Comment Log Display

                                           
Public comment re: California Air Resources Board Considering the
Adoption of a Proposed California Cap on Greenhouse Gas Emissions
and Market-Based Compliance Mechanisms Regulation, Including
Compliance Offset Protocols.

Carbon Trade Watch is an international collective of
research-activists that has been analyzing emissions trading since
2001. We produce in-depth, accessible and concrete research on
environmental and climate change from a justice-based perspective
with a special focus on issues of carbon trading, forest issues,
land rights and plantations.  http://www.carbontradewatch.org

We appreciate the opportunity to comment on the draft cap and trade
regulation that was issued by the California Air Resources Board on
October 29, 2010. 

Our comments are structured as follows:
General considerations on cap and trade
Experiences of the European Emissions Trading System (EU ETS) 
General considerations on carbon offsetting
Comment on ambition levels and offsets limit 
REDD sector-based offsets


1. Cap and Trade 

The rationale presented for a cap and trade scheme covering 85 per
cent of California's GHG emissions is that it: 
establishes a price signal to drive long term investment in cleaner
fuels and energy efficiency
encourages the implementation of the lowest-cost abatement first 
gives flexibility to covered entities 

However based on global experience of Cap and Trade schemes, these
assumptions are highly questionable:

Price signal: Carbon prices are incredibly volatile and prone to
major crashes –  in large part because “carbon” is a commodity that
does not exist as a single entity outside of the numbers displayed
on trading screens. The result is that these markets emit, at best,
a very weak signal. The practice of “hedging” carbon permit prices
against shifts in energy prices and currency exchanges cancels out
this signal altogether.
 
In theory, a “robust carbon price” would make dirty industry
uneconomic. In practice, such a price is of a different order of
magnitude to current prices – mainstream economists estimate ten
times or more the €13/tonne at which it currently trades. The
record of corporate lobbying to date suggests that a price ceiling
would be imposed before the price came anywhere near this level.

There are more fundamental problems, too. A high and stable price
would at best encourage companies to invest in changes that push
the problem off their books. In the power sector, for example, this
could make nuclear and biomass more competitive, since the
associated greenhouse gas emissions are made elsewhere (uranium
mines, plantations, and transport) – typically, outside the capped
area. Nor could such a price solve the problem of “locking in”
pollution.

Lowest-cost abatement first: In chasing after the cheapest
short-term cuts, cap and trade tends to encourage quick fixes to
patch up outmoded power stations and factories – delaying more
fundamental changes. 

Flexibility: A scheme that is flexible for polluters tends to
dilute the environmental goal, and exacerbate social injustices.
This will be illustrated in the examples below. Although the
proposed regulation states that CARB will monitor the consequences
of the cap and trade programme in relation to co-pollutants, the
provisions offered are inadequate. This is a fundamental problem:
the basis of the system is that the market chases after the
cheapest abatements, and under such a scheme there is no recourse
to adjust for the concentration of pollutants in “hot spots”,
potentially exacerbating environmental racism. We also note with
particular concern the treatment of biofuels, which appear at the
cheaper end of the carbon abatement curve for California. 

For more information, please look at Oscar Reyes and Tamra
Gilbertson, Carbon Trading – how it works and why it fails (Carbon
Trade Watch/Dag Hammarskjold Foundation, December 2009)
http://www.tni.org/carbon-trade-fails 

2. The experience of the EU Emissions Trading System
The world's largest cap and trade scheme is the European Union
Emissions Trading Scheme (EU ETS). It has created a trade in
European Union Allowances (EUAs), which are allocated according to
National Allocation Plans, which are in turn subject to European
Commission approval.  

The EU ETS covers approximately 11,500 power stations, factories
and refineries in 30 countries which include the 27 EU member
states, plus Norway, Iceland and Lichtenstein. These account for
almost half of the EU’s CO2 emissions, covering most of the largest
single, static emissions sources, including power and heat
generation, oil refineries, iron and steel, pulp and paper, cement,
lime and glass production.

Analysis of the development of this market is very instructive  in
highlighting the fundamental flaws in Cap and Trade that California
is likely to face as it develops its own emissions trading
programs. 

Corporate lobbying makes 'cap' ineffective

In the first phase of the scheme, from 2005-2008, however, far too
many emissions permits were handed out to these industries –
largely as a result of intensive corporate lobbying – a practice
that will almost certainly take place in California too. When the
first emissions data was released in April 2006, it showed that 4
per cent more permits were handed out than the actual level of
emissions within the EU. In other words, the “cap” did not cap
anything, nor was it just the first year of the scheme that was
overallocated. By the end of phase 1, emitters had been allowed to
emit 130 million tonnes more CO2 than they actually did, a surplus
of 2.1 per cent. The price of carbon permits collapsed as a result
and never recovered. From a peak of around €30, the price slid
below €10 in April 2006, and below €1 in the spring of 2007. 

Profits for power producers

A further major criticism leveled at the first phase of the EU ETS
is that it generated huge “windfall profits” for power producers,
helping them to make large unearned financial gains as a result of
flaws in the rules rather than any proactive measures taken to
reduce emissions through structural changes.  An inquiry by the UK
Parliament’s Environmental Audit Committee found that “it is widely
accepted that UK power generators are likely to make substantial
windfall profits from the EU ETS amounting to £500 million a year
or more.” 

At first glance, this seems contradictory. How can polluters profit
when the value of the credits in the scheme fell to almost nothing?
The answer lies in how energy companies account for the costs of
the EU ETS. The costs that are indirectly passed on to consumers
through an increase in wholesale energy prices do not reflect what
carbon credits actually cost, but rather what the companies assume
they could cost. This leaves considerable scope for overestimates.
First, by assuming a larger than necessary need to buy permits or
credits; second, by assuming that there will be a high carbon
price; and third, by assuming the costs of replacing EUAs,
irrespective of their actual use of offset credits which in any
case have consistently commanded lower prices. When these
assumptions turn out to be over-generous, the surplus is more often
pocketed as profit rather than returned. 

Polluters are rewarded, rather than forced to change behavior

The same problems of over-allocated permits and windfall profits
for polluters are occurring in the second phase of the EU scheme,
which runs from 2008-2012. Research by market analysts Point
Carbon, for example, has calculated that the likely “windfall”
profits made by power companies in phase 2 could be between €23
billion and €71 billion (and between €6 and €15 billion for UK
power producers alone). 

At the same time, with the majority of permits still allocated for
free, the EU ETS is effectively providing a subsidy stream for
highly polluting industry. The example of ArcelorMittal, the
world’s largest steelmaker and the holder of the greatest surplus
of EU ETS permits, is instructive. It has routinely been awarded a
25 to 35 per cent surplus of permits over and above its actual
level of emissions, allowing the company to gain a subsidy of up to
€2 billion since 2005. A recent Carbon Rich List survey, meanwhile,
concluded that the 10 industries (mostly steel and cement
companies) with the largest surplus of permits stand to gain over
€3.5 billion in subsidies between 2008 and 2012.

EU's supposed emission reductions are not real

The fundamental problem of “overallocation” and avoiding necessary
domestic action remains too. The EU’s figures for 2008 show an
overall reduction in emissions of around 50 million tonnes, but
these figures were inflated by over 80 million tonnes of credits
from carbon offsets, mainly from the Clean Development Mechanism
(CDM) which gives credits for “emissions-saving projects” in
developing countries (for more on the problems with this see
below). In other words, more than the entire claimed “reduction’”
was generated by projects outside of Europe. As the UK’s National
Audit Office found, “The maximum level of allowable emissions
within the EU is higher than the cap once offset credits are taken
into account.” 

With a further surplus of permits, another price collapse in the EU
ETS followed, from a peak of €31/tonne in the summer of 2008 to €8
in February 2009. The figure has since hovered between this level
and €16 (to May 2010). Allocations for the second phase of the
scheme were made on the assumption that European economies would
keep growing. The recession has reduced output and power
consumption, leaving companies with a surplus of permits. Since
these were mainly given out for free, the net effect is directly
opposite to the scheme’s theoretical intention: polluting
industries are offered a lifeline in the form of the option of
cashing in their unwanted permits, while the supposed “price
signal” that is meant to change their polluting ways has been
neutered.

This is already storing up problems for the third phase of the EU
ETS too. The main reason why the price of EUA permits in phase 2
has not collapsed to zero is that it is now possible to “bank” them
– in other words, to hold onto them for use in the third phase of
the scheme, which will run from 2013 to 2020. 

Surplus allowances will dog carbon market 
The World Bank estimates a surplus of 970 Mt CO2e (million tonnes)
by the end of phase 2. This would account for almost 40 per cent of
the “reduction” that the EU claims will be required of power
companies and industries covered by the ETS in phase 3 of the
scheme. This figure might yet be higher if companies decide to
purchase a significant number of offset credits and “bank” these
too. Legally, it could rise to 1.6 billion tonnes CO2e. In
addition, companies will be allowed to purchase an additional 50
per cent of their “reductions” in the form of offsets. This overall
figure masks the fact that new ETS rules will allow power producers
in the UK and Germany (currently the largest buyers of emissions
permits), as well as companies operating in Spain and Italy (which
allowed vast quantities of offsets in phase 2) to buy far more than
50 percent of their “reductions” in the form of offsets. The net
result of this could be that the EU ETS will require very few
domestic emissions reductions before 2020, and quite possibly none
at all.
For more information, please look at Oscar Reyes and Tamra
Gilbertson, Carbon Trading – how it works and why it fails (Carbon
Trade Watch/Dag Hammarskjold Foundation, December 2009)
http://www.tni.org/carbon-trade-fails 

3. Carbon offsetting  
Carbon offsets are a means to allow companies to buy their way out
of responsibility for cutting their own emissions with theoretical
reductions elsewhere. The fundamental problems with this scheme
include: 

Shifting responsibility: Offsetting does not reduce emissions at
source, but allows companies to buy credits from elsewhere. These
projects often make existing conflicts for those living near them
worse. Moreover, they delay action at the emissions source.

Selling stories: Offsetting rests on “additionality” claims about
what “would otherwise have happened,” offering polluting companies
and financial consultancies the opportunity to turn stories of an
unknowable future into bankable carbon credits. The net result for
the climate is that offsetting tends to increase rather than reduce
greenhouse gas emissions, displacing the necessity to act in one
location by a theoretical claim to act differently in another.
Moreover, countries that host offset projects have a new barrier to
the implementation of environmental regulations, since to do so
would remove “additionality” and thereby cut of potential revenue.


Making things the same: The value of CDM projects is premised on
constructing a whole series of dubious “equivalences” between very
different economic and industrial practices, with the uncertainties
of comparison overlooked to ensure that a single commodity can be
constructed and exchanged. This does not alter the fact that
burning more coal and oil is in no way eliminated by building more
hydro-electric dams, planting monoculture tree plantations or
capturing the methane in coal mines. 

Offsets burst the cap: While cap and trade in theory limits the
availability of pollution permits, offset projects are a license to
print new ones. When the two systems are brought together, they
tend to undermine each other – since one applies a cap and the
other lifts it. Most current and proposed cap and trade schemes
allow offset credits to be traded within them – including the EU
Emissions Trading Scheme (EU ETS) and the cap and trade schemes
being negotiated as part of the Western Climate Initiative.

Carbon offsets subsidize increased greenhouse gas emissions: One of
the most frequent justifications put forward for carbon offsets is
that they should ensure that the cheapest reductions are made
first. In practice, these tend to be generated by loopholes and
generous subsidies for the deployment of existing technologies,
rather than stimulating shifts to a more sustainable future. 

Up to September 2009, three-quarters of global offset credits
issued were manufactured by large firms making minor technical
adjustments at a few industrial installations to eliminate HFCs
(refrigerant gases) and N2O (a by-product of synthetic fibre
production).  It is estimated that a straightforward subsidy to
regulate HFC emissions would have cost less than €100 million –
yet, by 2012, up to €4.7 billion in carbon credits will have been
generated by such projects. N2O reductions also use simple,
existing technologies that could have been implemented far more
simply by subsidies and regulations.

A second example involves new “supercritical” coal-fired power
plants, which have been eligible for CDM credits since autumn 2007
– despite the fact that coal is among the most CO2 intensive
sources of power. This sets up a perversely circular structure
where, instead of envisaging a rapid transition to clean energy,
the CDM is subsidising the lock-in of fossil fuel dependence
through incentives for new coal-fired power stations in the South.
With the credits that these new plants will generate, the CDM is at
the same time encouraging a continued reliance on coal-fired power
stations in the North as well.

In this regard, it is worth noting the conclusions of the US
Government Accountability Office,
(http://www.gao.gov/new.items/d09456t.pdf):  “Because additionality
is based on projections of what would have occurred in the absence
of the CDM, which are necessarily hypothetical, it is impossible to
know with certainty whether any given project is additional.”

For more information, visit Steffen Böhm and Siddhartha Dabhi,
Upsetting the Offset: The political economy of carbon trading 
(University of Essex/Mayfly books, December 2009)
http://www.tni.org/tnibook/upsetting-offset



4. Locking in a lack of ambition 

The aim to return California's emissions to 1990 levels by 2020
lacks ambition, and does not respond to demands by developing
countries facing climate change who are calling for wealthy states
like California (that use a disproportionate amount of our global
atmosphere related to global population)  to reduce emissions much
more radically. In particular, we note that:

“The proposed program includes provisions that would allow a
maximum of 232 MMTCO2e of offsets through the year 2020. This limit
will be enforced through a limit on the use of offsets by an
individual entity equal to eight percent of its compliance
obligation.”

This is double the initially proposed limit of 4 per cent. The
problems with offsets identified above, combined with the low
ambition in the overall target, leads us to expect that there will
be very little obligation on participants to take action at source
– the financial advantage is likely to lie in buying permits that
result from over-allocation (and therefore do not represent genuine
reductions) or cheap offsets from elsewhere.

Moreover, the inclusion of forestry and land use offsets in a
positive list of projects fails to address questions of permanence
surrounding carbon sinks, or consider the impact that the use of
such sinks has in delaying the transition from a fossil-fuel based
economic model.


5. REDD sector-based offsets

The inclusion of REDD sector-based offsets is an issue of
particular concern. The safeguards listed (III-28) are inadequate,
and gloss over a series of fundamental problems with such schemes.
These will be exacerbated if the subnational Reducing Emissions
from Deforestation and Forest Degradation (REDD) working group of
Governors’ Climate and Forests Taskforce (GCF)  agrees to use REDD
credits from states outside the US. 

With many Indigenous Peoples’ and forest-based communities having
few formal titles to their land, REDD is likely to fuel property
speculation, and dispossess local populations. These risks are
exacerbated by the inclusion of plantations in the current standard
(UNFCCC) definition of what constitutes a forest. 

Furthermore, in common with CDM, the complex accounting procedures
involved in commodifying forests tends to divert resources from
forestry initiatives to carbon accounting. The combination of
significant uncertainties in forest carbon accounting and weak
governance structures signals a capacity for large-scale fraud, and
the siphoning off of funds by elite interests. A more general
concern is that REDD offsets diminish the responsibility to reduce
GHG emissions at source, or initiate a path away from fossil fuels
in power and industrial sectors.

In this regard, we would refer you to Carbon Trade Watch, 
Indigenous Environment Network et al., No REDD! A Reader (
http://noredd.makenoise.org/ ) and Friends of the Earth
International, REDD: the realities in black and white
(http://www.foei.org/en/resources/publications/pdfs/2010/redd-the-realities-in-black-and-white)


Submitted by: 

Nick Buxton and Oscar Reyes
Carbon Trade Watch
December 15, 2010

Address:
212 Grande Avenue
Davis, California
95616

Tel: 530 902 3772
Email: nicholasbuxton@gmail.com
Website: http://www.carbontradewatch.org