Accountants are trying to decide whether credits for trading carbon dioxide are assets or whether they are liabilities unless and until firms comply with progressively more stringent annual limits on their greenhouse gas emissions. The U.S. Congressional Budget Office has estimated the value of credits given away for free to major emitters (or polluters according to the Clean Air Act) under proposed legislation at $50–300 billion USD, depending on the evolution of the carbon price in the commodity futures market. However, if the beneficiary firms fail to invest in a low-carbon economy and fail to comply with their carbon cap, then carbon dioxide emissions are a liability not just for the firm, but for the planet and its people.
This accountancy dilemma was just one problematic aspect of carbon emissions trading GHG-reduction technologies debated at several side meetings that I went to during a week of United Nations Framework Convention on Climate Change (UNFCCC) negotiations. The messages from these meetings ranged widely. There were denunciations of carbon trading as a threat to local efforts to reduce GHGs. Carbon trading proponents asserted that only when the futures market discovered the “right” price for carbon on a consistent basis would major investment flows begin to save the planet from the ravages of climate change. Here are a few anecdotes that illustrate the hopes of the carbon traders and the problems embedded in such hopes.
At Agriculture and Rural Development Day on December 12, an official UNFCCC side event, one of four roundtables was dedicated to “the potential benefits of emissions trading for small-[land]holders." In a plenary address, Kanayo Nwanze, president of the International Fund for Agricultural Development, had reminded participants that more that two billion small holders had begun to be severely affected by climate change. The basis for the potential small-holder benefits would be agricultural practices that would be verified as having reduced GHGs. Following verification, farmers and ranchers would receive a small fraction of the revenues from carbon offset credits that big emitters would buy, to meet their GHG compliance requirements, rather than actually reducing their own pollution. However, as one GHG-reduction verifier stated, there was not a lot of scientific agreement on which agricultural practices could be verified in a quantifiable way as having reduced GHGs.
More than one potential beneficiary voiced displeasure at exacting verification requirements. Robert Carlsen, president of the North Dakota National Farmers Union, told participants that about 4,000 of his members had signed legally binding, multi-year contracts. As an aggregator of GHG reductions, NFU was liable to its members for contract performance to deliver GHG-reduction payments. A Canadian farm official asked if disagreements about verification methodologies prevent his farmers from realizing their anticipated payments, following their investments towards changing how they farm. Other participants suggested that until such time as there was scientific agreement about verification, why not certify farms as having complied with GHG-reduction practices? One participant said that farmers could be certified just as organic farmers are.
Certification of good agricultural practices would not suffice to monitor and verify GHG reductions, said Alex Michaelowa, an offset project developer with Perspectives Climate Change. Without GHG-reduction verification, offset credits could not be sold, nor, it was implied, could farmers receive payments from those sales. Michaelowa said that the science demonstrating GHG reductions from sequestering carbon in soil was “ambiguous.” Although U.S. legislation would start a carbon credit and offset credit market in 2012, it is not clear that there will be agreement on verification methodology for various would-be GHG-reduction agricultural activities in time for the anticipated legislative start of the carbon markets.
For developing countries expecting offset credit payments from the Clean Development Mechanism (CDM) operated by the World Bank, agriculture and food security are vulnerable to offset development projects, even if GHG reductions can be scientifically verified. One UN Food and Agriculture Organization official estimated that offset revenues could never amount to more than 10 percent of small landholder revenues, so the transaction costs of offset projects would have to be very low to attract the cooperation of farmers. Otherwise, said one participant from India, the transaction costs could damage already economically vulnerable farmers, including commercial farmers.
At the unofficial side events in the Klimaforum, there was widespread opposition to using land in developing countries for offset projects. At “Agrofuels in Africa,” the African Biodiversity Project noted that about 70 percent of African land was communally owned with no formal land titles. The expropriation of these lands for growing biofuels crops and the eviction of their indigenous peoples was predicated on a myth that these lands “marginal” to agricultural production. The contribution that biofuels might make to reducing GHGs by reducing fossil fuel use is controversial. In land classified by governments as “marginal” in order to justify expropriation to benefit investors, dry land agricultural and pastoralist livestock husbandry are the basis of food security and rural development. However, the UNFCCC sustainability criteria for offset projects exclude food security as a climate change concern.
Tanzania, for example, plans to take 20 percent of all its land for biofuels crops. These crops will be processed in Europe to meet the EU mandate of blending 10 percent biofuels with fossil fuels by 2020. Jatropha, a main biodiesel feedstock, survives drought though not enough to produce the berries to be processed into biofuel. Africa will see neither biofuels production for domestic consumption nor the value added benefits of biofuels processing.
Deepak Rugham reported on efforts to return carbon dust to the oil following the burning of biochar in cooking ovens. Why not, instead, cook with solar ovens and indeed, generate electricity through solar power in sun-drenched Africa? He said that the Royal Society of the United Kingdom, the highest body of scientists and engineers, had published their “significant doubts” about biochar as a GHG-reduction technology. Rugham said biochar was a concept that worked in a laboratory but not in an ecology. For more, see www.sparetheair.org.
The views of participants in events organized by the International Emissions Trading Association were more optimistic but focused on the regulatory and technical difficulties of achieving both GHG reductions and a global carbon emissions market. Where Klimaforum participants saw problems IETA saw technical challenges and investment opportunities. One challenge was “carbon leakage,” i.e., competitive trade advantage gained by companies whose governments did not enforce—or very loosely enforced—rules to fulfill GHG-reduction commitments.
The U.S. House of Representatives passed the American Clean Energy and Security Act (ACES) which includes carbon “border adjustment measures,” both tariff and non-tariff measures to impede the entry of products from countries that the U.S. judges to not have a “comparable” GHG-reduction regime. One participant said that if “border adjustment measures” were signed into law by President Barack Obama, all industrialized countries would be compelled to introduce their own measures. There was disagreement about whether such border measures would be consistent with the governments’ commitments to World Trade Organization agreements. But there was general agreement that the WTO could not act as a “policeman” for the UNFCCC.
In a remarkable exchange, Resources for the Future, a U.S. NGO with major corporate backing, asked an EU consultant whether the European Commission was likely to emulate the ACES provision that allowed major emitters to “update” their GHG cap every year, to provide flexibility in meeting the overall 2020 cap. The consultant replied that if emitters were allowed to adjust the cap at their convenience, what would be the incentive for planning to meet the cap? Since the EU GHG-reduction commitment is based on the more stringent 1990 emissions baseline and ACES uses a more emitter-generous 2005 baseline, allowing emitters “updating” flexibility may be the least of the difficulties of linking EU and U.S. carbon markets.
We were able to participate in only one side event in the Bella Center, the site of the UNFCCC negotiations. Increasingly restrictive access culminated with the arrival of the Heads of State, when only 90 of nearly 30,000 registered NGOs were able to enter the Bella Center. That event, hosted by the Carbon Marketing and Investors Association, addressed what investors would need in a climate change agreement to put their money into both a low-carbon economy and GHG-reduction technology. First, said one participants from Bank of America, negotiators would have to produce a “credible cap” on emissions in order to generate demand for buying offset credits and for firms to meet their caps through technology investments. CAMCO, a large offset project developer through the World Bank’s CDM, said that investors needed faster verification of CDM GHG reductions. They couldn’t invest in CDM projects and then wait 3–4 years for verification that would release CDM funds to their investors. The climate change negotiators had to find a way to CDM projects more widely to attract more investors. There were more CDM projects in Chile than in all of sub-Saharan Africa.
A UN Environmental Program official, said that UNFCC Long-Term Cooperation public funding would incentivize private investment. Negotiators were debating the terms of a new public investment fund and finance committee. Even after agreement had been reached on a funding framework, level and project management, it would take some time for developing countries to have confidence that private investors were committed to long-term cooperation for offset project development. Vivendi Economic, a consultancy, advised that while public financing can reduce investor risks, there were still political risks, such as host country expropriation of the offset projects. Currency rate volatility is also a big impediment to private investment in offset projects in developing countries. Because of such difficulties, major U.S. GHG emitters are concerned that there will not be enough verifiable offset credits for them to buy to meet their annual GHG caps. The U.S. and EU are counting on meeting at least half of their reduction commitments (whenever and to what extent those become legally binding) by buying offsets.
There is no blog-length way to summarize, much less analyze, the carbon market and anti-carbon market events in Copenhagen. What both sides of the climate change battle made clear, however, is that Copenhagen is just one meeting ground in a long battle. Those hoping to make a lot of money, once a climate change agreement is implemented, may have to wait a long time—time which the climatologists tell us we no longer have before the non-linear, unpredictable effects of climate change unfold.