The Role of Carbon Offsets in Climate Policy: Theory and Practice

A call for papers for a conference at Cornell on the role of carbon offsets in climate policy.

Verification, leakage and permanence are important obstacles to the effective use of carbon offsets and this is an important policy issue.

I have my doubts on how effective carbon offsets will be given these difficulties. the post below on fraud in the EU carbon trading market gives pause for thought.

This is a timely conference. The forestry and agricultural sectors in the US in particular have powerful friends and the distributional impact will be important - unless this is fully understood there may be unintended consequences.

CALL FOR PAPERS

The Role of Carbon Offsets in Climate Policy: Theory and Practice [PDF]

A Conference at Cornell University, May 13-15, 2011

It is now recognized that Carbon Offsets should play a major role in Climate Policy, by providing cost-effective reductions in greenhouse gas (GHG) emissions and sequestering carbon. However, there are many challenges associated with the production of offsets, including its verification, as well as issues related to additionality, leakage and permanence. At the same time, there is also a need to guide the design of public policies that will regulate the market for carbon offsets.

Yet the challenges of implementing carbon offsets and the role that carbon offsets can play in climate policy is under-researched:

(i) There is insufficient theoretical work that integrates the various challenges associated with the production of offsets – leakage, additionality, permanence - in a unified framework; the potential interactions between these challenges need to be analyzed in depth;

(ii) There is limited empirical evidence of the magnitudes of leakage and additionality associated with various carbon offset projects for different countries;

(iii)There is virtually no work on the effectiveness of various public policies that regulate the market for carbon offsets, through standards (e.g. quality or quantity limits), or other ‘mechanism-design’ type policies;

(iv)The interactions between cap-and-trade systems, voluntary consumption of offsets, and the production of carbon offsets needs to be better understood. Specifically, potential unintended emissions or welfare consequences need to be identified and measured. And the voluntary consumption of offsets remains under researched;

(v) The distributional impacts associated with the production of carbon offsets needs to be better understood, especially for the agriculture and forestry sectors.

With this background, Cornell University will host a major international conference
– “The Role of Carbon Offsets in Climate Policy: Theory and Practice” – May 13-15, 2011. The conference organizers are Antonio Bento and Ravi Kanbur of the Dyson School of Applied Economics and Management, Cornell University.

The conference will discuss theoretical, empirical and policy-oriented papers. The suggested topics include, but are not limited to, the issues (i)-(v) highlighted above.

The organizers invite the submission of completed papers or substantive abstracts (3-5 pages) by December 15, 2010. Submissions should be sent electronically to amb396@cornell.edu. Decisions will be communicated by January 15, 2011.
Participants who can use their own funds to cover part or all of the cost of their participation are requested to do so. The conference will provide accommodation and economy class travel for one presenter per paper accepted for those who do not have funding. Please indicate with your submission what funding you need.

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Economics in everything: "School Shootings and Student Performance"

Occasionally an economics paper is written that transcends the limited remit of "globalisation and the environment". This paper appears to say alot about the thinking of economists - I make no further comment.

I can imagine many members of the general public up in arms shouting "how could they" and other similar phrases.

The results seem reasonable though. In a seminar I would be tempted to ask for the "policy implications" of these results. Given the relatively infrequent number of school shootings, knowing the impact on exam results may not be considered of the utmost importance.

Why would young men be affected more than young women?

"School Shootings and Student Performance"

CESifo Working Paper Series No. 3114
PANU POUTVAARA, University of Helsinki - Department of Economics, Helsinki Center of Economic Research (HECER), CESifo (Center for Economic Studies and Ifo Institute for Economic Research), Institute for the Study of Labor (IZA)

OLLI TAPANI ROPPONEN, University of Helsinki - Department of Economics

In this paper, we study how high school students reacted to the shocking news of a school shooting. The shooting coincided with national high-school matriculation exams. As there were exams both before and after the shooting, we can use a difference-in-differences analysis to uncover how the school shooting affected the test scores compared to previous years. We find that the average performance of young men declined due to the school shooting, whereas we do not observe a similar pattern for women.

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"Plastic Tomb"

We have previously covered the "great plastic patch" floating in an ocean near you. It has now inspired a song called "plastic tomb" - a great title. "Texas-sized vortex" is how the song's author describes the said patch - wow.

The video is worth watching - on mute if you are not a big fan of Peter Buffet's driving rock ballard.

The description provided with the video makes for interesting reading. You will have to judge for yourselves whether the beat is powerful and the harmonies chilling.

In honor of Earth Day, Peter is releasing the driving rock ballad "Plastic Tomb," whose powerful beat and chilling harmonies remind us of the relentless grip that big box stores have on today's consumer culture. The harm from such material excess is evident in the Great Pacific Garbage Patch – a Texas-sized vortex of marine litter consisting of pelagic plastics, chemical sludge, and other debris in the Northern Pacific ocean. With characteristic urgency, Peter urges us to break free from these wasteful habits, and in turn, eliminate the wake of plastic and paper across the planet.



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Does CO2 endanger public health?

In a news item that could change the face of the US climate change debate the EPA is claiming that CO2 endangers health.

EPA Raises Heat on Emissions Debate[Wall Street Journal]

WASHINGTON -- The Environmental Protection Agency has sent the White House a proposed finding that carbon dioxide is a danger to public health, a step that could trigger a clampdown on emissions of greenhouse gases across a wide swath of the economy.

If approved by the White House Office of Management and Budget, the endangerment finding could clear the way for the EPA to use the Clean Air Act to control emissions of carbon dioxide and other greenhouse gases believed to contribute to climate change. In effect, the government would treat carbon dioxide as a pollutant. The EPA submitted the proposed rule to the White House on Friday, according to federal records published Monday.

Such a finding would raise pressure on Congress to enact a system that caps greenhouse gases -- which trap the sun's heat in the earth's atmosphere -- and creates a market for businesses to buy and sell the right to emit them, as President Barack Obama has proposed.

A White House representative said Monday that Mr. Obama's "strong preference is for Congress to pass energy security legislation that includes a cap on greenhouse-gas emissions. The Supreme Court ruled that the EPA must review whether greenhouse-gas emissions pose a threat to public health or welfare, and this is simply the next step in what will be a long process that engages stakeholders and the public."

The administration has proposed a cap-and-trade system that could raise $646 billion by 2019 through government auctions of emission allowances. Environmentalists want the administration to act on climate change before December, ahead of talks aimed at forging a successor to the Koyoto Protocol, the 1997 agreement that commits many industrialized countries to reducing their greenhouse-gas emissions.
Opinion

* Carbon Caps Are the Best Policy

EPA spokeswoman Cathy Milbourn declined to comment on the details of the endangerment proposal, saying it is "still [an] internal and deliberative" document. But in a move that indicated the potential scope of regulation, the agency earlier this month proposed a national system for reporting carbon-dioxide and other greenhouse-gas emissions by major emitters. The EPA has said about 13,000 facilities, accounting for about 85% to 90% of greenhouse gases emitted in the U.S., would be covered under the proposal.

Industry officials say it will still take months, possibly even years, for the administration to finalize rules for regulating greenhouse-gas emissions.

According to an internal document presented by the EPA to White House officials earlier this month, the EPA believes the health effects of elevated greenhouse-gas levels could cause "severe heat waves...with likely increases in mortality and morbidity, especially among the elderly, young and frail." The agency also said climate change caused by higher greenhouse-gas levels could result in more severe storms and more suffering related to "floods, storms, droughts and fires."

Business groups such as the U.S. Chamber of Commerce and the National Association of Manufacturers warn that if the EPA moves forward on regulation of CO2 under the Clean Air Act -- instead of a measured legislative approach -- it could hobble the already weak economy.

Coal-fired power plants, oil refineries and domestic industries, such as energy-intensive paper, cement, fertilizer, steel, and glass manufacturers, worry that increased cost burdens imposed by climate-change laws will put them at a severe competitive disadvantage to their international peers that aren't bound by similar environmental rules.

Environmentalists have called for the endangerment finding, and say action by Congress or the Obama administration to curb greenhouse gases is necessary to halt the ill effects of climate change.

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The Great Economist Carbon Offset Debate

From the inbox:

The Economist is currently running a new debate on the usefulness or otherwise of carbon offsets.

Personally, I am highly sceptical. 55% agree with me on the question although I could be convinced otherwise - I had better start reading.

"This house believes that carbon offsets undermine the effort to tackle climate change."

Are carbon offsets a convenient loophole or a real way to reduce emissions?

The Economist announces an online debate that is underway on the effectiveness of carbon offsets. The proposition for this debate is: "This house believes that carbon offsets undermine the effort to tackle climate change."

The debate began on December 4th and runs to December 16th 2008. Michael Wara, Assistant Professor at Stanford Law School, and Henry Derwent, President and CEO, International Emissions Trading Association, are contesting the proposition. Readers are encouraged to participate in the conversation, contribute opinions and cast a vote for or against the proposition. The winner will be decided by popular vote on Tuesday December 16th. The opportunity for readers to submit comments will be open until January 2.

Carbon offsets are a sort of currency--a financial instrument which represents a reduction in emissions and can be bought and sold. They play an increasingly important part in official and voluntary programmes to cut emissions. But they are also increasingly controversial. "Are carbon offsets essential to our efforts to tackle global warming, or do they undermine those efforts? Join us as we debate this crucial issue," says Emma Duncan, debate moderator, deputy editor and chief climate change writer of The Economist.

Arguing for the Proposition: Michael Wara, Assistant Professor at Stanford Law School

An expert on environmental law and policy, Michael Wara’s research focuses on climate policy and regulation, both domestically and internationally. Professor Wara’s current scholarship addresses the performance of the emerging global market for greenhouse gases and mechanisms for reducing emissions, especially in developing countries.
Professor Wara joined Stanford Law in 2007 as a research fellow in environmental law and as a lecturer in law. Previously, he was an associate in Holland & Knight's Government Practice Group, where his practice focused on climate change, land use and environmental law. The results of his scientific research have been published in premier scientific journals, including Science and Nature.
Professor Wara is also a faculty fellow at the Program in Energy and Sustainable Development in Stanford’s Freeman Spogli Institute for International Studies.

Arguing for the Opposition: Henry Derwent, President and CEO, International Emissions Trading Association.

Henry Derwent became the President and CEO of the International Emissions Trading Association (IETA) in February 2008. Previously, as international climate change director for the British government, he oversaw the UK’s role in the international negotiations, in the G8 (especially as the prime minister's special climate change representative during the UK G8 Presidency in 2005) and in other forums.
Mr Derwent has been closely associated with the development of greenhouse-gas trading in the UK and Europe from its earliest days. His responsibilities in the UK’s Department of the Environment covered all aspects of climate change and sustainable energy in the UK, as well as air quality and industrial pollution control, chemicals, biotechnology and genetic modification, the nuclear industry and radioactivity.

Throughout the course of the two-week debate, expert Guest Participants have been lending colourful commentary to the lively discussion, including:

- Fred Krupp, President, Environmental Defense Fund
- Mark Trexler, Director, Global Consulting Services, EcoSecurities
- Kevin Smith, Researcher with Carbon Trade Watch
- Carl Pope, Executive Director, Sierra Club
- William Tyndall, Managing Director, Natsource Asset Management, LLC
- Anja Kollmuss and Michael Lazarus, Scientists at Stockholm Environment Institute

The Economist Debate Series is an open community forum – no paid subscription is necessary and anyone can participate. This debate is sponsored by Intel.

Why Brazil rejected offset money from the rich to save the Amazon

To answer the question I raised in the previous post on "why did Brazil reject the idea of developed country money to prevent deforestation" here is the answer courtesy of PlanetArk.

The arguments appear sound. The fear that the lure of billions of dollars of easy money would lead to an Amazon land grab are well made and undoubtedly correct. The fears of indigenous people are very real. Brazil appears to have taken the correct stance politically but whether the environment will suffer as a consequence of this decision will not be known for some time.

Rich, Poor In Dispute Over Rainforest Cash [PlanetArk]

POZNAN - Brazil ruled out on Thursday letting rich countries offset their greenhouse gas emissions by helping to save the Amazon rain forest, an idea under active discussion by the European Union.

Indigenous peoples attending United Nations-led climate talks in Poznan protested that they had no chance of seeing such carbon cash, and appealed instead for money first to root out corruption and cement their land rights.

The global carbon market works by putting a cap on greenhouse gases in rich countries. They can exceed these targets, but only if they pay for corresponding emissions cuts in the developing world, in a system called carbon offsetting.

EU member states debated on Thursday widening that scheme to allow "forest offsetting" -- letting countries and companies compensate for excess carbon emissions by funding tropical forest conservation.

"The EU is discussing this right now," said Brice Lalonde, representing France, holder of the EU Presidency, in December 1-12 talks in Poland, meant to push for agreement on a new climate treaty by the end of next year to replace the Kyoto Protocol.

A French draft paper seen by Reuters on Wednesday suggested the bloc could allow forest offsetting as an way to help some companies meet carbon obligations more cheaply during a recession. That would mark a reversal of proposals by the EU's executive Commission in October.

Worldwide, an area of forest greater than the size of Greece is lost every year, contributing to about a fifth of the global greenhouse gas emissions blamed for global warming.

Last week Brazil said the rate of Amazon deforestation increased in the year to July for the first time in four years.

But the country would block the use of offsets for forest protection under a new climate treaty, Brazil's representatives told Reuters on Thursday, explaining that would absolve rich countries from cutting their own emissions.

MEDICINE

"Brazil has always been against offsets in forestry," said Sergio Serra, Brazil's ambassador for climate change.

That poured cold water on hopes from most other tropical forested countries, seeking money for protecting their forests under a new climate treaty. Advocates include Indonesia, Mexico and India, analysts say.

Brazil supported instead a public funding approach, building for example on a $1 billion pledge from Norway this year to a new Amazon Fund, aimed at improving conservation and the enforcement of laws against deforestation.

A delegate from Equatorial Guinea said the two approaches could be combined. "It should be open both for those who want to raise public money and for those who want to go to the (carbon) market. But it has to have the market aspect," Deogracias Ikaka Nzamio told Reuters.

Some indigenous peoples groups oppose a carbon market approach until their tenure rights are made secure, fearing the lure of billions of dollars may trigger a land grab instead.

"Papua New Guineans depend on the land, the forests provide basic necessities, food, traditional medicines, clean water, ancestral ties, everything for them," said Kenn Mondiai, from Papua New Guniea's Eco-Forestry Forum.

The behavior of logging companies had lowered expectations of benefits from the private sector, he told reporters in Poznan. They were supposed to supply infrastructure in forested areas under the terms of concessions, but had not done so.

"There's no hospitals, the roads are poorly built, the bridges are made from logs, the schools are not in place, we haven't seen any benefits on the ground," Mondiai said.

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European Trading Scheme - carbon crash!

As my students begin their ETS essay the more astute of them will bring their essays bang up to date with a mention of the current price of carbon. Those students reading this blog can consider themselves "astute" by proxy.

Note that now the whole premise behind the ETS is being questioned. In the essay I ask whether it has been a success. This article hints at part of the answer.

Carbon crash hits Europe's emission trading scheme [theautralian]

WHILE you were distracted by crashing banks and clashing US senators, you may have missed a small environmental earthquake.

The price of carbon has collapsed.

In only three months, life has become a lot cheaper for polluters. The financial cost of warming the planet has plummeted in Europe's emissions trading system (ETS) and the effectiveness of such a volatile market mechanism in curbing carbon is being questioned.

You may recall that the ETS is a mechanism to encourage businesses to reduce their carbon output. Europe's larger companies are allocated permits to emit CO2, and these allowances, called EUAs, can be traded on exchanges.

Companies that emit less CO2 than their allocation can sell EUAs for cash, but inefficient polluters must buy EUAs or face financial penalties.

The idea is that a shortfall in EUAs allocated by governments will cause the carbon price to rise, stimulating investment in carbon reduction.

It's a market solution to pollution, but this carbon market is showing a distressing tendency to behave like most financial markets -- hysterically. In July, the right to spew out one tonne of CO2 from a chimney would have cost a power generator E29.33, but yesterday it could be bought for only E18.25 ($34.14).

The sudden collapse of the carbon price mirrors the rout in the wider commodity markets. Carbon peaked in July, its price summit occurring within 10 days of the peak in the crude oil price.

Since then, everything from steel to potash has been tumbling and you might think it unsurprising that carbon has tracked the general retreat. Hedge funds and other financial investors dabbled in EUAs as they fiddled with palm oil and soya.

The rush to convert hedge fund investments into cash and US Treasury bills has resulted in rapid closure of positions on various carbon exchanges.

Obviously, the credit crunch has little to do with underlying demand for EUAs in a market artificially created by regulators in Brussels. However, economic downturn and recession will affect the carbon market.

Less industrial and transport activity implies fewer emissions, so the shortfall between actual emissions and allowances will shrink, reducing demand for EUAs, thereby causing the carbon price to fall.

Some analysts reckon the carbon price has fallen far enough, even allowing for a recession. IDEAcarbon, a rating agency, has halved its estimate of the allocation shortfall from 206 million tonnes of carbon to 98 million tonnes in 2008 and 83 million tonnes in 2009.

The point is that there will still be a shortfall. Societe Generale reckons EUAs will find a floor at E15 per tonne before rebounding next year into the low E20s per tonne.

Maybe so, but the ETS is making a mockery of Europe's stumbling attempts to lead the world with a market-based carbon strategy. It is causing irritation and frustration to the armies of advisers and investors who seek to cajole utilities into big investments in carbon reduction.

James Cameron, the director of Climate Change Capital, a financial adviser and fund manager, said: "The whole purpose of the ETS is to take carbon out. It's not there to benefit funds or to support trading."

It's those "speculators" again -- the ones that pushed the oil price up the hill to $US147 a barrel and then let it roll back to $US60.

It is a terrible irony that one aim of creating a carbon market was to provide a measure of certainty to the energy industry in estimating the future price of carbon for the purpose of planning investments in new power generators.

Estimates of the price at which carbon capture and storage technology might be economically viable vary between E40 and E60 a tonne. Suffice it to say we are nowhere near these levels.

More political action is needed, Cameron says, with smaller carbon allocations by governments to industry, which would entail a much bigger shortfall in EUAs and a much higher carbon price.

It is a moot point, however, whether there is political appetite in Europe for such a burden. The European Commission is already struggling to create a coalition of the willing to do battle with carbon emissions, and Italian Prime Minister Silvio Berlusconi has made clear his preference for a gentle regime.

It's a measure of the speed at which politics moves in response to market prices that the green agenda has almost vanished from media political chatter.

Carbon's falling price spells companies going bust, the loss of jobs and the shredding of political reputations. Over the next year, no politician with re-election hopes will back a policy that would triple the price of carbon for industry and raise consumers' energy costs. There is a wider question about the ETS that must be addressed, and that is whether it is a sensible mechanism to regulate carbon.

Price volatility, whether in oil, gas or coal, is a huge burden for the energy industry. Violent movements in price cause financial damage and promote short-termism -- the sort of thinking that is anathema to the climate change lobby.

If there is to be any prospect of a serious cut in carbon, there must be stability in carbon pricing. Although a financial market gives useful price signals, it cannot provide stability.

Only a stable regulatory regime can provide certainty, but that means carbon taxes and a policy leap that no one is yet willing to make.

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Contests to allocate pollution rights

My Econ211 students are currently writing an essay on the European emissions trading scheme.

The allocation of pollution rights is controversial. This paper by Nick Hanley and others makes suggests an interesting new mechanism.

Using contests to allocate pollution rights

Using contests to allocate pollution rights
Author(s):
MacKenzie, Ian A
Hanley, Nick
Kornienko, Tatiana

Contact Email: imackenzie@ethz.ch

Citation: Stirling Economics Discussion Paper 2008-21

Keywords: Rank-order contests, pollution permits, initial allocation
JEL Code(s): D44 Q25
Issue Date: Oct-2008

Series/Report no.: Stirling Economics Discussion Paper 2008-21

Abstract: In this paper we advocate a new initial allocation mechanism for a tradable pollution permit market. We outline a Permit Allocation Contest (PAC) that distributes permits to firms based on their rank relative to other firms. This ranking is achieved by ordering firms based on an observable 'external action' where the external action is an activity or characteristic of the firm that is independent of their choice of emissions in the tradeable permit market. We argue that this mechanism has a number of benefits over auctioning and grandfathering. Using this mechanism efficiently distributes permits, allows for the attainment of a sec- ondary policy objective and has the potential to be more politically appealing than existing alternatives.

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World Series of Poker goes green

In a post that encapsulates more than one of my interests comes news that the World Series of Poker has purchased carbon credits to offset its global warming impact. Given how many players will have flown into Vegas (an entire city sustained by air conditioning) this will have cost a pretty penny.

Hurrah's buys carbon offsets for WSOP [Gaming Industry Media]

Harrah's Entertainment, owner and operator of the World Series of Poker, has purchased carbon offsets to mitigate the global warming impact from energy use and waste at its six and a half week event at the Rio All Suites Hotel & Casino in Las Vegas.

The company purchased the carbon offsets through NativeEnergy, which manages a farmer-owned distributed wind program. NativeEnergy assists the building of new wind turbines on farms throughout the Midwest, thereby helping farmers to reduce their global warming impact from energy use and to reduce their long-term electricity costs while at the same time helping to stabilize the electricity grid with distributed, small scale, renewable power generation.

'Harrah's continues to look for innovative ways to conserve energy and demonstrate our commitment to environmental sustainability,' said Gary Loveman, chairman, CEO and president of Harrah's. 'Our collaboration with NativeEnergy allows us to reduce the environmental impact of the world's largest poker event.'

If anyone fancies a hand of poker search click below and you will find me playing the occasional hand of Poker of an evening. Combines statistics, game theory and psychology so a perfect (but time consuming) game for economists. Look for "netbet" on the tables. It is possible to play entirely for free and most people do.

French in Green Tax Plan

It is not just Gordon Brown who likes his green taxes and using incentives to encourage road users to use less fuel intensive automobiles. The FT reports. It will be interesting to see whether the French politicians also back down in the face of weaker poll results and the powerful automobile lobby. After all, most voters drive a car.

The bottom line is that cash incentives via the tax system are pretty much the only way to change behaviour. Appealing to the better nature of individuals is doomed.

French car tax to spur green upheaval [FT]

France is to slap an annual green tax on high-emission cars, such as sports utility vehicles, and extend punitive taxes to more environmentally damaging products in an attempt to revolutionise consumer behaviour and combat climate change.

Jean-Louis Borloo, ecology minister, said on Tuesday that the government’s carrot-and-stick “bonus-malus” tax system was proving successful and would be accelerated. The aim is to cut taxes further on environmentally friendly products while raising them on the most harmful products. “This will be a revolution. We must impose a fair ecological price,” he said in an interview with Le Parisien newspaper.

From the start of the year, the government has introduced bonuses for consumers who buy environmentally friendly vehicles and turn in cars more than 15 years old. These bonuses range from €200 ($316, £158) for cars that emit 121g to 130g of carbon dioxide per kilometre to €5,000 for electric cars.

But the government also penalises those who buy heavily polluting cars, charging as much as €2,600 for the largest SUVs. The new annual tax, which the government suggests could amount to about 10 per cent of the original charge, will apply to the most heavily polluting new cars sold from the beginning of next year. The government estimates it will affect about 1 per cent of French cars.

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Energy efficiency: "The Fifth Fuel" and the "negawatt"

I like the "5th fuel" catchphrase to describe energy efficiency. Clearly, this is largely meaningless but I like it nonetheless. This is also the first time I have come across the term "negawat". A fine phrase indeed.

I really need to get up to date with my lingo. "Wonkish" is another term I am not overly familiar with. Are those in "Wonkish" circles known as "wonkers"?

The Economist investigate:

The elusive negawatt [Economist]

IN WONKISH circles, energy efficiency used to be known as “the fifth fuel”: it can help to satisfy growing demand for energy just as surely as coal, gas, oil or uranium can. But in these environmentally conscious times it has been climbing the rankings. Whereas the burning of fossil fuels releases greenhouse gases, which contribute to global warming, and nuclear plants generate life-threatening waste, the only by-product of energy efficiency is wealth, in the form of lower fuel bills and less spending on power stations, pipelines and so forth. No wonder that wonks now tend to prefer “negawatts” to megawatts as the best method of slaking the world's growing thirst for energy.

Almost all blueprints for tackling global warming assume that energy efficiency will have a huge role to play. Nicholas Stern devoted a whole chapter to it in the report he wrote on climate change for the British government. In the greenest of futures mapped out by the International Energy Agency, a think-tank financed by rich countries, greater efficiency accounts for two-thirds of emissions averted. The McKinsey Global Institute (MGI), the research arm of the consultancy, thinks that energy efficiency could get the world halfway towards the goal, espoused by many scientists, of keeping the concentration of greenhouse gases in the atmosphere below 550 parts per million.

This long article concludes:

However, no matter what methods governments adopt to encourage energy efficiency, the results may not be as impressive as they imagine. The culprit is something called the “rebound effect”. Falling demand for electricity or fuel brought on by an efficiency drive should lead to lower prices. But cheaper energy, in turn, is likely to prompt greater consumption, undermining at least some of the original benefits. What is more, consumers with lower electricity or fuel bills often put the money they have saved to some other use, such as going on holiday or buying an appliance, which is likely to involve the consumption of fuel and power.

Economists disagree about the size of the rebound effect, which is hard to measure. The British government commissioned two studies of the effect, from two different universities. The first found that it cancelled out roughly 26% of the gains from energy-efficiency schemes; the other put the figure at 37%. Either way, negawatts are worth pursuing. But they are unlikely to satisfy the world's thirst for energy to the extent their advocates assume.

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Richard Sandor "The Carbon King" strikes gold

It is always interesting to read about "economists" making millions (usually from some sort of convoluted hedge fund deal) but it would be remiss of me not to cover a "economist makes millions" story that involves environmental economics.

One impressive quote is that Richard Sandor, an economist remember, is labeled as "gregarious". Not a term often employed to describe economists.

This is a long article that is worth reading. Some of the more salient quotes are included below.

Economist Strikes Gold In Climate-Change Fight [Wall Street Journal]

LONDON -- The planet is getting warmer. Richard Sandor, a 66-year-old economist, is getting wealthier.

His company, London-based Climate Exchange PLC, has carved out a key role in Europe's booming trade in "carbon permits" -- essentially, buying and selling the right to pollute. Since 2005, the European Union has required major polluters to either cut the amount of carbon dioxide they spew, or buy pollution credits in the open market.

A big chunk of the action occurs on an exchange founded by Mr. Sandor, a one-time Berkeley professor who has morphed into a gregarious climate-change entrepreneur.

It all seems so simple. Why didn't I think of it (given I was teaching this stuff).

Yesterday, Climate Exchange's stock jumped 16% after the firm reported a tripling in 2007 revenue to £13.6 million, or about $27 million. That gives the company, which handles about 90% of the trading on carbon exchanges, a market capitalization of roughly $1.31 billion. Mr. Sandor's 20% stake is worth more than $260 million on paper.

Sander's take on this is spot on. This "bold" quote applies to environmental economists in general (but not ecological economists).

It's an unusual mix of markets theory and environmentalism. "The right wing always suspects you of being a tree-hugging environmentalist and the left wing accuses you of being a money-grubbing capitalist," says Mr. Sandor, who back in the 1990s developed a markets-based system to cut down on pollutants causing acid rain.

Sander does not have it all his own way however. With the current financial crisis "financial wizards" are getting a bad press. This is a valid criticism.

Other criticisms of carbon trading focus on the financial wizards -- such as Mr. Sandor -- who design and run the markets. "Financial resources are being redistributed to the banks and traders rather than paying for technological innovations to cut emissions," says Carlo Stagnaro of the Italy-based economic think tank Istituto Bruno Leoni, who just published a paper on the European Union's emissions-trading system.

Robert Stavins (a well respected and well published environmental economist) gets in on the act:

Robert Stavins, an environmental economist at Harvard's John F. Kennedy School of Government, agrees Europe's carbon market isn't perfect, but defends the role of financiers. "The only way we can fight climate change is if there is an opportunity for businesses and individuals to make a fortune off of it," he said.

That's what Mr. Sandor has done. "I am a capitalist who runs a business and has to deliver value to shareholders," he said during a recent interview at the Ritz Hotel in London. "I consider myself to be an environmentalist, but I divorce those sentiments from my day job."

It is good to see that making a fortune is consistent with being an environmentalist although I am not sure that the "only way" to fight climate change is to ensure a select few individuals become multimillionaires.

A little background on Sander for economists out there:

Mr. Sandor, a dapper professor in close-cropped hair and tailored suits, started his career teaching economics and finance at the University of California, Berkeley, where he developed ideas for trading intangible things, like interest rates or mortgages, on a market.

He later made a name for himself at the Chicago Board of Trade where he did leading work on developing financial futures markets in the U.S.

As a final note I am still not convinced of the current business model of Sander's company. As an AIM quoted stock it is lightly regulated and is susceptible to political shocks. There are far better AIM investments out there at the moment.

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Becker and Posner on "Carbon Offsetting"

Carbon Offsetting is all the rage among the environmentally conscious middle class travellers.

What then are the economics mechanisms lurking behind the headlines and hundreds of companies offering us a way out of carbon footprint induced guilt?

The Posner blog post gives a good insight into some of the key global warming issues and is written to be accessible to all using simple language and simple examples.

The blog comments section is also worth ploughing through.

The Becker post concentrates on the "crowding out" argument that projects paid for by carbon offsetting would have occurred anyway. A fair point.

Carbon Offsets--Posner

The most serious drawback of the carbon-offsets movement is that it is likely to make the problem of excessive carbon emissions more rather than less serious, and this for three reasons. The first is that it creates the impression that modest reductions in the rate of annual increases in carbon emissions make a meaningful contribution to the fight against global warming. They do not.

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Second, the movement encourages the belief that anyone who reduces his carbon "footprint" (that is, the emissions of carbon dioxide that he causes) to zero has done his bit to combat global warming.

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Third, and most serious, the carbon-offset movement, combined with well-publicized projects by Google and other companies to reduce carbon emissions, creates the false impression that global warming can be tamed by voluntary efforts, just as cleaning up after dogs has been achieved by voluntary efforts, without need for legal compulsion.

On Carbon Offsets-Becker

In our complicated and interdependent global economic system, opportunities to create carbon offsets can be readily produced by both companies and governments without any significant affect on the scale of emissions. Mainly for this reason, but also because of the reluctance of most individuals to voluntarily pay significant costs for acting "green", a cap and trade system, despite its many flaws, is a far preferable direction to develop in order to cut down on carbon emissions.

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Brookings: "Economic Approaches to Reforming Energy and Protecting the Environment"

An excellent event and it is good to see Brookings getting involved in climate change via the Hamilton Project.

The event was to discuss how best to promote market mechanisms to reduce greenhouse gases. An excellent agenda and bringing into focus the different approaches between government regulation and private sector incentives.

A Climate of Change: Economic Approaches to Reforming Energy and Protecting the Environment

On October 30, The Hamilton Project at Brookings hosted a two-part forum on mitigating climate change through market mechanisms and new technologies. In addition to the release of a new Hamilton Project strategy paper, the forum highlighted two new discussion papers on how to best design market mechanisms to reduce greenhouse gas emissions and will include proposals to expand —and possibly restructure—the federal research and development program to better promote the development of new greenhouse gas reducing technologies.

Former U.S. Treasury Secretary Robert E. Rubin and Hamilton Project Director Jason Furman, also a Brookings senior fellow, opened the event with a special award presentation, followed with opening remarks by former U.S. Treasury Secretary Lawrence H. Summers on economic approaches to energy security and climate change—the subject of the new strategy paper.

The new Hamilton Project strategy paper argues that the best way to address climate change is to give the private sector the right incentives to undertake emissions reductions. At the same time, the strategy calls for policies to protect low- and middle-income families from the consequences of higher energy prices.

The two new discussion papers feature alternate views on how to best harness market forces to protect the environment. Gilbert E. Metcalf of Tufts University discussed his proposal for a carbon tax and Robert N. Stavins of Harvard University presented his proposal for a cap-and-trade system. John Deutch of the Massachusetts Institute of Technology and John Podesta of the Center for American Progress discussed their recent proposal for a new federal research and development strategy, and Richard Newell of Duke University and Resources for the Future shared his ideas for creating science and technology policies that would enable new technologies to work effectively.

Additional resources:

Policy papers:

* An Economic Strategy to Address Climate Change and Promote Energy Security
by Jason Furman, Jason E. Bordoff, Manasi Deshpande, and Pascal J. Noel
* An Equitable Tax Reform to Address Global Climate Change
by Gilbert E. Metcalf
* A U.S. Cap-and-Trade System to Address Global Climate Change
by Robert N. Stavins
* View presentation by Richard Newell [PDF]

VIDEO of the event HERE.

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Carbon Trading Markets: US to enter?

It is interesting how US big business maintains an eye on a profit despite the behaviour of the current government. This story has "Porter-hypothesis" overtones and suggests that higher EU regulations have lead other countries to steal a march on the US by being ahead in the Carbon Trading game. But for how long?

The final line is important:

"The carbon emission market is benefiting from the emergence of exchanges ... (but) the question is more about the economic viability of these xchanges,"

Full article:

US Exchanges Explore Carbon Trading Market[Planet Ark]

NEW YORK - Some of the biggest US exchanges are eyeing a piece of the global carbon trading market, which is expected to double in size by 2012 from current levels as governments and industry step up efforts to reduce pollution.

The market for trading carbon emissions reached 22 billion euros (US$32 billion) in 2006 and will cross 40 billion euros (US$58 billion) by 2012, according to a report by Boston-based research firm Celent.

"The opportunity is that it's a new product area that's not traded very heavily on exchanges right now," said Niamh Alexander, an analyst at Keefe, Bruyette & Woods.

"Lots of exchanges are likely to come up with different structured products to participate in that market," she said.

Analysts said carbon trading is likely to be among the slew of lucrative new products that exchanges are racing to offer customers. Exchanges the world over are buying stakes in each other to take advantage of new technologies that allow customers to swiftly trade a variety of products, from currency options to weather futures, across national boundaries.

New York Stock Exchange operator NYSE Euronext recently said it has partnered with French bank Caisse des Depots (CDC) to launch a carbon trading market in early 2008.

The market will allow trading and settlement of carbon dioxide allowances and credits, which can be bought and sold like any commodity.

NYSE Euronext spokesman Stefane Flex said further details will be presented at the United Nations' panel on climate change next month.

Craig Donohue, chief executive of CME Group Inc, the world's largest derivatives market, also said on a third-quarter earnings call his exchange was interested in developing carbon trading products.

CME recently acquired a 10 percent stake in Brazilian derivatives exchange BM&F, and Donohue said carbon trading may be a joint area of focus.

"Our agreement with BM&F does call for joint product development... but very much in particular, we are going to be focused on the agricultural and commodity markets, as well as the carbon market," Donohue said.

Exchanges can help create transparent and rules-based markets for trading carbon and other greenhouse gas emissions, analysts said.

Currently, about two-thirds of carbon trading happens in over-the-counter markets, said Veronique Bugnion, managing director of Point Carbon, which provides research on global energy and carbon markets.

Four exchanges -- Nord Pool, Powernext, the European Carbon Exchange and Chicago Climate Exchange -- conduct the remainder, Bugnion said.

The Chicago Climate Exchange is the first US exchange to create a market for carbon credit trading.

Nymex Holdings Inc, owner of the New York Mercantile Exchange, has also said it will begin offering contracts for carbon trading in the first quarter of 2008.

The United States, -- unlike the European Union -- is yet to establish a mandatory nationwide cap on greenhouse gas emissions. But many US companies, including giants like Ford Motor Company and Intel Corp, are participating in voluntary trading of carbon allowances.

"Exchanges are gradually nibbling away at the over-the-counter market," Bugnion said.

But Celent analyst Axel Pierron, who authored the report, said lack of liquidity and uncertainty around regulation has prevented exchanges from jumping in to offer carbon trading.

"The carbon emission market is benefiting from the emergence of exchanges ... (but) the question is more about the economic viability of these exchanges," Pierron said.

Other Carbon Trading Stories from today:

Carbon Traders Demand More UN Market Experts[Planet Ark]

SINGAPORE - The United Nations should replace policy officials with market experts to run a US$5 billion carbon trading scheme administered under the Kyoto Protocol, project developer EcoSecurities said.

Voluntary Carbon Market to Boom in Asia, US [Planet Ark]

SINGAPORE - Trading in voluntary carbon markets is booming as companies, in top customer the United States but also in Asia, rush to offset their impact on global warming outside a regulated Kyoto protocol scheme.

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Economists' Voice on "Global Climate Change"

A special issue on global climate change has jsut been released from Economists' Voice.

When economists such as Arrow and Stiglitz wade into a discussion it is worth listening.

Each paper can be downloaded if you register as a "guest".

Contents page is here:

Global Climate Change

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Joseph Stiglitz (2006) "A New Agenda for Global Warming", The Economists' Voice: Vol. 3: No. 7, Article 3.
http://www.bepress.com/ev/vol3/iss7/art3

SUMMARY:
Joseph E. Stiglitz presents his plan for getting the United States and the Developing World to address global warming, and argues that by failing to address this problem, the United States is implicitly subsidizing energy usage and engaging in unfair trade practices.


Sheila M. Olmstead and Robert N. Stavins (2007) "A Meaningful Second Commitment Period for the Kyoto Protocol", The Economists' Voice: Vol. 4: No. 3, Article 1.
http://www.bepress.com/ev/vol4/iss3/art1

SUMMARY:
Robert Stavins and Sheila Olmstead propose ways to modify the Kyoto Protocol for its second commitment period (2012-2016) so that it will provide a way forward that is scientifically sound, economically rational, and politically pragmatic.


Kenneth J. Arrow (2007) "Global Climate Change: A Challenge to Policy", The Economists' Voice: Vol. 4: No. 3, Article 2.
http://www.bepress.com/ev/vol4/iss3/art2

SUMMARY:
Kenneth J. Arrow explains why something must be done to limit global warming even if the Stern Report inadequately discounted future costs.


Thomas C. Schelling (2007) "Climate Change: The Uncertainties, the Certainties and What They Imply About Action", The Economists' Voice: Vol. 4: No. 3, Article 3.
http://www.bepress.com/ev/vol4/iss3/art3

SUMMARY:
Thomas Schelling argues although the uncertainties regarding climate change are many, the certainties create certain urgencies and inaction is an extreme position; he emphasizes technological advance and governmental sponsorship.


Lawrence H. Goulder (2007) "California's Bold New Climate Policy", The Economists' Voice: Vol. 4: No. 3, Article 5.
http://www.bepress.com/ev/vol4/iss3/art5

SUMMARY:
Lawrence Goulder describes California's recent commitments addressing Global Climate Change and recommends that a cap-and-trade program play a key role in achieving the state's climate policy goals.


Scott Barrett (2007) "Proposal for a New Climate Change Treaty System", The Economists' Voice: Vol. 4: No. 3, Article 6.
http://www.bepress.com/ev/vol4/iss3/art6

SUMMARY:
The existing international agreements on climate change are inadequate, according to Scott Barrett, and a new approach is needed.


Joshua S. Gans (2007) "Do Voluntary Carbon Offsets Work?", The Economists' Voice: Vol. 4: No. 4, Article 7.
http://www.bepress.com/ev/vol4/iss4/art7

SUMMARY:
Voluntary purchases of offsets for carbon emissions have been criticized as potentially increasing emissions. However, Joshua S. Gans argues that even if offsets do increase the consumption of carbon intensive goods, net emissions will always fall because these goods will become less carbon intensive.


Rognvaldur Hannesson (2007) "Letter: The Other Problems with the Stern Report", The Economists' Voice: Vol. 4: No. 3, Article 4.
http://www.bepress.com/ev/vol4/iss3/art4

SUMMARY:
The Stern Report seems optimistic about the cost of emissions reductions, and does not seriously face the fact that stabilizing the climate could require keeping much of the world in poverty, according to Rognvaldur Hannesson.

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China's Carbon Trading Market

Carbon trading is something I am uncomfortable with. Does paying China to pollute make sense? Some answers can be found below in this nice little introduction that explains the basics. Convinced?

This is an interesting article on Carbon trading from a traders perspective. Chinadialogue is a consistently good site for all things Chinese and environmental.

China’s carbon market: a trader’s view

Carbon trading is a divisive issue, especially with regard to China. In the final part of our series on the emissions market, Leigh Fitzgerald says it’s time to open up the discussion on a new footing.

So, what do you do?

That inevitable question.

PR; investment banking; consulting; journalism; IT: my friends’ answers usually get a pleasant smile and a nod.

My answer, “carbon trading,” rarely gets that reaction. I always wince a little before I throw it out there. Most people ask me what on earth carbon trading means. Others are horrified that I am paying Chinese companies to pollute. Once, a particularly pugnacious (and intoxicated) compatriot threw a fist at me. It’s not often that I hear, “Wow, carbon trading, that’s great.”

In a carbon market, an entity sets or is given a limit on how much greenhouse gas it can emit. If it isn’t able to meet this target in-house, it can buy emissions reduction credits from somewhere else. Carbon trading is the buying and selling of those reduction credits, known as carbon credits. Here in China, we develop emissions-reducing projects that generate carbon credits used to offset emissions elsewhere.

Most of the time, I dig myself in deeper with that follow up. Buying and selling emissions reductions? Outsourcing to China? It just doesn’t go over well. Still, I have learned that most of the upset surrounding the carbon market is based on common misconceptions that can easily be talked through.

The scientific community has come to a consensus that climate change is real and its effects catastrophic. The carbon market is a very active response to the problem. According to Point Carbon, the leading carbon market news provider, the market traded 1.6 billions tonnes of CO2 or equivalent in 2006, worth about 22.5 billion euros (around US$30.6 billion or 231 billion yuan). That’s a lot of money in the name of climate change. So where is it going?

Here in Beijing, day in and day out, I see firsthand what that carbon money is doing. China, with the world’s fastest growing economy and largest population, is poised to overtake the United States as the world’s greatest emitter of greenhouse gases. It is crucial that China build the infrastructure needed to curb its greenhouse gas emissions growth. Nonetheless, despite stellar year on year economic growth rates, China’s per capita GDP is still only one-sixth that of the United States.

In 1997, when the Kyoto Protocol was being negotiated, parties were concerned that specific emissions caps would handicap economic growth for developing nations. Therefore, they did not give developing country signatories specific limits on their greenhouse emissions. To encourage the reduction of emissions in these developing countries, the Protocol established the Clean Development Mechanism, or CDM. This mechanism gives China, and all other developing countries, the practical assistance it needs to stop emissions without unfairly hindering economic growth.

The Clean Development Mechanism, and the carbon market in general, is based on the fact that the gases warming our planet are all being dumped into the same place, our atmosphere, regardless of where they come from. Abatement is abatement, regardless of where it happens. Therefore, under CDM, stakeholders from developed country signatories to the Kyoto Protocol, like the UK, invest in and transfer technology to greenhouse gas abatement projects implemented in developing country signatories like China. If these projects prove that they could not have been implemented without CDM support, they are issued carbon credits that can be used by developed countries to stay under their emissions caps.

CDM, simplified, works like this: I am a utilities company in the UK, a developed country signatory to the Kyoto Protocol, and am allowed to emit 10 tonnes of carbon dioxide (CO2) this year. I emit 11. It costs me 50 euros to reduce a tonne of CO2 at home. I pay a company in China, a developing country signatory, 20 euros to help build a wind power project. The project generates electricity that would have otherwise been generated by burning coal. Less coal is burned and the project reduces the amount of CO2 that would have been emitted into the atmosphere by one tonne this year. The project would not have happened without my financing, so the worldwide net reduction in CO2 emissions is still the same. This CDM funding gives China real incentives to develop the technology and training needed to that wind project off the ground. Once it is up and running, companies gain valuable experience, which can be reapplied to more clean energy projects.

At the center of the mechanism is an intricate regulatory system that ensures the project quality. Getting projects registered through the CDM process requires the support of both the developed and developing country host parties, verification by a certified third-party standards body and the ultimate approval of the United Nations. Baseline emissions, what would have been emitted without CDM, must be clearly measurable and the project must be able to be strictly monitored. Finally, combinations of financial, investment, technological or common practice barriers must be strong enough to block the implementation of a project without CDM support.

So what is being done in China? One type of project far and away gets the most attention: the highly profitable HFC-23 destruction. Although the environmental benefits of destroying this highly potent refrigerant are unquestionable, HFC-23 factory owners to make a great deal of money off CDM. HFC-23 projects, because of their profitability, were developed first and tend to be the poster child for CDM.

Such a strong focus on HFC-23 presents a seriously skewed picture of CDM’s impact. China does hold a greater share of HFC-23 CDM projects than any other country in the world. Yet, of the 85 projects in China that have passed through UN registration, only eight are HFC-23 destruction projects. HFC-23 project development has all but trickled to a halt; 488 new projects in China are preparing registration applications, of which three are HFC-23 projects; 261 are renewable energy projects.

The vast majority of CDM projects will make long term contributions to curbing China’s emissions growth. Many projects generate electricity through renewable sources, such as hydropower and wind power. The electricity generated by these sources displaces the electricity produced from fossil fuel burning power plants, which, in China, tend to burn coal. Less coal is burned and greenhouse gas emissions are thus reduced. Other projects generate electricity from waste heat recovered from industrial processes. Others capture methane gas emitted from working coal mines and utilize it to generate electricity. The owners of these projects, regardless of how committed they are to the issue of climate change, aren’t able to implement them without financial support. The carbon market, through CDM, provides that. The fate of CDM after 2012 is unknown. Regardless of what happens, the infrastructure created by CDM projects will still be in place.

The impact of the carbon market extends beyond curbing Chinese emissions, and there isn’t space in a short article to fully argue the merits and flaws of the carbon market. However, by opening the conversation I hope we can correct some misconceptions and start a real discussion on how to do it better. Rather than destroy one of most important schemes we’ve devised to seriously tackle climate change, let’s keep the dialogue going.

Leigh Fitzgerald is senior specialist at Arreon Carbon UK, a firm that develops carbon credits in China then trades them on the international market.

Personal Carbon Trading: Impossible Dream?

Today's Guardian has a story about the first public trading demonstration in personal carbon credits - the idea that everyone is given a personal carbon allowance after which you can buy and sell credit.

The market price would of course be set by the invisible hand (supply and demand) but with an upper carbon cap. The higher the price, the more incentive there is to cut your own carbon use.

Of course in reality such a scheme is utterly doomed - a result clearly evident from the demonstration. However, it is worth reading what happened at the Manchester experiment and to see "economic experiments" like this being attempted.

Fair trade takes on a whole new meaning in Manchester [Guardian]

A progressive climate change solution, or a pain in the arse personal intrusion?

Personal carbon trading is an idea that could result in a division of opinion of fuel tax proportions, if managed poorly. It is currently still only a kernel of an idea being developed by the Royal Society for the Encouragement of Arts, Manufactures and Commerce (RSA).

Understandably, everyone has a different carbon footprint. The absence of a local train station may make you a heavy car user, for example, or you may need to visit your distant family for an important event. On the other hand, does that stag party really need to be in Tallinn?

With a personal carbon trading scheme, everyone would have a carbon allowance. If you needed more credit, you could buy more, but the application of an allowance would make people consider which high carbon behaviours they could chop. The market price would be determined by supply and demand, with the total amount of carbon capped. So the more people that buy, the higher the price and the greater the incentive to reduce.

Last night, RSA CarbonLimited was in Manchester with 60 members of the public to explore the idea of personal carbon trading in a public demonstration.

The group, drawn from people pledging through Manchester Is My Planet (Mimp) to cut their emissions by 20%, could be characterised as keen greens.

Participants registered their personal carbon emissions at rsacarbonlimitedcities.com and were placed in a league table. At the town hall, they received their personal carbon allowance - their carbon credits, ready for trading.

In line with existing proposals, all participants received the same carbon allowance. In an initial demonstration, Peter Fell, of Manchester City Council, chose to 'green' his lifestyle rather than buy surplus credits from Mike Reardon, of Manchester University, but the council's environmental expert, Sarah Davies, attempted to trade with Mimp's Keith Boxer. He reluctantly traded while musing about the possible future value of the credit he handed over.

The group of Mancunians then had a go themselves. Through a mixture of pledges to change their behaviour and a number of trades, they managed to simulate a 23% reduction in their average allowance.

This suggests that this community could live within a tightened carbon emissions allowance, with the trading market enabling some people to maintain a larger carbon footprint for now.

The major hiccup with the idea proved to be that the Manchester group blocked the trading market - many of them didn't want to sell, at least not to that SUV-driving bloke opposite.

Perhaps the other pilot groups will react in the same way - but in the real world, sellers wouldn't know the identity of buyers, so surely our simulated price of £100 per tonne would provide an adequate incentive.

· CarbonLimited will be coming to a city near you to further develop the idea of a personal carbon trading scheme. To get involved, visit rsacarbonlimited.org

"Carbon Offsetting": Questions and Answers

Given the popularity of "carbon offsetting" of which I remain distinctly unimpressed and unconvinced despite its prominent media standing I thought it would be useful to include here the recent Guardian Q&A article.

The article attempts to debunk some of the myths which is does to a certain extent. The questions it answers are at least the right ones. For example:

"Aren't you just in this to make a 'quick buck'?" - good question.

Climate Care answer that we should think of it as:

"'is it wrong to profit from tackling climate change?'" - a good question also.

It is not clear that the answer should be "yes".

Climate Cares defence?

"In fact, in a global capitalist economy no profit equals no action."

Not strictly true. There are many charities out there that operate on a "not for profit basis". It is good that Climate Care make all the results public so that we can see where the money is spent and how much is spent on salaries and administration (and how these figures compare with mainstream charities such as Oxfam etc.)

This article is useful and acts as a good reference post whenever I get asked tricky questions on this topic.

Warning - long post alert

Q&A: Carbon offsetting [Guardian via Climate Care]

What is 'carbon offsetting'?
Carbon offsetting is buying carbon reductions made by someone else. You measure your 'carbon footprint' - normally in tonnes of CO2 - from an activity or your whole lifestyle and buy an equivalent amount of 'carbon credits' to offset this impact.

Isn't it just an excuse to keep on polluting?
Only if you use it as an excuse. Should we scrap our recycling system in case some people use it as an excuse to keep on producing more waste than they need to?

The House of Commons recently investigated carbon offsetting and concluded that: "we found little substantial evidence to support the view that offsetting encourages ethical carelessness". The Voluntary Carbon Market (pdf), Sixth Report of Session 2006-7, House of Commons Environmental Audit Committee, p.14

But it doesn't lead to any overall reduction in carbon emissions, right?
It absolutely DOES lead to an overall reduction.

This would only be true if all the carbon emissions that are being offset would have been avoided if offsetting weren't available. Firstly, hardly anyone can get their carbon footprint down to zero. Secondly, even where it is technically possible to avoid certain carbon emissions people may not be prepared to - for example the green guru Satish Kumar still flies to India to visit his family.

If you don't offset there is no way to take full responsibility for your impact on climate change - offsetting lets you deal with your unavoidable carbon emissions.

Surely I should do everything I can to reduce my carbon before I consider offsetting the rest?
No. We should do both at the same time. Offsetting isn't just an optional extra, to be added on top of the things we're doing to reduce our carbon impact. It's an essential part of fighting climate change.

Why 'essential'?
Because a credible offset will direct your money wherever in the planet it makes the biggest impact.

For example, Climate Care is helping to fund simple 'treadle' water pumps for farmers in India, to give them the freedom to irrigate their crops without relying on expensive, polluting diesel pumps. Pound for pound this project will make hundreds of times more carbon savings than many options in the UK.

As a comparison it costs an average of £12,000 for a home solar panel (2kW). This will take over 2000 years to make the same carbon savings as the treadle pump project will make in a single year with the same investment. What's more, over 300 India families will be helped off the poverty line.

George Monbiot has stated in his book Heat that we must "seek the cheapest way to cut carbon emissions, for the reason that a pound spent on an inefficient process is a pound not spent on an efficient one". If we apply this principle to the world, not just the UK, the result is carbon offsetting.

So why don't we spend all our money on carbon offsets?
Offsetting is part of changing the world system - but it is only part of what we can do. We should also reduce our own impact - making our houses energy efficient, taking holidays nearer to home, buying seasonal, locally sourced food. And we should get involved politically: tell your MP that action on climate change is a priority.

We must work to change things at home and abroad. One without the other does not make sense. Paying other countries to cut their pollution while carrying on exactly as we are is unacceptable, but so is ignoring the rest of the world and failing to support low-carbon development in countries like India.

Why describe carbon offsets as 'changing the world system'?
Because to tackle climate change we need to green the global economy.

Experts such as Nicolas Stern say this involves putting a price on carbon emissions. This price, so long as it is high enough, helps the economy to choose the low-carbon options: it makes polluters pay and rewards those making reductions.

By offsetting you are supporting a world economy that takes carbon into account.

If the 'price is high enough'. Offsets are so cheap, so surely they can't make a difference?
Carbon offsets will be cheap whilst there are still opportunities for small investments to make big carbon savings. A low price for carbon offsets shows how much carbon there is to save, and how few people are prepared to pay for it!

The more of us that offset, the faster the cheaper projects will get used up. The price will start to go up and have more of an influence on our behaviour. But even at a low price they are still helping by funding carbon reductions.

Aren't there a lot of cowboys out there selling dodgy offsets?
There are cowboys out there. But the fact that there are cowboy builders doesn't mean we should not build houses.

When buying offsets there are a few simple questions to help you decide: are they verified under a recognised standard (eg the Gold Standard; is the provider chosen by major companies that will have done their own due diligence?; is the provider transparent about how the money is spent?

So I pay my money and buy my offset. What happens then?
This depends on who you buy the offset from.

Climate Care uses a 'portfolio approach', investing the money in a range of different projects. Some are highly innovative - such as providing efficient cooking stoves for thousands of families in Africa, with robust measurements of how much pollution is being saved. Others are more 'tried and tested', such as investing in wind turbines generating green electricity. This means that we can use the funds from our customers to promote really exciting developments in low-carbon technologies.

The key thing is that the reduction you have paid for will be made, no matter how any particular project performs.

There are now internationally recognised standards for carbon offset projects. Independent experts approve the project and verify the carbon savings that it makes. The key ones that Climate Care uses are:

· United Nations CDM standard: good for larger projects
· Gold Standard for Voluntary Offsets: designed for community scale projects with strong sustainable development benefits.
· Voluntary Carbon Standard: benchmark standard for voluntary projects.

Isn't offsetting about planting trees?
Absolutely not. The most important way to invest money from offsets is in promoting renewable energy and energy efficiency technologies. These reduce the amount of fossil carbon that will be dug out of the ground - in the form of coal, oil etc - and burnt to create CO2 in the atmosphere.

The key phrase in a good quality offset project is 'market transformation' - using the money from offsets to direct the economy away from fossil fuels and towards low-carbon technology. How you do this depends on the technology being funded and the country it is in.

For example, in most countries you can produce electricity cheaper through coal-fired power stations than wind farms. By calculating and buying the carbon saved by the 'green energy' from wind turbines you can provide that essential extra source of money, on top of selling the electricity, to encourage wind turbines rather than coal power-stations to be built.

That said, a fifth of the world's greenhouse gas emissions come from forest fires, land use change etc. We cannot ignore the protection and restoration of forests if we are to tackle climate change. However there is a lot of complexity around using them as offsets.

What is clearly a bad investment is offsetting through planting trees in the UK, where they are counted towards the government's own carbon reduction targets and therefore do not help achieve any new carbon reductions.

Aren't you just in this to make a 'quick buck'?
The key question is 'is it wrong to profit from tackling climate change?'

If we are happy for companies to make a profit when their products help cause climate change - home energy, petrol, flights, consumer goods - then how can we object to offset companies making a profit? If the offset is credible, leading to real emissions reductions, then why not?

In fact, in a global capitalist economy no profit equals no action. People need to make money from tackling climate change - it attracts entrepreneurs and investors to get things moving.

Given the huge amount of coverage for carbon offsetting it is important to keep it in context. The market for voluntary offsets is growing fast, but from a very small starting point. The government has valued the market at £60 million in 2006.

Parliament's environment committee stated clearly in its report on carbon offsets (pdf) that:
"If the voluntary offset market is going to fulfil its potential as part of the drive to reduce carbon emissions and raise awareness about climate change then there needs to be a considerable increase in the numbers of individuals choosing to participate" (p.50). They urged the government help and encourage more people and companies to offset.

Aside from the above point of principle, no one could describe Climate Care as 'in it for a quick buck'. Mike Mason founded the company over 10 years ago, investing his own money and working without drawing a salary. It was a long slog of 8 years before enthusiasm for tackling climate change, and consequently the sale of offsets, finally took off. Climate Care's aim is to have the biggest impact in tackling climate change globally. To do this we need to grow. But we will keep the integrity that has earned us such as strong reputation. (As part of our policy of being transparent and open we publish full annual accounts so you can see for yourself how our customers money is spent).

Offsets are a drop in the ocean then?
Climate Care has delivered over 1 million tonnes of CO2 reductions - the same as taking 300,000 cars off the road for a year. Next year we anticipate sales that will let us fund reductions equal to 1% of the UK's annual carbon footprint.

This is against a background of ten years in which UK CO2 emissions have increased by 4.6m tonnes per year.

So offsets are starting to deliver serious volumes of carbon reductions.

You are obviously in favour of offsets - you sell them. Who else is cheering them on?
House of Commons Environmental Audit Committee (pdf):
"we believe that the voluntary carbon offset market does have a role to play both in reducing carbon emissions and raising awareness of climate change issues to the general public."

Leading green NGOs Forum for the Future and The Climate Group:
"Drastic cuts in carbon emissions are necessary to stabilise climate change, and carbon offsetting has a vital role to play in this."

Yvo De Boer, United Nations climate chief:
"it makes sense to get the biggest bang for your bucks, to identify the most cost-effective emissions reduction options around the world …The atmosphere doesn't care where you reduce emissions as long as you reduce emissions."

Al Gore, climate campaigner:
"The debate has moved on to what kinds of carbon offsetting have credibility, and which fall into the 'snake oil' category. Those that have genuine integrity are now, actually, driving a massive cottage industry around the world, which is every day reducing CO2 emissions".

Assessment of U.S. Cap-and-Trade Proposals

New NBER paper out of MIT. It took of lot of them to write this paper.

-----------------

"Assessment of U.S. Cap-and-Trade Proposals"
NBER Working Paper No. W13176

Author: SERGEY PALTSEV
Massachusetts Institute of Technology (MIT)
Auth-Page: http://ssrn.com/author=426881

Co-Author: JOHN M. REILLY
Massachusetts Institute of Technology (MIT) - Joint
Program on the Science and Policy of Global Change
Email: jreilly@MIT.EDU
Auth-Page: http://ssrn.com/author=332566

Co-Author: HENRY D. JACOBY
Massachusetts Institute of Technology (MIT) - Sloan
School of Management
Auth-Page: http://ssrn.com/author=25749

Co-Author: ANGELO C. GURGEL
Massachusetts Institute of Technology (MIT) - Joint
Program on the Science and Policy of Global Change
Email: gurgel@mit.edu
Auth-Page: http://ssrn.com/author=859430

Contact: GILBERT E. METCALF
Tufts University - Department of Economics,
National Bureau of Economic Research (NBER)
Email: GMETCALF@TUFTS.EDU
Auth-Page: http://ssrn.com/author=45251

Co-Author: ANDREI P. SOKOLOV
Massachusetts Institute of Technology (MIT) - Joint
Program on the Science and Policy of Global Change
Email: sokolov@mit.edu
Auth-Page: http://ssrn.com/author=859433

Co-Author: JENNIFER F. HOLAK
Massachusetts Institute of Technology (MIT) - Joint
Program on the Science and Policy of Global Change
Email: holak@mit.edu
Auth-Page: http://ssrn.com/author=859434

Full Text: http://ssrn.com/abstract=994225

ABSTRACT: The MIT Emissions Prediction and Policy Analysis model is applied to synthetic policies that match key attributes of a set of cap-and-trade proposals being considered by the U.S. Congress in spring 2007. The bills fall into two groups: one specifies emissions reductions of 50% to 80% below 1990 levels by 2050; the other establishes a tightening target for emissions intensity and stipulates a time-path for a "safety valve" limit on the emission price that approximately stabilizes U.S.
emissions at the 2008 level. Initial period prices are estimated between $7 and $50 per ton CO2-e with these prices rising by a factor of four by 2050. Welfare costs vary from near zero to less than 0.5% at the start, rising in the most stringent case to near 2% in 2050. If allowances were auctioned these proposals could produce revenue between $100 billion and $500 billion per year depending on the case. Outcomes from U.S. policies depend on mitigation effort abroads, and simulations are provided to illuminate terms-of-trade effects that influence the emissions prices and welfare effects, and even the environmental effectiveness, of U.S. actions. Sensitivity tests also are provided of several of key design features. Finally, the U.S. proposals, and the assumptions about effort elsewhere, are extended to 2100 to allow exploration of the potential role of these bills in the longer-term challenge of reducing climate change risk. Simulations show that the 50% to 80% targets are consistent with global goals of atmospheric stabilization at 450 to 550 ppmv CO2 but only if other nations, including the developing countries, follow suit.
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