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Mad Max: Beyond Carbondome

Posted by Danny Morris on August 2, 2009

Things are moving slowly on the climate legislation front these days. While there were a couple Senate hearings this week and maybe a couple more scheduled for next week, climate has taken a back seat to health care and likely won’t be a major talking point until mid-September. Though eventual passage of the bill looks a wee bit shaky right now, that’s not stopping other nations from being bullish on the prospects on of a U.S. carbon offset market.

Tim Flannery, one of my favorite science writers (his book the Weather Makers partially inspired me to start working on climate issues), and 2007′s Australian of the Year, recently told the Australian government that it should set up a single trading desk that can sell carbon offsets into the U.S. market. According to Mr. Flannery, Australia could buy up 10% of the 1 billion tons of international offsets available in H.R. 2454, generating a substantial amount of revenue for the land down under:

‘‘The Government could then buy a certain amount of permits from farmers for carbon soil storage … at, say, $15 a tonne and sell them on to the US at $20 through the desk,’’ Mr Flannery said. ‘‘If we could get 10 per cent of the US market at, say, $20 that would be about $2 billion a year coming into Australia and [would] help Australian farmers expand carbon storage projects.’’

Now, you could seriously debate whether or not the benefits Flannery claims are available for Australia. Assuming he’s speaking in Australian dollars, he’s predicting that Australia will be able to corner 10% of the international offset market by selling ag and forestry credits at $17US (current exchange rates have $1US = $1.19AUD).

Consider that EPA is predicting allowances will come into the market at $13 at the low end (though they certainly could come in higher). Also consider that the huge amount of offsets in H.R. 2454 were put in their as a cost containment mechanism, meaning they will assuredly be less expensive than allowances. Lastly, while they may not be available right away, forest offsets from developing countries are going to take up a massive chunk of the international offset market and they are likely going to be much cheaper than $17. Paying for a plot of rainforest in Bolivia is probably going to be much cheaper and better PR than paying a farmer in the Murray-Darling basin to rotate his crops differently.

Aside from the economic reality, Flannery offers a compelling institutional vision for the future of the carbon market. Presuming some vaguely similar version of H.R. 2454 passes the Senate, the international carbon market is going to blow up. That rapid growth will require a lot of quality control throughout the product chain. Establishing government agencies that are wholly responsible for managing the entry and sale of offsets in the market could help provide a level of security. Of course, it could be subject to corruption in less-stable countries (like the Democratic Republic of Congo, for example). Additionally, such an institution would limit the amount of over-the-counter (OTC) sales, which is where the offset buyer makes the purchase directly from the seller. OTC transactions dominate the voluntary market currently, and limiting them will have major implications for the functionality of the international carbon market.

The suggestion of a single carbon desk is not unlike one recently made by RFF scholars Ray Kopp, Nigel Purvis, and our own Andrew Stevenson. In the paper, they argue for the formation of an International Forest Conservation Corporation, which would be primarily responsible for working with countries to prepare them to enter the carbon market and monitoring the volatility of the market. With such an entity in place, it could encourage other nations to follow Australia’s lead and establish their own carbon-specific trading agencies.

It will be interesting to see if Flannery’s proposal gains any traction with Kevin Rudd‘s government. In the meantime, I sincerely hope that carbon trading with Australians is more civilized than oil trading with Australians:

(A little forced maybe, but I gotta take my Mad Max references where I can get them.)

Posted in Climate Change, Commodities Markets, Offsets | 2 Comments »

Offsets, offsets, offsets

Posted by Danny Morris on June 16, 2009

Offsets.

Offsets.

(related to) Offsets.

It seems like all anyone can do anymore is talk about offsets (at least in my sheltered life). Partially that’s because they are emerging as the key issue that could make or break the Waxman-Markey bill, and possibly a future Senate bill (which may make a splash before the end of the summer).  The three links above provide a good snapshot of the world of offsets as it stands now.

The first link is a rundown of the lobbying brawls surrounding the amount of offsets in Waxman-Markey. It does a good job of highlighting the difference between industry lobbyists (they heart offsets) and environmental lobbyists (they don’t trust them). One thing the article gets wrong, however, is who decides what is an offset:

Near the top of the lobbyists’ wish list is persuading Congress to specify which projects would be eligible as offsets. The bill creates large categories, then allows third parties to decide what is eligible as an offset. Those third parties probably would be similar to groups in the voluntary offset market like the Chicago Climate Network or the Climate Action Reserve in California.

That is an incorrect statement. Third party standards will probably be followed closely or entirely, but it is the Offsets Integrity Advisory Board (OIAB) that will be housed in the EPA that will be the the final authority that determines what is an offset. Thankfully, the bill itself does not say what counts as an offset, but you can imagine the fury that will burn around the OIAB if they make a decision that enrages a powerful and well-endowed interest group.

Actually, you need not imagine that because it has already occurred, which brings us to the second link above. Way back when Waxman-Markey emerged from committee markup, Collin Peterson (D-MN), chariman of the House Agriculture Committee started throwing a hissy fit about the supposed lack of role for agriculture offsets. He basically threatened to torpedo the whole bill if it gave offset market oversight to the EPA. Peterson is still stewing about an EPA rule that may make biofuel producers responsible for their full carbon footprint, including the possible indirect landuse changes resulting from ethanol production, so his solution is to bring down Waxman-Markey unless he gets his way. Discussions between Peterson and Henry Waxman’s staff have been on-going, but as of today, it sounds like Waxman is done playing with Peterson and House leadership may look to take their chances with a floor debate.

At this point, it can feel like using economic arguments is sort of like sternly yelling at a freight train, but I’ve got a loud voice, so I’ll give it a shot. This bill in no way excludes agricultural offsets. It doesn’t exclude any kind of offsets, nor should it. The point is to establish a market system where offsets can be brought, and let the market decide what makes a good offset. The role of OIAB is essentially quality control and setting standards. If your offset is legit, then you don’t need to worry. If it’s just a play to get make more money for Monsanto without any real carbon benefits, then there’s a chance it won’t make the cut.

Even though the offset language in the bill doesn’t favor a certain kind of offset, it contains a number of additional standards for forest offsets. That’s probably because everyone recognizes landuse and forest emissions are a big slice of the climate pie (20% of global emissions), but it also because we have a ways to go before we figure out how to make international forest offsets and REDD (Reducing Emissions from Deforestation and forest Degradation) work effectively.

The third link connects to the latest and greatest studies related to REDD and offsets. Basically, if we want to keep temperature changes below 2 degrees C, we need forest carbon. In the short term, capacity building, establishing pilot projects, and setting baselines for forests are the priorities. In the long term, international offset markets are going to sustain efforts to reduce emissions, so long that enough revenues make their way to indigeneous communties to compete with other land uses.

How well can these international offset markets work? According the authors of the economics study, offset prices between $10-$30 may capture 1-4 billion tons of CO2 per year, or 12-20% of current global emissions. Additionally, international links between markets may significantly reduce global allowance prices (by about 40%). Not bad. It’s important, however, to view these studies in context of the others. If we don’t get local buy-in and solid capacity building, we don’t get our offset markets. Conversely, if the market benefits don’t make their way down to the people on the ground, then all those forests (and investments) could go up in smoke. An when indigeneous people feel like they are being exploited by foreign investment, it’s none too pretty.

Posted in Agriculture, Forestry, Legislation, Offsets | 6 Comments »

The carbon offset and international development act of 2009

Posted by Rich Sweeney on May 21, 2009

Consider this new policy idea: The United States Government will tax all domestic carbon emissions between now and 2025 at some relatively small amount, let’s say $10/ton CO2. Then each year it will take this entire sum of money and use it to buy international offsets. If it acts through its development agencies or some sort of iterative bidding process, the government could essentially play a monopsony role in this new market, extracting the rents from offset suppliers and refunneling them back into the program.  This would maximize the number of carbon offsets purchased (and therefore tons of CO2 abated) for a given level of domestic carbon taxation. If, on the other hand, there are multiple buyers of offsets (like the EU) or the informational/ bureaucratic deficiencies of the “monopsony-like” arrangement become too costly, the US could simply purchase all offsets at the market clearing price. This would effectively send the rents of the program to the offset suppliers (or some middleman) so that emissions “reductions” would be smaller, but the same amount of money would still be flowing to developing countries.

A tax of $10/ ton would do little to change domestic CO2 consumption, which is around 6 billion tons per year. But it would purchase a lot of international offsets, especially if the government can price discriminate. In EIA’s 2008 analysis of Leiberman-Warner, in 2015, the government purchased over 750 million tons of international offsets at around $21/ton, for a total cost of around $16 billion. Using this point and the origin, we can map a very crude estimate of EIA’s international offsets supply curve. A back of the envelope calculation reveals that the US could purchase over 1.5 billion tons of offsets for $60 billion at the market clearing price, and over 2 billion tons if it can price discriminate. If you believe offsets are real (which is outside the scope of this post), then the US could effectively reduce its carbon footprint by 33% overnight for around $200 per person! Moreover, it would send $60 billion / year in revenue to developing countries, placing them on a cleaner path to development. A 2.3 second Wolfram Alpha search revealed that 2006 US economic aid was around $23 billion.

I’m actually pretty skeptical of international offsets as a compliance mechanism personally but in recent weeks I’ve come to see that Waxman-Markey is really just one big offsets program anyways (as Josh and Danny already pointed out). Congress and the lobbyists involved have become fixated on lowering the carbon price (which EPA now says will be in the $13-17 range for the early part of the program). Yet the only way you get this price without completely gutting the abatement targets is through offsets. The bill allows for up to 2 billion tons of offsets per year, which is more than the total ammount of abatement required under the cap during at least the first decade. Thus, if EIA’s L-W analysis is any indication of what will happen under Waxman-Markey (and I believe it is), the US will continue to chug along during the first decade, with domestic emissions declining by maybe a percent or two. Compliance will come in the form of massive amounts of offsets, which, depending on how its handled, will send large rents overseas at the expense of American taxpayers (as Josh argued yesterday). If this is really what cap-and-trade is going to boil down to anyways, a mandate to purchase international offsets, would it make sense to simply make that an explicit policy? Would this simple policy be more or less easy to sell politically?

Or is this new policy idea so obviously ridiculous/ undesireable that this simple thought experiment makes you question the role of offsets in Waxman-Markey…….

Posted in Cap and Trade, Offsets | 1 Comment »

How International Offsets Hurt Low Income Families

Posted by jab12004 on May 19, 2009

There has been some great discussion on the new Waxman-Markey bill including Danny’s previous post.  One aspect of the legislation, however,  that I don’t think has received enough attention is how offsets affect low income Americans.

First it is important to realize how large of a part offsets play in Waxman-Markey.  For a quick refresher on their role, check out Danny’s post on the subject.  Besides their large and increasing percentage of abatement, offsets are a huge factor in allowance price.  Here are a few quotes on the importance of offsets from the EIA analysis of the Waxman-Markey draft.

“Without international offsets, the allowance price would increase 96 percent.”

“The availability of offsets under WM-Draft significantly influences the allowance price.”

And from the appendix.

“Without the use of international offsets, covered sectors are forced to find an additional 39 billion metric tons of abatement.”

So, offsets have a HUGE impact on how the program functions.  Just how huge? Check out this graph from the EPA analysis.

MW-draft graph

Looking at the highlighted statistics, you can see that the 1,677 international offsets dwarfs the 408 domestic abatement in 2015.  Also, this equates to $4 billion being spent on domestic covered abatement, while $17 billion is spent on international offsets.  (The story balances out a bit looking into the future, but it still leaves us spending 50% of abatement costs abroad in 2030.)

Getting back to the original question of how offsets harm low income families, it is important to remember that climate policy is regressive.  One way to remedy this is to redistribute some of the money raised by selling allowances.  International offsets, however, don’t allow this to happen.  The EPA analysis says:

“International offset payments are calculated for each model as the product of the amount of international credits purchased and the international credit price.  Unlike the abatement costs associated with domestic covered abatement and domestic offsets, … international offsets .. are all purchased at the full price of international allowances and those payments are sent abroad.”

So, basically purchasing international offsets is equivalent to shipping money overseas.  For example, if the cheapest international offset in Mexico costs $4/ton to offset, U.S. firms still have to buy it for the international offset allowance price of $10/ton.  The remaining $6 (called the rent) will flow to international firms.  If this abatement or offset was done in the U.S., either the government or U.S. firms would be able to capture this rent.  These captured rents could then be redistributed to low income U.S. households bearing the brunt of climate policy.  With international offsets, this money is lost abroad.

I understand that offsets are being relied upon heavily for cost containment, but why hasn’t the idea of rents being shipped overseas showed up in the political debate?  Considering the average American doesn’t know what cap-and-trade is, this might be an effective way to sway public support towards a more effective system.

Unfortunately, in the current political climate, offsets will continue to be a significant part of climate policy.  Offsets can have many positive components, but they also have a direct harmful effect on low income Americans.  If this is the pill we have to swallow for climate policy to pass, then so be it.  However, I would at the very least like to see this important trade off enter the discussion.

Posted in cap and dividend, Cap and Trade, Climate Change, International, Offsets, Uncategorized | 1 Comment »

Offsetting everything

Posted by Danny Morris on April 3, 2009

Hey, did you know that this week is International Offset Week? Oh you didn’t? Well, that’s probably because it’s not, but with all the posts about it here on CT the past couple days it might as well be. In my world, it’s been 648 pages of climate legislation week. One of the big issues I’ve mentioned in previous posts was how the Waxman-Markey bill would treat offsets. Turns out, it luuuuuuuvvvvvvvvvvvvvsssss them. As Andrew pointed out yesterday, a lot of this legislation came straight from recommendations from the US CAP, and they loaded it up with as many offsets as they could find. Seriously. You should go out and horde lodgepole pine seeds and move on top of a covered landfill, because you could potentially be sitting on a gold mine in a few years. How many offset credits will be in a future carbon market? I’ve crafted a handy-dandy (updated!) table below to show you:

Year Emissions (mmt) Offsets (%) Emissions offset (mmt) Actual offsets (mmt)
2012 4,770 30 1431.00 1788.75
2013 4,666 30 1378.43 1723.04
2014 5,058 30 1517.55 1896.94
2015 4,942 28 1400.40 1750.50
2016 5,391 29 1553.15 1941.44
2017 5,261 27 1423.62 1779.53
2018 5,132 28 1413.58 1766.97
2019 5,002 28 1402.69 1753.37
2020 4,873 29 1391.89 1739.86
2021 4,739 29 1379.02 1723.77
2022 4,605 30 1366.67 1708.34
2023 4,471 30 1353.82 1692.28
2024 4,337 31 1340.44 1675.55
2025 4,203 32 1326.50 1658.12
2026 4,069 32 1311.95 1639.93
2027 3,935 33 1296.75 1620.94
2028 3,801 34 1280.88 1601.10
2029 3,667 34 1264.26 1580.33
2030 3,533 35 1246.87 1558.58
2031 3,408 36 1231.88 1539.85
2032 3,283 37 1214.13 1517.66
2033 3,158 38 1195.53 1494.42
2034 3,033 39 1176.04 1470.05
2035 2,908 40 1155.57 1444.47
2036 2,784 41 1134.47 1418.09
2037 2,659 42 1111.62 1389.53
2038 2,534 43 1087.79 1359.73
2039 2,409 44 1062.64 1328.30
2040 2,284 45 1036.06 1295.08
2041 2,159 47 1007.94 1259.92
2042 2,034 48 978.12 1222.65
2043 1,910 50 946.95 1183.69
2044 1,785 51 913.04 1141.30
2045 1,660 53 877.15 1096.43
2046 1,535 55 838.80 1048.50
2047 1,410 57 797.74 997.17
2048 1,285 59 753.67 942.08
2049 1,160 61 706.24 882.80
2050 1,035 63 655.06 818.83

For those of you not in the know, mmt = million metric tons.

In the major proposed legislation of the 110th Congress, few of them were willing to give offsets more than 30-35% of the total cap. As you can see, Waxman-Markey blows them out of the water, allowing 30% of the total cap to be achieved through offsets in the 1st few years before eventually increasing to 63% by 2050. That’s a lot of offsets. The first question I have is: are there enough offsets out there that are reputable enough to be included in a market starting in 2012? I’m pretty sure there are not, and ClimateWire tells me that a report by Point Carbon (sub req’d) has found essentially the same thing. So let’s see, you not only give emitters an easy out for emissions reductions, but also make it a substantial portion of the entire market, generating lots of demand for a product that is in short (and potentially questionable) supply. I’m not entirely sure how to describe your eventual outcome, but i think it might rhyme with mustard-duck.

Update: A little bit more on how the offset totals are calculated. The cap for offsets in any year is 2 billion tons. The legislation states that the way to determine the applicable percentage of offsets in any year’s market is to take 2 billion, divide it by 2 billion plus the emissions cap for the last trading year, then multiply that by 100 to get your percentage. BUT, remember that 1.25 offset credit = 1 emission credit, meaning your actual avoided/reduced emissions is 80% of the offsets in the market. I’ve updated the table above to illustrate things a bit further.

Later Update: After re-reading the bill itself, and looking at some other analyses, I realized I misinterpreted how the bill treats offset credits and emissions credits. I thought 2 billion was the absolute cap for offsets and actual emissions reductions would be 80% of that due to the 1.25 = 1 conversion rate in the bill. Now I think that that is the cap for credited emissions, which means the actual amount of capped offsets could go as high as 2.5 billion (125% of 2 billion). The table has been corrected again. I humbly throw myself at the feet of the readership and beg forgiveness. Can we make up? It pains me to think some of you might go to bed angry with me.

Posted in Cap and Trade, Offsets, Uncategorized | 9 Comments »

A tree falls in the forest…and it definitely makes a sound

Posted by Andrew Stevenson on April 1, 2009

Some interesting news on the artist formerly known as REDD (Reducing Emissions from Deforestation and Forest Degradation) the last couple days. First a new report commissioned by Greenpeace claiming that full inclusion of REDD in a global emissions trading scheme will drop the price of credits by 75%. They think this is undesirable, since it will reduce the incentives for developed countries to make the transition to a new, sexy “clean energy economy”. Therefore, Greenpeace is arguing that tropical forest conservation should instead be financed through a separate fund.

However, many developed countries (aka the U.S.) think this may not be so bad after all. Case in point: the Senate just passed an amendment 89-8 stating that cap-and-trade will not increase energy or gas prices (with a clarifying Boxer amendment to the amendment), the highly influential U.S. Climate Action Partnership is all about forests (presumably for similar reasons), and the Waxman-Markey behemoth makes REDD a key piece of its massive offset strategy. Market flooding? Why not! Credit price crashing? No problem! Unsurprisingly, the EU has been taking a more conservative position.

So what’s the right solution? Funds? Markets? Dual markets? Triple markets?!? Given that similar debates about REDD have been going on between countries and within the environmental community for decades, I’m just not sure that there will ever be a one-size fits all solution that everybody can agree on. At least in the short term, in order to get this off the ground (because from a scientific standpoint, it’s vital), I think we’ll have to be satisfied with a disjointed system. Developing countries will have their national baselines and funding for capacity building from developed countries (from foreign aid or through the UNFCCC), Brazil will have its Amazon Fund (which someone besides Norway may eventually give money to), the U.S. will have its offsets (in all honestly I think Waxman-Markey is pretty good on this issue), and the EU will keep trying to find a good solution that doesn’t involve its Emissions Trading Scheme (unless it bumps its target from 20% to 30% by 2020, then they’ll definitely take the offsets). I think this is an outcome we can be satisfied with, and once REDD has been going for a few years and we see how it works in practice, then it’s time to go back to the drawing board for a comprehensive system. Now it’s all about getting it up and…sequestering.

Posted in Climate Change, Deforestation, Offsets, Uncategorized | 1 Comment »

Offsets and Algae

Posted by jab12004 on March 26, 2009

After spending a lunch seminar listening to a number of knowledgeable Europeans talk about the ETS, I feel a bit overwhelmed by how many potential strange side effects there might be in a huge cap and trade system.  These might not be preplanned nor malicious, but I have a feeling there will be some unintended consequences.

With this on my mind, one article caught my attention about biofuels producing algae under a U.S. cap and trade system.  If algae biofuels are eligible for offsets, we might see some strange side effects.  Right now algae based biofuels are years away from commercialization.   However, if the right offsets are granted and carbon prices are high enough, the biofuels algae industry might find itself on a perverse fast track of sorts.  One quote sums it up.

At a high enough carbon price — maybe $40 to $50 per ton — producers could sell the environmental attributes of their fuel for more than the actual fuel. “You could make biodiesel, pour it down the drain, and make a lot of money,” Ballentine said.  (E&E subscription required)

While I am in favor of putting a price on carbon, I don’t think I could find anyone who likes the above situation.  My first reaction is to say we shouldn’t have offsets, but I am in no way an expert on this topic and won’t pretend to be.  All I know is that I constantly hear about the problems they cause and not much about the benefits they might have.  So I leave it as an open question, what do you think about offsets?  Could they provide enough advantages  to make them worth it?

 

Posted in Biofuels, Offsets | 2 Comments »

 
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