EUAs vs crude oil update

I’ve updated the chart of EUAs vs crude oil (see below). I’ve included some comments based on an incomplete understanding of the dynamic between the two, so any comments would be gratefully received.

For the past year, EUAs have been rangebound between 12 and 16 euros. Oil, conversely, has trended strongly upward from $63 (EUR45) a year ago to a high of $80 (EUR63) a week ago. This is in contrast to the first period shown on the graph, between Jan 2007 and Spring 2009, where EUAs and crude were strongly correlated.

The relationship between EUAs and crude oil is partly that both are driven by overall demand for energy, but this changes over the long-term. The relationship observable in this graph is more likely driven by the ‘dark-spark’ mix of energy production in Europe. This refers to the mix of coal (dark) and gas (spark) in energy generation. Oil prices tend to drive the price of natural gas, which is clean relative to coal. When oil increases in price, energy generators switch to coal and therefore demand for carbon credits increases.

The increase in oil price over the past year would usually indicate a greater proportion of coal going into Europe’s energy supply. However, higher demand for carbon credits has not resulted. The sluggishness of EUAs in responding to oil prices is probably a reflection of poor industrial recovery following the credit crunch.

(click to expand)

Project-based carbon offsetting is like a lottery with no prizes

At Carbon Retirement, we have just published a short piece of research into the efficiency of carbon offsetting through the Clean Development Mechanism, covered today by the BBC. It shows that for every £1 spent on CERs by voluntary buyers, 28p goes to the project’s capital expenditure and maintenance costs.

The chart below, from the report, summarises the costs per CER, with the grey chunks representing project expenditure. Project costs total £3.78 per CER, or 28% of the price paid by the final buyer.

Costs in the CDM market, per CER

This isn’t a study of profitability for any of these actors and the costs at each stage might be reasonable. The big chunk taken by the pCER buyer in our model, for example, may be a fair reflection of the risk it holds that the project will not deliver CERs.

However, the research shows that the efficiency of the overall system is very poor. While some transactional costs are inevitable and you could never expect 100% of your money to go to project funding, 28% seems far too low. Imagine if a development charity told you that 72% of your donation went to middlemen and admin fees!

Co-incidentally, 28% is also the proportion of UK national lottery revenue that goes to charity. So, buying carbon offsets to mitigate climate change is like buying lottery tickets to give money to charity. With carbon offsetting, you don’t even win a prize!

Friends of the Earth report on carbon trading – risks burying its good points with garbled points

I just read the new report on carbon trading (pdf) from Friends of the Earth. Given the charity’s stance on anything related to carbon trading, the critical approach is unsurprising. The report makes some good points, but also makes some points that don’t seem well thought out. This is a shame because the charity could achieve much more by taking a reasoned position in the debate and focusing on the things that need changing.

One of my gripes is that the report contains some rash statements, like:

The EU ETS scheme has clearly failed to provide adequate incentives for European firms to reduce their emissions in Phase I;  Phase II is performing poorly and is likely to fail.

Is it? Last time I checked it was doing OK! Or:

The complexity of the carbon markets, and the involvement of financial speculators and complex financial products, carries a risk that carbon trading will develop into a speculative commodity bubble that could provoke a global financial failure similar in scale and nature to that brought about by the recent subprime mortgage crisis.

That’s not a good comparison. There is a lot of derivative trading in the EU ETS but we know exactly what the underlying asset is. The derivatives are simply tools to make trading smoother. The idea that carbon markets are a ponzi scheme run by speculators runs through the report, and some errors are made, including that most carbon credits are held by speculators (they aren’t; most credits are held by statutory market participants).

And the environmental economics get a bit shaky with the argument that cap and trade actually ‘locks in’ high emissions:

Polluters have an incentive to make extra emission reductions under emissions trading so that they can sell credits, therefore, emissions trading stimulates innovation. This model accurately explains the situation of sellers of credits. [...But it ignores the buyers...] Carbon trading makes lower-cost credits available to these firms as an alternative to the higher-cost investments that they would otherwise have to make. Hence trading removes any incentive that they have for technological innovation.

This would be better explained as “cap and trade makes equally valuable emission reductions for less money”.

I do, however, agree with FoE’s stance on offsetting. The report says:

developed countries are using the prospect of increased carbon market finance to hide from their commitments under the United Nations Framework Convention on Climate Change (UNFCCC) to provide new and additional sources of finance to developing countries. Carbon market finance comes from offsetting developed-country emissions cuts which should be additional. Counting it towards the financial commitments of developed countries is double counting.

This is right. And the report makes a generally fair rehearsal of all the usual issues with offsetting and the CDM.

If the parties to the UNFCCC can turn the screw on carbon markets, by (a) using the cap to demonstrate greater commitment to more ambitious reductions and (b) cutting out offsetting, then carbon markets like the EU ETS can be an effective central tool in mitigation. There is no reason why cap and trade should exclude direct support for low carbon technologies where governments feel help is needed.

It’s not practical to ask the UNFCCC to throw out carbon markets, and I would like to see FoE take only its reasonable points to the negotiations.

Does the government need to provide guidance on the term ‘carbon neutral’?

The Department for Energy and Climate Change has been running a consultation on the meaning of the term ‘carbon neutral’. Today they published their report. ‘Carbon neutral’ has been given the definition:

Carbon neutral means that – through a transparent process of calculating emissions, reducing those emissions and offsetting residual emissions – net carbon emissions equal zero.

The government is repeating the general mantra that carbon offsetting must be the last step in carbon management, following measurement and internal reduction.

I have always found this view a bit simplistic and also feel the government is sticking its oar in too far by giving a hard line in an area of voluntary corporate responsibility. There is no similar guidance for corporate foundations regarding which charities they should support, for example.

For most organisations, it is not clear what ‘residual’ emissions are. At some point the cost of internal abatement reaches an unbearable level and offsetting makes more sense. But this point is not obvious for any organisation. Very few have a full breakdown of the environmental projects available to them and the cost per tonne of each project. And even if they did, they would be unlikely to be able to decide on the threshold for which projects are affordable – particularly if they cannot compare internal projects with carbon offsets on the same terms (because internal projects should be prioritised).

The carbon offsetting industry supports a strict ‘measure-reduce-offset’ hierarchy because it is regularly accused of creating the moral hazard that it’s OK to keep on polluting. A self confident offsetting industry – an industry that believes its credits have environmental value – would position offsets as a legitimate tool that can be weighed against internal reductions.

Having made those criticisms, I would strongly advise any company wishing to claim it is ‘carbon neutral’ to follow DECC’s guidance. There is no point saying you are carbon neutral if you are going to be shot down by campaigners or switched on customers who believe you are making unsubstantiated claims. Following the guidance at least means you can point to a common methodology. Even better, avoid the term carbon neutral altogether.

Carbon trading game – understanding the difference between the three basic types of environmental policy

I’ve developed a game that explains the differences between three key policy options for reducing emissions: command and control, tax and cap-and-trade. There are other games like it, but I think this one works really well and we like to use it with clients to explain the rationale behind the current preference that many governments have for cap-and-trade policies.

‘Command and control’ is when the government simply tells industry to reduce emissions by a set amount. ‘Tax’ involves levying a charge on each tonne of pollution. ‘Cap-and-trade’ is a policy type that allows companies to buy and sell emission credits, and therefore choose who makes the necessary reductions. Here’s how the game works:

Up to six participants (or six teams of two or three) are cast as the CEOs of large, carbon-intensive companies. They have asked their business analysts to prepare reports on how they can reduce their carbon emissions. These reports are shown at the top of each worksheet (you can download the worksheets here). Each company can implement two projects. You don’t have to implement an entire project – you can do half of it for the half the cost.

The facilitator (who is cast as the government), then asks each company to work out how much it will cost them to meet emission reductions under a command and control regime (i.e. you must meet the reduction target, and you can only implement your own projects). The facilitator asks each company to report how much money they spent and the emission reductions they achieved, and writes totals up on a flipchart.

Next, a tax regime is used. Each company will be charged £40 for every tonne of carbon that they miss their target by. Again, they report the results.

Finally a cap-and-trade scheme is used. Each company decides how many credits they would buy or sell at four price points (using auction ‘order books’, which you can download here). The data is fed into a spreadsheet that works out the optimal clearing price and shows who buys and who sells (the spreadsheet is available here). It’s called a French auction and it’s just like real carbon markets.

The exercise shows that:

• Command and control achieves the desired emission reductions, but at a high price;
• Tax is cost efficient, but unpredictable in terms of emission reductions; and
• Cap-and-trade is cost efficient and achieves the desired reductions.

The game involves huge simplifications, of course, but does outline some basic economics behind these policy choices.

Is carbon still following oil?

In January I looked at European oil and carbon prices to show how they were reacting to the economic recession. Today I had another look at these two markets to see what’s happened over the past six months.

The graph below (click to expand) shows the December 2009 EUA contract (from ECX) and the Europe Brent spot price (from the Energy Information Adminstration, converted in Euros using currency data from OAndA). The prices have been indexed to January 2007. Historically, carbon has largely followed oil.

In 2009 the trend seems unclear. While daily trading news is full of headlines like “carbon nudges higher on strong energy complex”, carbon seems have recovered less than oil. In January 2009, the nominal prices of oil and carbon were both around 70% of January 2007. At the end of last week, oil was at 110%, while carbon was at 80%.

Performance of EUAs vs crude oil

I don’t have any clear commentary to offer just now. Glancing at the graph, it looks like carbon has fallen behind oil by about three weeks, but that doesn’t feel like a very plausible theory. I’d be interested to hear any thoughts.

Why does carbon offsetting struggle with its reputation?

Carbon offsetting has a reputation problem. Some parts of the ‘carbon’ industry act dishonestly or are not environmentally motivated, and people outside the industry tend to lump the diverse organisations involved in carbon trading together. When an exposé story appears in the media, we all suffer.

This week there was a story about suspected VAT fraud in carbon markets. Dodgy brokers were buying carbon credits abroad (which does not attract VAT), and then selling them in the UK and applying VAT. They are thought to have made £38m. It’s called carousel fraud or ‘missing trader’ fraud (because the broker disappears with the tax). One funny thing about this story is that none of the coverage says which market the fraud was in. Were these CDM credits (the carbon offsets that the UN allows governments to use)?

Twitter was full of people saying that this story confirmed carbon trading to be a con. Several newspapers referred to “so-called carbon credits”. Why “so-called”?

Another example is the campaigns by NGOs like Friends of the Earth and WWF against the use of offsets in statutory carbon trading schemes. Under the Kyoto Protocol, governments of rich countries can offset some of their emissions by funding projects in the developing world. The NGOs feel this allows them to wriggle out of their responsibilities.

Friends of the Earth said:

Dangerous climate change will be unavoidable if the UK, EU and USA succeed in increasing the use of carbon offsetting, Friends of the Earth is warning in a new report released today [Tuesday 2 June 2009] that exposes carbon offsetting as ineffective and damaging.

WWF:

The problem with carbon offsetting is that at best it robs Peter to pay Paul – with no net benefit for the planet. All too often, offsetting is simply used to justify business-as-usual behaviour in the UK and other countries.

These charities are referring to the CDM or whatever succeeds it when the Kyoto Protocol expires in 2012. While both have misgivings about voluntary carbon offsetting, neither would object to its use by a company or individual who is doing all they can to reduce their own footprint. Unfortunately most people are not aware of the difference between voluntary and statutory carbon markets and articles like the above cast the whole sector in a poor light.

The challenge for organisations involved in carbon trading is to help their market understand what happens to their money. No customer can be expected to spend their money if they believe it will be appropriated by fraudsters.

Do young people care about climate change less than everyone else?

I just ran a workshop on climate change with  120 bright and articulate Quakers aged 13 – 20. Some of the results of the discussion were so interesting that I thought they were worth sharing.

In one session, I asked the young people whether they agreed or disagreed with various statements. The results looked like this:

	Agree	Don’t know	Disagree
I like marmite	48%	3%	49%
I support a football team	40%	0%	60%
Twitter is a good idea	8%	46%	46%
Climate change should concern everyone	98%	0%	2%
It’s hard to know what to do about climate change	70%	0%	30%
Climate change and how we respond to it are among the biggest issues I worry about today	5%	45%	50%
I am personally making a significant effort to help reduce climate change through how I live my life today	15%	35%	35%

The last two of these questions were lifted from HSBC’s annual ‘climate confidence’ survey (pdf). Here’s how the data compare.

	% of young people that agreed in the workshop (from table above)	% of UK that agrees (from HSBC survey 2008)
Climate change and how we respond to it are among the biggest issues I worry about today	5%	26%
I am personally making a significant effort to help reduce climate change through how I live my life today	15%	26%

What’s going on there? How come this group of well-informed (most of them knew where Mozambique is, which was more that I could say) and thoughtful world-inheritors cares less about climate change than the general population? I put this to them, and the two most common answers were:

We’re being more honest. In the national survey, people were probably trying to look good.

(that’s my theory)

Teenagers are focused on problems closer to home. Climate change is too abstract to concern young people.

In another session, I asked the young people to rank the effectiveness of various actions in terms of addressing climate change. The picture below shows how they stack up (each column represents the consensus of a group of around 12, with the top action rated most effective – click to expand).

• Red = Go vegetarian
• Yellow = Stay in the UK instead of flying abroad on holiday
• Orange = Discuss climate change with your friends
• Blue = Write to a supermarket to tell them to be greener
• Green = Write to your local politician to ask them to do more about climate change
• Purple = Join a campaigning NGO

Results from the session with young Quakers

The clearest message is the variation, and the groups said that people don’t have the information to understand the effectiveness of actions like these. But to force a crude ranking, where the top rated action scores 6, the second scores 5 and so on, the order from most to least effective is:

• Stay in the UK instead of flying abroad on holiday (47)
• Join a campaigning NGO (40)
• Write to your local politician to ask them to do more about climate change (38.5)
• Go vegetarian (31.5)
• Write to a supermarket to tell them to be greener (31)
• Discuss climate change with your friends (22)

One thing is for sure – young Quakers prefer Marmite to Twitter.

Thanks to Yorkshire Friends Holiday School for inviting me to talk.

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.

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.

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.

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…

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.

Forests should be protected with carbon money – but not through cap-and-trade schemes

There have recently been a few reports in the media about using carbon finance to protect the world’s forests.

Forests provide the world with ‘ecosystem services’ (like biodiversity or absorbing carbon dioxide), which should be valued and paid for. If communities in forested countries can only survive by clearing the forest for timber and farming, it will be impossible to stop deforestation without paying them.

MEPs involved in the EU ETS are arguing that forestry could be protected by giving land owners EUAs if they leave the forest alone. A recent Panorama programme argued something similar – corporations should offset their carbon footprint by paying people to preserve forests.

The CDM has resisted forestry based CERs because it is too difficult to prove the reductions and their additionality. But there is an even better reason why a CDM type approach is wrong: the main market for the forestry credits would be cap-and-trade schemes (i.e. the EU ETS at this stage), so preserving forests would allow increased internal emissions and no net emission reduction.

The right approach would be provisions under the UNFCCC for a forestry fund. Forest owners would receive freely tradable credits when their management of the forest is verified. Anyone would be allowed to sell credits to the fund, either at a fixed price or through regular reverse auctions. Under this system, the market would provide upfront cash to forest owners (assuming we have emerged from financial meltdown, of course).

The fund would be comprised of national donations from rich countries. Those with working cap-and-trade schemes could use their auction revenues – which would effectively mean carbon consumers in rich countries pay for forests to be preserved in poor countries.

That’s what it comes down to: someone just has to pay up.

Broadsheet sensationalism?

The Guardian on Saturday published a feature on the EU Emission Trading Scheme, highlighting that some companies stand to make a windfall from the scheme.

This is true, but the article is wrong to suggest that the scheme isn’t working yet.

Some companies do have more EUAs than they initially need – but, as environmentalists, it is the overall cap that concerns us. The Guardian’s analysis shows that the UK’s allocation is 60 million tonnes below baseline emissions.

And what really matters is that the scheme as a whole is not over-allocated. As the World Bank’s Carbon Markets 2008 report (pdf) shows, the annual allocation across Europe in phase 2 (2008 – 2012) is 7.1% below 2007 CO2 emissions, which are trending upward.

The distribution of EUAs among installations is a financial issue for individual companies. To some extent this type of economic disruption is inevitable while the government is giving out a large proportion of EUAs for free (see previous post on why the government has to allocate free credits in the early stages). It is not a significant environmental issue and it is a shame that such a respected voice is potentially undermining support for a successful scheme that is not well understood by the public.