Common Tragedies

Thoughts on Environmental Economics

On early retirement

Posted by Rich Sweeney on July 16, 2008

Monday I got an email from Dan Lewer, co-founder of a brand new company called Carbon Retirement. From the email:

We buy EUAs from the EU Emission Trading Scheme and retire them on behalf of our customers. Voluntary retirement of EUAs reduces industrial emissions by a measurable amount and pushes up the carbon price, encouraging companies to invest in clean technology. The service is packaged as an offset: you can retire any amount and match it up with the emissions from flights or driving, for example.

While this is possibly a good idea, I’m a little skeptical about the actual benefits of such a scheme for two reasons. First, as Daniel pointed out in an email to me, European companies can already substitute CDM offset credits (CERs) for EUAs. Now the assumption might be that CDM supply is somewhat fixed in the short run. Otherwise it seems like retiring EUAs would have very little effect on European emitters’ decisions (This is really Daniel’s area of expertise, so I’m sure he’ll chime in if I’m messing this up).

Secondly, and the real point of this post, I’d be weary about the assumption that once allocated, the permit supply is absolutely fixed. I know that during RGGI negotiations many stakeholders and legislators were worried about “green” outside actors coming in and retiring permits (In such negotiations this outsider is invariably referred to as “George Soros”). The threat of this was somewhat controlled for with safety valve like provisions. Yet, at the end of the day, I think most parties involved just figured that if this ever became an issue they’d simply correct for it legislatively or loosen the cap.

Which brings me to Carbon Retirement’s plan. While its totally feasible for them to purchase permits and hold them, I think there’s probably a political limit to just how much they’ll be allowed to influence prices. When caps are set, it’s assumed that they’ll be binding, and the level of allowed emissions is the result of a long, complicated political process. Some of us may feel that this process is corrupt and the outcome is unjust, but our ability to significantly alter this political equilibrium outside of political channels is limited. If annual emissions start coming in well below the cap or the price gets to high, government could pass a law making it a crime to retire permits or it could simply print more to achieve the initial level. At the very least they would start factoring an expectation of retired permits into future negotiations.

In the long run it’s probably impractical to fully restrict ownership of carbon permits if the carbon market is to function properly. And there is certainly a case to be made that non-use of a privately purchased good is just as reasonable as using it. But for the time being I think its important to recognize the very fragile tenets upon which current cap and trade programs are being agreed to, and to respect the fact that this asset’s value is derived from political decree, which can be altered pretty quickly.

One Response to “On early retirement”

  1. andy said

    Your argument seems to be a version of “if voting changed anything they’d ban it”.

    All property rights (to a greater or lesser extent) derive their value from “political decree”. One of the reasons the price of carbon collapsed first time around is that businesses didn’t have confidence in the supply of permits. So the rules for this phase of the ETS are much tighter (though there are still safety valves and polluting companies will naturally continue to lobby for their interests).

    What your post boils down to is a lack of confidence in the EU ETS and a sense that Carbon Retirement – in its very modest attempts to game a cap-and-trade system that traded £21bn in the last 6 months – might bring the whole edifice tumbling down. Given the political and economic challenges that would be raised if that happened, I might put that in the category of a “nice problem to have”.

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