Suspect carbon offsetting

I recently received a press release from a company called My Emissions Exchange. I get lots of press releases – mostly about ethical shampoo and that sort of thing – but this one caught my eye.

‘MyEEX’ (no relation to German energy exchange EEX I assume) sells carbon offsets. The ‘projects’ behind the carbon offsets are individuals who reduce their home energy bills. You can sign up to MyEEX, enter your baseline bill, reduce your energy use, enter your new bill and MyEEX will create carbon credits that represent the reductions. They will then sell the credits on voluntary offset market – not sure who to – and return some proportion of the money to the individual.

For those of you familiar with the concept of additionality, alarm bells will be ringing. How do we know the baseline bill is not unusually high? How do we know the individual would not have reduced their energy use anyway (making the carbon offsets irrelevant)? Why do people need to be paid to reduce their bills? Who are the buyers anyway?

When I saw this I assumed it was an enterprising but poorly conceived project that probably wouldn’t get that far, but today I spotted a very promotional article in The Times!

“People really want to make a difference by cutting down their carbon emissions, but at the moment it’s all very woolly and they’re not seeing anything concrete from their efforts,” said Paul Herrgesell, the company’s project manager.

“This will let people actively track their energy usage and make money at the same time, both of which will motivate people and make them more aware of their carbon emissions.”

Herrgesell said the firm is hoping to expand the website to measure all types of personal carbon emissions, but is using households bills as a starting point.

“Our vision is to cover personal carbon footprints produced by car and air travel, and even, eventually, food and services,” said Herrgesell.

Bonkers!

Swine flu: additional?

A pig farm in Mexico that was to host an Ecosecurities CDM project is suspected to be the epicentre of the swine flu outbreak. Unfortunately I can’t share the link with you because I have only seen this on a subscription news service (the headline is here), but I think one critical question needs to be asked: can we really claim swine flu is additional if pandemics occur with predicable regularity? Surely a question for the CDM board!

EU 2008 Carbon Dioxide Emissions Exceed Permits by 25 Percent

The EC has published verified emissions data.

Bloomberg:

Power plants and factories in the European Union’s emissions trading program produced 25 percent more carbon dioxide than the amount of permits they received, according to Bloomberg calculations based on European Commission data.

The data is 91 percent complete, Stavros Dimas, the environment commissioner, said today in Brussels. The comparison between verified emissions and the allowances total is a like for like comparison, using only figures for installations that data is available for.

EU ETS: “No longer as short”

Point Carbon has just published its annual survey of people working in carbon markets. It’s full of useful insights and I can email you a copy if you want one.

In particular, I was interested in a chart on the expected trading positions of participants representing companies in the EU ETS (below). The proportion of companies with surplus EUAs has jumped about 10 ppts between 2008 and 2009, from 15% to 25%. The proportion that need more EUAs or CERs is something like half (the top four categories).

This tells a clear story: as recession bites, demand for carbon credits will be lower. But by this metric (which admittedly is a bit crude – it’s just the proportion of people who report being short/long and doesn’t account for the volume of emissions they represent), the movement is not so predicted to be big enough to sink the market.

Hot air deals should be linked to CDM

Last week Reuters reported the first ‘hot air’ deal, in which Ukraine sold 30 million AAUs to Japan. The cost was not disclosed. AAUs are the credits created under the Kyoto Protocol – if a country has a target of 1 million tonnes then it will be given 1 million AAUs by the UN.

Eastern European countries have far more AAUs than they need because their targets under the Kyoto Protocol are based on their emissions in 1990, before the Soviet Union collapsed and took Easten European industry with it. The chart below (courtesy of Global Warming Art) shows carbon dioxide emissions by region – you can see how emissions in Eastern Europe have declined since 1990.

This leaves the bloc with many more AAUs than they need – hence they are able to sell them to countries that find their targets more challenging, like Japan. These AAUs are often called ‘hot air’ and trades are felt to be immoral by environmentalists because they allow rich countries to buy themselves out of meaningful reductions.

Hot air deals are unavoidable under the Kyoto system. While Ukraine has pledged to spend the revenue on “six specific environmental measures”, the impact on emissions of these projects is very ambiguous.

Where AAUs are traded between countries, the revenue should go into projects that reduce emissions to the same extent as the AAUs, using the same rules as the CDM. This would allow AAU trades to continue without underminining the environmental integrity of the Kyoto system (at least to the extent that the CDM’s additionality test works), but would not necessarily inflate the AAU cost to the CER cost (if the seller was able to find cheap projects to spend the money on).

Carbon Retirement – vote for us!

Carbon Retirement is a company I’m involved with, and it retires EUAs as an alternative to carbon offsetting. We believe that retirement of cap and trade allowances offers a credible alternative to project-based carbon offsets.

One exciting piece of news this month is that we’ve reached the final of the Daily Mail and Make Your Mark ‘Enterprising Young Brits’ competition. Part of the competition is a public vote for your favourite business. We’d love to win – we don’t spend any money on marketing and it would give us some free publicity. You have to sign in to the website to vote, which takes 2 or 3 minutes, so this is really a competition to see whose supporters are the most tenacious! We know it’s ours – so if you can spare the time please vote for Jane Burston and Dan Lewer here.

The competition closes on Tuesday 24th March at 11am.

Camp for Climate Action has a common sense failure

I strongly support the Camp for Climate Action. I attended the camp at Heathrow in 2007 and saw that the participants were engaged with policy in a relevant and radical way, and that they were exploring new and more sustainable ways of living and organising.

So I was dissapointed to see that the camp is organising a demo at the European Climate Exhange on the 1st of April.

ECX is the biggest exchange for EUAs (the permits traded in the EU Emmission Trading Scheme), and during February an average of 15m tonnes were traded there per day (1 EUA = 1 tonne of CO2. To put that into perspective, the annual carbon footprint of the UK is about 500m tonnes).

The Climate Camp’s website says:

By creating a brain-bending system of carbon pollution licenses, fossil fuel companies and trading firms have found a way to keep on churning out global warming gases and to reap huge windfall profits at the same time … [The UK government is] handing control of our climate over to the same people and systems that caused the financial collapse … Don’t let the financial and fossil fools make the rules!

This is wrong, of course – the Directives behind the EU ETS were written by the European Commission, not the traders and polluters, making the EC the most successful environmental regulator in history. The EU ETS will effectively limit carbon dioxide emissions within its perimeter to a known amount. Billions of Euros have already been invested in energy efficiency as a result of the carbon price this creates. This investment is the net economic effect of the scheme – not the windfall made a minority of companies.

Cap-and-trade is not viewed by anyone as the single solution to climate change, and it is not incompatible with the technology and lifestyle changes that the Climate Camp endorses. There’s not much to be gained from dismantling the EU ETS.

Finally, ECX is just one of several private exchanges that facilitates trade in EUAs – it has nothing to do with European or member-state level environmental policy.

The Climate Camp’s targetting of ECX is poorly informed and unconstructive. It panders to activists’ natural distrust of the market and establishment. As climate change moves into the mainstream and becomes more of a concern for governments, effective activists will need to engage with mainstream initiatives like the EU ETS rather than instinctively rejecting them.

EUA sell-off is a natural reflection of economic recession

Carbon prices have been falling recently. Since July 2008, EUAs have lost over 60% of their value and are one of the worst performing commodities in 2009. The chart below shows the EUA price indexed to January 2007. I have also included the oil price, which has been converted from dollars to euros, for comparison.

As you can see, carbon has largely followed oil. The main mechanism at work is that oil prices drive gas prices, which in turn determine the cost of switching energy generation from coal to gas. Burning gas produces less carbon dioxide per unit of energy than coal, so demand for EUAs goes down when gas gets cheaper. Levels of industrial production also drive both markets, of course, which leads them to correlate.

But in the past couple of weeks oil and carbon seem to have ‘decoupled’ (as you can see from the sharp drop-off in EUAs in January, while crude has recovered from a low at the end of last year). A new factor seems to be at play: industrial companies in distress selling their stockpile of EUAs, now surplus as their output shrinks, on the spot market to raise funds they cannot find in the credit market.

Many environmental commentators and journalists are saying that this demonstrates an inherent weakness in cap-and-trade. An article in Reuters last week said that:

companies from some of the European Union’s most polluting industries are now raising funds on the carbon market to help them weather the credit crisis.

That has raised some uncomfortable questions about a scheme meant to fight climate change rather than subsidize companies during a downturn.

“This was not designed as a scheme to give corporates cheap short-term funding options in the face of a credit crunch meltdown where banks are not lending,” said Mark Lewis, Deutsche Bank carbon analyst. “But that appears to be what’s happening.”

The first thing to get straight is that the through the EU ETS, the members states are transferring a liability to the regulated industries, not an asset. EUAs only have a value if there is a cost to complying with the emissions cap they represent. The EUA ‘windfall’ in this situation is better described as a reduced burden of compliance across the whole market, which pushes some companies long while most remain short. There must still be buyers out there no ‘windfall’ would be possible.

This new factor of spot sell-offs is really just a particularly rough piece of volatility reflecting rapid changes in expected demand over the next few years.

Given that EUAs can be banked into Phase III of the EU ETS (which will run from 2013– 2020), it is unlikely that the recession will hit manufacturing and energy so severely that the carbon price will collapse in the way it did in 2006. If this were to happen, does anyone really think a carbon tax, which would continue to brake output regardless, would fare better politically than cap-and-trade?

Non-weigh in to third runway

Geoff Hoon announced that the government will approve the third runway. We can be pretty sure this is not the end of the argument; the campaigning NGOs (and Boris) are going to have a field day.

I thought I’d weigh into the argument (or maybe it’s a non-weigh in). Instinctively I don’t support a new runway – while I can see the leakage point of losing transit passengers, the UK should be showing leadership in climate policy – but I admit I don’t understand the environmental or economic impact.

The debate is full of flimsy sounding statistics around the changes in greenhouse gas emissions, jobs created and business requirements for airport expansion. Each side makes different claims and I suspect there are aren’t many people who know what data is available or what it says.

I believe the aviation industry needs to shrink, but I find it hard to take a reasoned stance on the third runway.

Incidentally, you’ll probably have noticed Greenpeace’s ‘Airplot’ campaign in the media, which I think is a great piece of campaigning.

Cap and trade in the context of shrinking production

Questions are being asked of the two working installation-level cap and trade schemes in light of economic recession. The EU ETS – the world’s largest carbon market – is trading at about 16 Euros per tonne and is volatile because no-one is quite sure of the impact of shrinking production. Analysts believe that all reductions could now be met through purchase of CERs. Essentially this means that industry within the EU ETS has lowered its output and can comply with the cap by offsetting rather than making additional internal reductions.

The other scheme, RGGI, a scheme covering power plants in north-east US, held its second pre-compliance auction on 18 December and sold 31.5m allowances at a price of $3.38 per short ton (up 31c from the first auction, which is surprising given the commentary that follows). An article on BusinessGreen says:

… the auction came amid fears that the economic downturn meant the US scheme could repeat the mistakes evident in the first phase of the EU’s emissions trading scheme by setting the cap too high – a scenario that led to a glut of available emission permits and a collapse in the price of carbon.

Non-profit policy thinktank Environment Northeast released RGGI Emissions Trends & the Second Allowance Auction, a report which said emissions were currently 16 per cent below the cap. It pointed to skyrocketing fossil fuel prices earlier in the year as the primary reason for a lower than expected emissions rate.

“RGGI was negotiated back in early 2003 through 2005, and at that time everybody thought the trend would be up,” said Derek K Murrow, director of policy analysis at Environment Northeast. “Since it was negotiated we’ve seen a signfiicant decline, which is really a good thing. Now the question is whether that trend will continue as the programme starts up in 2009, in which case the cap might need to be bought down more quickly after the first compliance period. Or will emissions return to their historic levels, in which case the cap would be constraining?”

Comments like this suggest that cap-and-trade must deliver a carbon price that is neither zero nor unbearably high, and also force emission reductions beyond anything that happens ‘naturally’ (as a result of lower consumption or developments in eco-efficiency, for example). These characteristics sound more like tax than cap and trade. Cap and trade provides an absolute limit for emissions and a price crash indicates that the limit can be met with no unusual investment. Equally, if emissions rise unexpectedly, a cap and trade market will force decisions about where additional reductions will be made.

That’s the strength of cap-and-trade: unforeseeable events that effect emission levels are reflected in the permit price. If the price crashes due to unforeseen cuts in emissions, the cap and trade scheme is not a failed policy.

Lack of CDM progress at Poznan will be the major sticking point for negotiations over the next year

CDM reform didn’t get anywhere at Poznan. To me, this is the most worrying outcome of the conference. Although technical discussions and low-level negotiation planning were all anyone expected, there is now very little time to do something about the CDM before the Kyoto Protocol runs out.

There was a lot of discussion about Forestry and CCS. Forestry is unsuitable for the CDM – partly because there are issues with calculating the volume of carbon dioxide a forest absorbs, and mainly because forests would produce far more CERs than Annex I countries could buy (essentially we wouldn’t be able to buy enough carbon credits to protect the forests).

The situation with coal is similar in that the CDM couldn’t support the volumes required (I haven’t done the maths on this but the IEA forecasts that to stabilise at even 550ppm we will require 10 new CCS plants every year), except that CCS will be neither operational nor affordable before 2020. Most estimates show that a carbon price of EUR 40 – 75 will be required to make CCS commercially viable, and CERs are unlikely to enter that range.

There was also discussion on making the CDM more transparent and efficient. These discussions didn’t progress either, but we really need a new approach to technology transfer and funding rather than tweaks to a process that can’t demonstrate additionality.

Despite encouraging statements from China, Brazil and Mexico, the developing world will not sign up to quantified emission reductions without a clear understanding of how rich countries will support them. The ethos behind the CDM needs to switch from reducing the cost of compliance endured by Annex I to structural funding for the developing world to pay for abatement.

People care about the wrong things

HSBC recently published their annual ‘climate confidence monitor’ (pdf), a survey of 12,000 people in Australia, Canada, France, Germany, the UK, the USA, Brazil, China, the Hong Kong SAR, India, Malaysia and Mexico.

The summary is short and very interesting. The chart below stands out, showing what people think governments are doing vs. what they governments should be doing. While renewables are the clear favourite (perhaps the polar bears of climate change policy), carbon trading is in the far bottom left despite being the key plank of international and European climate policy.

Hat tip: John Grant.

Committee on Climate Change reports

The Climate Change Bill became law today. That makes the UK the first country in the world to commit to quantified emission reductions regardless of what anyone else does.

The UK’s Committee on Climate Change, an independent statutory body that advises the government on how it should repond to climate change, published its first report today – Building A Low Carbon Economy.

Its advice to the government includes:

• cutting emissions by 80% from the 1990 level (77% below the 2005) by 2050;
• including international shipping and aviation in the target;
• setting an interim target of 21% by 2020, or 31% (the ‘intended’ target) if a global deal is reached at Copenhagen;
• all Kyoto GHGs in the target;
• no government purchase of CERs to meet the interim target. EU ETS participants would be allowed to use CERs as normal – but that is only likely to represent 10% of the reductions. In the inended target, total offsetting would be allowed to reach 20%; and
• all new coal must fit CCS by a deadline (probably between 2020 and 2025).

The report also gives estimates that these targets will cost 1% of GDP by 2020 and 1-2% by 2050. Journalists are saying the government is likely to accept all the committee’s recommendations.

EU should insure long term carbon prices to push the climate and energy package through

Some industries are claiming that carbon costs could lead them to move outside the EU, which would harm the internal economy and prevent emission reductions. Eurogypsum – the trade body of gypsum manufacturers – is claiming this, but it’s not clear whether the issue is the absolute cost of carbon or the uncertainty over price.

In an interview with Euractive the president of Eurogypsum said:

I cannot challenge the fact that we have to decrease the energy content in our product. But I can also say that in the thirty years that I have been in the industry, we divided the cost of energy in our products by two. And there is still room for progress. So, it is our job in managing the business. Having an incentive to push us to accelerate is okay.

What I am afraid of is the free market for the CO2 tickets because it is out of control. We do not know. When we make a simulation at a certain level, we have no vision of the carbon price. So that is one of the main issues is that the system that they are going to adopt is a system that will give us no vision of what could happen. Maybe it will cost nothing. Maybe it will cost a big amount. So we may take decisions on something that will never happen? They should be conscious about that…

When you have to choose in between certainty or uncertainty, you avoid the uncertainty.

EUAs trade out to 2012 on derivative markets, but not ten years out like Eurogypsum is thinking, and there are no readily available financial products that can transfer that sort of risk.

Over the next few months, as traders speculate on the extent of the recession and talks in Poznan and Brussels hopefully provide some clarity on Phase III, the EUA price is going to be volatile and those pushing back against the climate and energy package are likely to use this as a lever.

France (as EU Council president) is putting together a big package of concessions for industries in central and eastern Europe in an attempt to push the package through. One that I would throw into the mix is a publicly backed long-term carbon hedge. This would hopefully knock on the head the argument “we’re all environmentalists and we don’t mind paying for carbon, it’s the uncertainty that messes with our business models”.

Stay focused on the emissions, not the shampoo

A lot of work is going into carbon lifecycle analysis. This is a process that determines a product’s upstream and downstream emissions, as well as the emissions from using it.

To work out the carbon footprint of a car from a lifecycle point of view, for example, you need to know the emissions from its manufacture, use (i.e. fuel and maintenance) and disposal. And the emissions involved in the manufacture and disposal of machinery involved in manufacturing and disposing of the car. Err…

Do slips in the cost of pollutants threaten environmental targets?

It’s generally felt (and I would be surprised if it was not true) that recycling paper is more efficient than sending it to landfill, burning it or leaving it all over the tube.

A story in today’s Guardian caught my eye. It said that a reduction in international prices for waste paper is threatening the government’s recycling targets. The story is based on an unusually interesting press release (pdf) from the Confederation of Paper Industries. The press release says:

The UK relies on global export markets to take well over 50% of the recovered paper it collects with Far East markets taking over 75% of the export total … without these markets UK merchants are left with little option other than to store the material they have paid significant amounts for or sell at loss making prices … With no obvious signs of Far East buyers returning to the market soon there is a serious possibility that storage of [paper] may end up being a very high risk strategy with huge costs to those requiring storage, including the tax payers through Local Authorities.

Well, there are always winners and losers when commodity prices move. But is this actually an environmental issue?

Paper waste prices are collapsing because people worldwide are using less recycled paper. This is due to lower demand in an economic downturn – not a reduction in eco-consumerism (recycled paper is cheaper). Globally, if there is less demand for paper then we don’t need to recycle as much to meet energy and waste targets. And if the UK situation continues, the market should support new domestic processing plant (if recycling is indeed an efficient process).

Similarly, the European carbon price has slipped significantly over recent months and many forecast it will continue to go down. This will kill the business case for some emission reduction investments, but because the consumption baseline is shrinking overall emissions will not increase. The lower carbon price just delays capex to a time when the economy and emissions start to grow again.

No-one seems to like aviation in the EU ETS. :-( I do.

So, airlines will be in the EU ETS from 2012. No-one seems to like it.

Airlines of course argue that this is bad timing given the looming economic recession and rising fuel costs.

Crisis is not the time for rubber stamps. But that is exactly what the Council of Justice and Home Affairs Ministers used today – without a word of debate – to seal into law the EUR 3.5 billion cost of bringing airlines into the European ETS. It’s Brussels acting in a bubble – even in the middle of a global economic crisis,” said Giovanni Bisignani, IATA’s Director General and CEO.

Instead of a cap, IATA argues that member states should focus on liberalising European airways to improve flight efficiency:

While Brussels has been fast to introduce its regional ETS scheme, it has been slow to improve efficiency. We need the same urgency to deliver an effective Single European Sky that would save billions of Euros in cost and 16 million tonnes of CO2 annually. That we have been waiting decades for this is Europe’s biggest environmental embarrassment.

Campaigning NGOs are no happier with the decision, arguing that emissions from aviation will continue to grow rapidly under the EU ETS.

IATA: the cap will be tough if no-one does anything to meet it. The argument for better air traffic control is not an argument against a cap. Further, as demand weakens compliance with the cap will become cheaper. Witness the carbon price slipping more than 20% over the past month. If recession cuts demand by more than 3% before 2013, no additional cuts will be necessary.

Greenpeace et al: emissions from aviation may continue to grow after inclusion in the EU ETS but only if consumers decide that they want to cut emissions elsewhere instead. The allocation to airlines will decrease from a 2004/6 baseline.

Animation – Carbon Retirement

We’ve just produced a short animation about how Carbon Retirement works. Carbon Retirement is a new company I’m involved in. We remove EU Emission Allowances from the EU’s Emission Trading Scheme, reducing the volume of CO2 that can be emitted.

Check out our animation (on the Carbon Retirement homepage, Youtube or below) – we’re really happy with it.

Unlike carbon, tropical forests are not commodities

I’ve been meaning to write something about tropical forests for a while. There is not much doubt that they are worth more standing than cut down, and there is some debate about how to make sure they stay where they are.

Deforestation across the world is thought to be responsible for a fifth of greenhouse gas emissions. Tropical forests also contain half the world’s known species and play important roles in all kinds of ecosystems.

The debate on protecting tropical forests seems to have moved from purchase and retirement of land by wealthy individuals and charitable foundations to how tropical forests can be preserved with carbon money.

Organisations preserving forests would be allocated offset credits that regulated companies in developed countries could buy instead of reducing their own emissions. This is not a good idea for two reasons:

• It’s theoretically zero-sum and probably worse. Preserving forests as carbon sinks is not an accurate way to mitigate carbon emissions. Where offsets are sold into cap and trade schemes, the accuracy of the reduction behind the offset is essential to the integrity of the cap.
• It’s an expensive way to preserve forests. While almost certainly better value than the industrial gas destruction projects that have historically delivered a lion’s share of the CER pipeline, preserving forests does not need to cost 20 euros per tonne of CO2.

So how can the ‘ecosystem services’ that forests provide be valued and paid for, if not through carbon markets?

This is the wrong question. The human ROI of protecting tropical forests is a no-brainer. There is no need to let the market determine the value of forests as CO2 sinks – we just need to find the cheapest way to preserve them.

This is why I favour a fund that would be allocated to organisations preserving forests through reverse-auction type processes.

The current plans for the role of the Global Forest Carbon Mechanism in the post-Kyoto UNFCCC framework are half right – the fund will channel money to forest preservation, but will also allow Annex I countries to buy credits from the forest managers.

CCX offsets: the money is gravy to us

Hidden at the end of an article in Monday’s Washington Post is a clear statement of non-additionality from the owner of a project selling offsets on the CCX:

In the western Virginia town of Christiansburg, the operators of a landfill sell carbon offsets tied to a project that captures methane, a powerful greenhouse pollutant, and burn it in a tall orange flare. They’ve made $43,000 on the Chicago Climate Exchange in just a couple of months.

But that project was put in long before the offsets were sold and for a different reason: to keep dangerous gases from accumulating in a capped landfill. So if the offset market dried up completely?

Nothing would change.

The money “is gravy to us right now,” said Alan Cummins, executive director of the regional authority that runs the landfill. Even without it, he said, “we would always continue to flare.”