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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 »

Links yo

Posted by Rich Sweeney on May 15, 2008

  1. Ajay Shah has a nice, thorough post on what’s going on with food prices, debunking several common explanations and putting forth a reasonable, if unsexy, story of his own.
  2. Paul Kedrosky challenges the conventional wisdom that OPEC always prefers high oil prices. Persistent, predictably high oil prices would encourage people to switch to alternatives. Instead, he argues that what OPEC prefers is a series of high prices, unpredictably interspersed with periods of very low prices. Saudi Arabia’s role in curbing excessively high OPEC prices has been pretty well documented. It’d be interesting to see any evidence that the Saudi’s actually undercut price with the deliberate intention of warding off substitutes.
  3. Finally last week’s Economist has a briefing on energy efficiency. Overall I found the piece a bit elementary and far too dependent on the McKinsey report. Nevertheless, it’s a good intro for readers who are new to the topic.

H/T to Thom for the first two links.

Posted in Commodities Markets, Efficiency, Oil | Leave a Comment »

Commodity prices – WTF?

Posted by Rich Sweeney on April 10, 2008

More on food prices. From the inbox:

BLS data say that food prices are increasing on the order of 3.5-4.5% with grain prices up only about 6.6%, but commodity prices for grains have skyrocketed. Any idea why there is a difference? Even the local bakery in Ithaca has a per loaf bread charge that tracks prices of flour and other grains and is updated weekly, so it doesn’t seem like it should take much time for commodity prices to hit consumers.

My response was basically, “I got nothin”. Then another friend directed me to this article from last week’s NYTimes, which at least let me know that I’m not the only one clueless here. Basically futures and cash market prices for wheat and soybeans have been all out of whack for some time now and nobody knows what the eff is goin on. As Scott Irwin of Illinois says in the article, “These are highly competitive markets with very experienced traders. Yet they are leaving these profits alone? It just doesn’t make sense.”

Any smartypants CT readers care to put forth an explanation?

Posted in Commodities Markets | 4 Comments »