdrx.blogharbor.com/blog
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David Roberts Posted 5:27 am
13 May 2008
grist.org
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Glenn Hurowitz Posted 6:11 am
13 May 2008
Third, the CDM rules should be liberalized to allow all forms of carbon reductions. At present, the CDM has an eclectic (but growing) array of methodologies, many concentrated on projects that deliver small volumes of credits for projects of dubious additional effort. Adding other large sources of reductions for which it is easier to assign additionality--such as CCS projects as well the growing array of possible forest-based net reductions in emissions--would ease the task of reorienting the CDM to a smaller number of projects with higher integrity.
It's also important to note that verifiable offsets have received powerful support from the Bali conference (PDF), the Stern Review (PDF), the World Bank (PDF).
One reason is that forest offsets are far cheaper than most offsets, with about 50 percent being able to be achieved at a cost of less than $20 US /ton CO2. That means that deforestation globally can be cut in half for approximately $5 billion a year (PDF), according to the IPCC (completely stopping deforestation might cost an additional $10 billion, still super cheap compared with other forms of emissions cuts).
To put this in perspective, that's a cost of about $3.50/ton, far cheaper than either direct or international Clean Development Mechanism greenhouse gas reductions.
What this cheapness means is that more greenhouse gas reductions can be achieved through forest conservation far faster than in any other sector.
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TomCasten Posted 7:14 am
13 May 2008
You have this one wrong.
The goal is not, I repeat not,high price carbon allowances. The goal is to reduce carbon emissions at the lowest possible cost, preferably with a profit. Climate change is a world problem, requiring optimal solutions - i.e., solutions that reduce carbon and save money. If the US forces very high price carbon reductions, which nations are going to emulate our policies when the see that those policies tanked the economy?
Who benefits from selling allowances to the inefficient coal plants? Answer: every producer of clean energy, whether renewable, more efficient combined heat and power, recycled industrial waste energy, or something we do not yet imagine. Every opportunity to sell excess emission credits improves the prospects for building clean energy, which is good. Wall Street likes this not because of the relatively small profit potential from organizing trades, but because it minimizes the costs of reducing carbon.
Finally, I submit that neither the 'love' lavished on democrats or the distrust of republicans on global warming control is warranted by the facts. No administration since Eisenhower has done anything to improve utility efficiency. The Senate resolution to oppose Kyoto was almost unanimous. No administration has proposed anything very bold, and we are clearly on a course of leaving no child unharmed.
We must focus on solutions, not knee jerk against any suggestion because of who said it, and avoid using climate as a bargaining chip for partisan politics. The parties have to come together on climate.
We need Senator McCain to move to full output allowance standards on all four pollutants, then have the Democrats agree to use output standards to replace the counterproductive New Source Review Standards that bar investments in efficiency. Finally, we must stop the Warner Lieberman approach of buying votes for a very bad allowance approach with gifts of carbon allowances to every vested interest, but no allowances to new clean energy.
Tom Casten
Tom Casten, Chair, Recycled Energy Development LLC
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GreyFlcn Posted 9:39 am
13 May 2008
They put in a carbon permit system.
(Fixed number of tradable permits)
And separately, created an offset rebate program paid for by permit revenues.
By seperating the two, you could be pickier about what qualifies as an offset, and hopefully shift the burden of proof.
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GreyFlcn Posted 9:46 am
13 May 2008
Unless the spoof went to pay for buying carbon permits, it wouldn't really affect the permit system.
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Oh yeah, and auction the permits, since there's a fixed number of em.
Maaaybe include a year-to-year permit banking system as well. Maybe.
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David Roberts Posted 9:52 am
13 May 2008
GreyFlcn, if emission reductions outside the covered sectors could be validated with enough certainty to qualify as offsets, why shouldn't they be covered by the program itself? That's the key question.
grist.org
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GreyFlcn Posted 10:59 am
13 May 2008
They could just apply those rebate funds to buying carbon permits.
The benefit being though that bogus offsets would most likely pocket the rebate money, rather than purchasing carbon offsets with it.
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The reason for the split though is to try to keep a tighter grip on the allowable annual carbon emissions.
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GreyFlcn Posted 2:40 pm
13 May 2008
http://www.gamedev.net/reference/design/features/balance/ ...
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Heh, at one point in time I was seriously consider game design.
And one thing you learn very early on in gameplay design, is that you have to make it so that even if people are trying to exploit/cheat the system, how to still maintain a strong set of rules.
Since thats all a "game" really is, a set of rules designed to shape one's choices.
http://en.wikipedia.org/wiki/Game_theory
Ideally achieving positive results.
http://en.wikipedia.org/wiki/Nash_equilibrium
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But all in all, avoiding side effects is key to avoiding the Law of Unintended Consequences.
http://en.wikipedia.org/wiki/Unintended_consequence#The_L ...
In the best way to do that is to keep different functions separate. So they can be tweaked in isolation.
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The way I look at it. Fixing "game" flaws is all about surgically removing the flaw. You don't go chopping off a leg with a hacksaw just to get one bullet out.
But if you want to punish one behavior without massive side effects, you've got to have a way to isolate it from the rest of the system.
Since these "side-effects" are really what gets used to "game the system" in the first place.
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TomCasten Posted 1:28 am
14 May 2008
As Shaw said, be careful what you wish for. Be especially careful about supporting a system of carbon penalties that does nothing to fix the underlying problem of excessive carbon per unit of output.
Tom Casten
Tom Casten, Chair, Recycled Energy Development LLC
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amazingdrx Posted 1:50 am
14 May 2008
It's not clear how rules could be instituted to do this. Would every tree planting scheme be examined? If a scam company was uncovered, how would funds be recovered?
As with the subprime mortgage bubble, the cash stolen by hedge funds isn't coming back, it's squirreled away in the international banking system. "Laundered" by now, and being used to create new bubbles in grain prices and corn farmland as hedge fund manipulators take advantage of agribizz ethanol fuel farming subsidies.
Why not just divert subsidies that now go to coal, nuclear, oil, and asgribizz energy industries directly to investors in renewable/conservation technology. A 10 cent per kwh subsidy would create a gold rush.
No new taxes that way. Just divert subsidies undeserved by the mature industries with record profits, to GHG-freeing emerging energy industries.
http://amazngdrx.blogharbor.com/blog
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David Roberts Posted 2:07 am
14 May 2008
Tom, clean power plants are covered under the cap-and-trade system -- they won't be the ones generating offsets. The offsets, at least as McCain is envisioning them, will come primarily from the U.S. ag sector and from overseas (the CDM -- which is notoriously squirrelly itself).
grist.org
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GreyFlcn Posted 8:26 am
14 May 2008
Is that if a coal utility wanted to just plant a bunch of trees, they would need to finance the planting themselves, and couldn't claim the return until they actually created the carbon storage decades later.
This system would actually favor a coal plant to invest directly on maintaining profitability. Which means that efficiency retrofits would be the most direct and immediate method.
Which ultimately seems like a better approach to me, since the goal isn't "Carbon Nuetral".
The goal is "Carbon Negative".
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