28 November 2011

Unclean Development Mechanism: How African Carbon Markets are Failing

The following article was published as part of a debate hosted by the Heinrich Boell Stiftung. To read it in context, click here

Stories of the carbon market’s potential to mobilise billions of dollars in investment for projects to reduce emissions and contribute to sustainable development in the developing world tend to rely on aggregate figures about the value of the global carbon market, which was US$142 billion in 2010. There is a major discrepancy between this headline value and Clean Development Mechanism (CDM) financial flows, however, and this gap has continued to increase. In 2010, the “primary trade” in CDM offsets was worth $1.5 billion, its lowest level since the Kyoto Protocol entered into force in 2005. This is generally taken as an estimate of how much money goes to projects, although a recently leaked World Bank report suggests that the actual financial flows may be five times lower ($300 million) if the real purchase prices of credits are used instead of estimates.

The geographical scope of the CDM is also highly uneven, with over 80 per cent of registered CDM projects (and almost 86 per cent of credits issued) in the Asia-Pacific region. By contrast, Africa hosts 1.9 per cent of projects, issuing 1.3 per cent of credits, according to data from UNEP Risoe. These regional figures mask significant discrepancies between countries as well as regions. The majority of credits issued in Africa so far have gone to Egypt, but South Africa has the largest number of registered projects (19). By contrast, the rest of Sub-Saharan Africa hosts just 31 projects, amounting to 0.9 per cent of the total projects globally and just 0.005 per cent of credits issued to date.

On the north coast of Egypt, Africa’s largest fertilizer factory generates more carbon offsets than the rest of the continent combined, which are sold to coal-fired power stations in Germany’s industrial heartland to help them avoid cutting their greenhouse gas emissions. In 2010, the Abu Qir factory made an estimated US$25 million profit from these offset sales, while the power stations avoided 3 million metric tonnes of carbon dioxide reductions.

The story of Abu Qir is a snapshot of how the carbon offset market under the UN’s CDM has worked to date. Most credits are generated by industrial gas reduction projects, using cheap end-of-pipe technologies that generate far more money from the sale of carbon credits than they cost to buy and run. The largest buyers of these credits, in turn, are European energy producers keen to extend the lifespan of their coal-based power plants.

The fact that such a high proportion of Africa’s credits come from one factory illustrates just how marginal Africa is to the carbon market, and that the carbon market has been largely irrelevant to the continent's efforts to tackle climate change.

Project developers point to a lack of capacity in African states, but the main explanation for these disparities is economic. The largest global investors direct their efforts to the most profitable projects. Economies of scale invariably point to the larger projects, and since offsets represent “avoided emissions”, these involve heavy industries or power sector projects in countries where grid energy already register significant greenhouse gas emissions. Such project opportunities rarely exist in sub-Saharan Africa, which is not dirty enough or does not consume enough to compete successfully within the CDM.

This picture is clearly borne out in projections of how the scheme is likely to look by 2020. African projects already in the CDM pipeline would issue fewer than four per cent of credits by 2020. Almost half of these would come from a handful of gas-flaring projects in the Niger Delta, which looks set to overtake Egypt as the country with the highest number of credits by the end of the decade. The economic fundamentals limiting African involvement in the CDM as it is currently structured remain firmly intact, with project developers gravitating towards large-scale extractives and the industrial sector.

Various rule changes are on the table in Durban, which could exacerbate this trend. The inclusion of Carbon Capture and Storage (CCS) could depress offset prices that have already fallen so low as to be the “world’s worst performing commodity”, according to Reuters. The early beneficiaries would be in South Africa, where Sasol is looking at the possibility for its gas-to-liquids/coal-to-liquids plants; and in Algeria, where BP, Sonatrach and Statoil run the world’s largest onshore CCS demonstration project on their gas fields.

The other major changes could affect agriculture and forestry projects, which advocates for increasing the use of CDM in sub-Saharan Africa have identified as the sectors with the greatest “potential”. The World Bank is hoping to expand CDM to cover carbon storage in the soil as part of its proposals for “climate smart agriculture,” its version of the agricultural deal that the South African presidency hopes to be Durban’s main legacy. The World Bank claims that soil carbon storage will see small holder farmers “benefiting from significant payments for emission reductions.” However, its flagship pilot project in Kenya would see over 40 per cent of the costs spent on monitoring and registering the project, with $1.05 million spent on these “transaction costs”, leaving just over $1 per year for each farmer involved.

This cost profile is fairly typical of agricultural projects, which fetch far lower than average offset prices due to issuance uncertainties, and restrictions imposed on these project types due to difficulties in accounting for forest and agricultural carbon. As a result, the cards in this sector are also stacked in favour of agribusiness, which have better economies of scale. For example, the largest of a handful of CDM “reforestation” projects proposed (but not yet approved) would see the replacement of grasslands in Ghana with large-scale biodiesel monoculture plantations. In response, campaigners suggest that the inclusion of agriculture, forests and soil carbon in the CDM could lead to a “triple lose” for farmers, leaving them dependent on unpredictable carbon prices, increasingly vulnerable to land grabs, and left shouldering the burden of a climate crisis that they did not create.

In summary, the CDM is not failing Africa because of the inertia of policy makers and the CDM Executive Board. The CDM is failing in Africa because the economics of carbon markets create regional imbalances and favour large projects – subsidising the extractives sector and heavy industry, which are generally highly polluting and socially harmful. These same dynamics, if extended to agriculture, would favour agribusiness over small farmers. Various capacity-building initiatives are under way but these cannot alter the market fundamentals, and serve to merely divert scarce public resources away from directly addressing climate change.

21 October 2011

MiFID II: carbon trading included, many problems unaddresed

The European Commission is proposing that trading on the carbon market should be governed by the revised Markets in Financial Instruments Directive (MiFID II), a set of new laws governing financial speculation.

The move comes amidst continued volatility in the $142 billion per year carbon market, most of which is traded in the EU, and follows a series of fraud cases in recent years.

The proposal to classify carbon as a financial instrument would bring the whole market - including “spot” and "derivatives" trades - under a single regulatory framework. These proposals were subject to significant corporate lobbying, as revealed in a report from Carbon Trade Watch and Corporate Europe observatory released last week.

A compilation of the new measures on emissions trading included in MiFID can be found here. I've also compiled a similar document in relation to the Market Abuse Directive.

Treating carbon as a financial instrument is a welcome recognition of the problems in this market, but it is no panacea. Emissions trading has not driven investments in cleaner energy and there is no sign of it meeting environmental goals, as the latest carbon price slump shows.

The inclusion of carbon in MiFID II leaves key exemptions in place, however. For example, MiFID does not cover trading on “own account” and so fails to capture speculation engaged in by energy companies, which are the largest players on the carbon market.

This issue is covered in more depth in
Letting the market play: corporate lobbying and the financial regulation of EU carbon trading

16 October 2011

Corporate lobbying and the financial regulation of EU carbon trading

The European Union is changing its rules on how carbon is traded in response to a series of fraud cases and the financial crisis.

My new report analyses these changes, and looks at how corporate lobbies are trying to influence this process.

It shows that the European Commission initially took a light-touch approach to regulating carbon markets, putting increases in the volume of trade ahead of security concerns. In so doing, it failed to anticipate the specific opportunities for gaming and fraud posed by creating a large market in an intangible commodity. A series of carbon fraud cases, and the role played by “derivatives” in triggering the financial crisis, has made this position untenable and ushered in a new wave of regulation. This brings together measures designed to address fraud and gaming, with others designed to limit the destabilising effects of speculation. These may clean up the market’s image, but they do not address the core problems with carbon trading.

The measures proposed to tackle fraud focus on tightening registry security – in essence, regulating more strictly who can trade in carbon so that it is no longer possible to simply register as a trader from a home computer, steal funds, then disappear without trace. This much is sensible, although the fact that it took a series of fraud cases to bring about these obvious protections casts Commission decision-makers, and the lobbyists who pressured them to avoid regulation, in a poor light.

More controversially, the Commission’s package of security measures manages to include changes that hide serial numbers. The City of London Corporation, not known for its radical pro-regulatory stance, reports surprise at this decision, stating that “It is not understood how this will aid security as it prevents the market from identifying the provenance of the allowances.” Indeed, it is hard to find explanations that do not point towards a cover-up. In making it impossible to anyone except law enforcement agencies to trace individual allowances, the Commission has reduced transparency across the whole scheme, making it harder for civil society to reveal evidence of fraud and gaming, or the perverse effects of the system, and making it impossible to trace the volume of permits re-issued as a result of theft. These reissued permits would, in turn, further inflate the already generous emissions limits that the scheme establishes.

Significant fraud and gaming risks remain, despite these changes. Holes in registry security mean that there is still a risk that carbon trading could be used for money laundering. This is a particular problem across different legal jurisdictions. While the EU is trying to close the door to registry fraud within its borders, it is at the same time attempting to link it’s carbon market to other emerging markets (eg. Australia), as well as allowing offsets to be traded within its scheme – increasing the potential for carbon fraud globally.

Fraud risks, in this narrow sense of deliberate deception for unlawful gain, are potentially less significant than those posed by “gaming” - deliberate deception that is legally sanctioned. As we have shown elsewhere, the lobby pressure to freely allocated large surpluses of emissions permits has resulted in windfall profits for industry and the power sector. The offset markets are notorious for the same practice. CDM credits are issued in relation to “additionality” claims that are impossible to prove. A recently leaked US cable gave dramatic evidence of the scale of this problem, reporting from a meeting in Delhi that “all interlocutors conceded that all Indian projects fail to meet the additionality in investment criteria and none should qualify for carbon credits.” These interlocutors included the Chair of the national CDM authority, as well as some of the country’s largest project verifiers and developers. In a nutshell, carbon trading schemes are awash with paper “reductions” that do not correspond to actual reductions of greenhouse gas emissions in the real world, and this is a systematic problem. Gaming results in windfall profits and undermines efforts to address climate change.

On the side of financial speculation, the key regulatory proposal is to classify carbon as a “financial instrument.” This would bring it under the scope of the Market in Financial Instruments Directive, a key component of EU market legislation that is currently under review. The International Emissions Trading Association (IETA) and other financial sector lobbyists have vigorously opposed this change, fearing that it could limit some avenues for financial speculation on carbon. A leaked draft of the proposed Directive suggests that the Commission may not side with the lobbyists, although some key exemptions remain in place. Most notably, leaving it to national authorities to set “position limits” would be ineffective: the majority of trades pass through the UK, which is opposed to this concept and would not implement it in any meaningful way. The restriction to trading on “own account” fails to capture speculation engaged in by energy companies, which are the largest players on the carbon market.

More fundamentally, though, restrictions on speculation shed critical light on the flawed purpose of the carbon market in the first place: it introduces speculation by design, undermining the stated objective of long-termer clean investment decisions. To really address these issues requires bolder steps to de-financinalise climate policy and move away from the carbon market model.

03 October 2011

The CDM's missing billions

According to World Bank figures, the global carbon market was “worth” $142 billion in 2010. Most of this number relates to financial speculation on permits in the EU Emissions Trading System. The value of the money that goes to CDM projects continues to decrease. The Bank officially claims it was $1.5 billion in 2010, its lowest level since the Kyoto Protocol entered into force in 2005. However, the real figure for 2010 may be closer to $300 million.

The difference between the official and "actual" figure was explained by the Mobilizing Climate Finance report, leaked to The Guardian. It notes that

The value of transactions in the primary CDM market – the largest offset market by far – totalled around $27 billion in 2002-10, which is estimated to have been associated with around $125 billion in low-emission investment. Since the bulk of transactions are forward purchase agreements with payment on delivery, actual financial flows through the CDM have actually been lower, about $5.4 billion through 2010.
The World Bank's official figures can be recalculated with these "actual financial flows" as follows:


WB Official

WB actual



















Figures are in $ billions

05 September 2011

Wikileaks and EU climate targets

A cable detailing a 2008 spat between the EU and US on climate change targets sheds light on the EU’s lack of ambition.

In a frank exchange on March 7, U.S. and European principals reviewed work on climate change under the Major Economies and UNFCCC Processes. U.S. principals secured EU Environment Commissioner Dimas' admission that current EU proposals will permit some EU Member States to record absolute increases in emissions by 2020.

Dimas conceded that “some EU Member States will be permitted under the EU's proposals to record an absolute increase in emissions by 2020.”

Jim Connaughton, Chairman of the White House Council on Environmental Quality at the time, further questioned the EU’s achievements in relation to its Kyoto targets:

for Europe, 1990 as a reference year incorporates the early 1990s economic collapse of eastern Europe, which no policymaker would recommend be repeated; the UK's decision to move away from coal to natural gas, long before climate change was a policy issue; and the EU's use of diesel fuel, at the expense of air quality and human health.

Wikileaks and the CDM: no "additionality" in India

Several of the recently released wikileaks cables discuss the CDM in passing. A cable on the CDM in India is particularly enlightening, however. It reports on a seminar with the US Consulate General Office (Congenoff) and analysts from the Government Accountability Office (which later released a skeptical study on offsets).

At a seminar on CDM in Mumbai, R K Sethi, Member Secretary of the National CDM Authority and the present Chairman of the CDM Executive Board, publicly admitted that the National CDM Authority takes the "project developer at his word" for clearing the "additionality" barriers. Mathsy Kutty of Det Norske Veritas (DNV), a CDM Executive Board-accredited validation and verification organization for CDM projects, told ConGenoff that the designated authorities of host countries approve projects in a cursory manner and do not check to see whether the project meets all the requirements laid down by the CDM Executive Board. CDM projects in India do not have to be validated or verified to get host country approval while both processes are mandatory to get the project registered with the UNFCCC, she continued. For this reason, she pointed out, Indian projects account for 44 percent of the total projects rejected by the CDM Executive Board.

Most Indian CDM projects are initiated without foreign backing, and

For this reason, Santonu Kashyap of Asia Carbon maintains that Indian projects can never fulfill the additionality requirement as no developer will risk investing in a project unless he is certain of a revenue stream independent of the CDM incentive. In a separate discussion with GAO analysts and ConGenoff, Jamshed Irani, Director of Tata Sons and the Chairman of the Tata group's Steering Committee on Sustainability, agreed that no Indian company is brave enough to rely entirely on a CDM-driven revenue stream.

Although all of the CDM project developers spoken to claim that their projects have sustainability benefits, the cable concludes that

Amidst complaints about the "arbitrary" decisions of the CDM Executive Board, all interlocutors conceded that all Indian projects fail to meet the additionality in investment criteria and none should qualify for carbon credits.

16 August 2011

Technology Transfer in the CDM: some basic considerations

“Technology transfer” is often described as one of the key “co-benefits” of the Clean Development Mechanism, but it is a concept that requires further elaboration.

The UNFCCC's CDM Registration & Issuance Unit tried to measure the extent of CDM “technology transfer” at one point by looking at how many projects involved technology imports. It used companies' own reporting of "the use of equipment or knowledge not previously available in the host country for the CDM project." Industrial gas projects (such as those involving HFCs) came out well in this study.

Taking technology imports as a measure is fairly useless measure of the potential benefits, however. Further analysis of the HFC cases have shown that a fairly simple, pre-existing piece of technology was transferred in a massively inefficient manner, as this February 2007 article by Michael Wara demonstrated.

The extent to which HFC projects have contributed to a series of other perverse incentives has since been established in far more detail, with even the European Commission now accepting that they suffer a total lack of environmental integrity.

More fundamentally, though, a better definition of "technology transfer" is needed - and a clearer understanding of the context in which it works, is helpful. Three key points may be raised here.

First, the CDM can serve to disincentivise and delay the passing of environmental regulations.
As the CDM program became active, policymakers realized that the additionality requirement provided incentives to retard the process of creating developing countries’ policy in order to preserve credit eligibility.
-David Drieseen and David Popp
Second, technology transfers through imports by private actors can crowd out domestic industry - as the work of Ha-Joon Chang (eg. the books "Bad Samaritans" and "Kicking away the Ladder") eloquently demonstrates.

Third, the CDM promotes a development model that eclipses local technologies. As Larry Lohmann argues,
'technology transfer' continues to carry the connotation, as it always has, of moving Northern technology into a ‘technology-deprived’ area in the South. In practice, this typically plays out in the degradation, skewing or destruction of one set of technologies in favour of another.
Although Chang and Lohmann appear to be making similar points, the latter engages in a more fundamental critique of the benefits of "development" regimes.

18 July 2011

World Bank Partnership for Market Readiness begins push for new carbon markets

The World Bank is busily encouraging “middle income” countries to create new carbon trading schemes. It hopes that this will lead to a “scaling up” of carbon markets and has created a new Fund, the “Partnership for Market Readiness” (PMR), to meet this aim.

Without much fanfare, the Fund's first meeting took place on 30-31 May in Barcelona, just ahead of Carbon Expo, a huge carbon trading jamboree co-organised by the World Bank and the International Emissions Trading Association (IETA). Representatives of over 30 countries joined the meeting, according to the Bank.

The Partnership approved initial grants of $350,000 to Chile, China, Columbia, Costa Rica, Indonesia, Mexico, Thailand and Turkey. Each of the eight countries will now develop a “Market Readiness Proposal” to detail their plans. Two further countries, Morocco and Ukraine, have been confirmed as participants.

The Bank hopes that the PMR will stimulate two main activities: the creation of new cap and trade-style carbon markets, and engagement in “NAMA crediting.” The latter suggestion pre-empts ongoing debates within the United Nations Framework Convention on Climate Change (UNFCCC), which has yet to agree to this controversial means of “scaling up” carbon finance beyond carbon offset projects.

A range of economic activities might be covered, with the current (non-exhaustive) list including: power generation, iron and steel, transport, construction/buildings/housing, cement, energy efficiency, waste management, and NAMAs for “low-carbon cities”. In Mexico, the PMR will work to set up a carbon offset registry, while in China it is promoting the creation of regional emissions trading pilot schemes.

Funding pledges so far come from: Australia, the European Commission, Germany, Japan, Norway, The Netherlands, Spain, Switzerland, the United Kingdom and United States. These amount to a little under $70 million of the $100 million expected total.

The latest pledges include $7 million from the International Climate Fund (ICF), the UK government's means of channelling climate money through the World Bank. This follows the usual UK-government practice of re-announcing the same money several times: the money can be double-counted as part of the UK's Official Development Assistance (ODA) funding, and this same money also forms the UK's contribution to “fast-start financing.”

For “fast” read “slow” - while the rhetoric suggests that money will be directed towards the immediate needs of people already facing the impacts of climate change, the use of such funds to develop new market-mechanisms is a boost for schemes that are notable for delaying action to address climate change.

The vast majority of the money from the PMR will be directed towards establishing systems for “monitoring, reporting and verification” (MRV) – in other words, technical support for the creation of a system of tradeable carbon credits. However, this remains a small proportion of the total needed to pilot market mechanisms, meaning that the scheme's “beneficiaries” are likely to spend far more on the schemes than the money that the Bank puts in.

More information
Carbon Trade Watch, Partnership for Market Readiness: a critical introduction, January 2011

14 July 2011

The case against sectoral carbon markets

The global carbon market is in crisis. Proposed emissions trading schemes in the USA, Japan and Canada have stalled indefinitely; new markets in Australia and South Korea face significant delays; and climate justice activists have successfully blocked the start of a planned scheme in California. Trading has become ever more concentrated around the EU Emissions Trading System (ETS), which could well see carbon permit prices drop to zero if the 27-country bloc adopts stricter guidelines on energy efficiency. Overall carbon trading volumes were lower in 2010 than in the previous year, and are predicted to stagnate in subsequent years; and the Clean Development Mechanism (CDM) has declined for four years running, with fewer credits purchased from new projects than at any time since the Kyoto Protocol came into force in 2005.

Perhaps confusing these contractions for birth pangs, there is currently a push to create new international carbon market mechanisms in the context of United Nations Framework Convention on Climate Change (UNFCCC) international climate negotiations. The World Bank is offering further encouragement, in the guise of a new Partnership for Market Readiness (PMR) to promote carbon markets in middle-income countries.

I've written a new report new report that critically examines the reasons behind and potential consequences of creating new carbon market mechanisms. In particular, it focuses on “sectoral” carbon markets, which would move beyond the project-by-project basis of the CDM and issue carbon allowances in relation whole sectors of the economy.

Click here to download a pdf of the report

22 June 2011

Industry lobbyists gunning for EU climate targets

Proposals to increase the EU's carbon emissions target from 20 - 30 per cent and the EU's new Roadmap for moving to a low-carbon economy by 2050, have been met by heavy opposition from industry lobbies. Here's a new report (co-authored with Corporate Europe Observatory) which shows how BusinessEurope, the European Chemical Industry Council and Eurofer (Confederation of Iron and Steel Industries) have bullied the European Commission, exploiting tension between DG Energy and DG Clima to weaken the EU's climate targets: Caught in the cross-hairs: how industry lobbyists are gunning for EU climate targets

04 May 2011

Carbon Offsets in the EU Emissions Trading System: summary of 2010 data

The European Commission has released new data showing how many carbon offsets have been used in its Emissions Trading System. Here are some quick notes on what's hidden away in those figures:

* 137 million in offsets were used in the EU ETS in 2010. This includes 117 million CERs (credits from the Clean Development Mechanism), compared to 78 million tonnes in 2009.

* 20 million ERUs (credits from Joint Implementation) were used, compared with 3.2 million in 2009 (a 625% rise).

* The majority of international offsets were used by companies in the power sector: 83.6 million, a little over 60 per cent of the total. Cement, lime and glass used 13 million offset credits, and oil and gas used 12.8 million credits.

* German companies were the largest users of offset credits, handing in 37.6 million tonnes, followed by Spain and Poland (15.7 million tonnes).

* A total of 277.28 million offsets have been used in the ETS phase 2 (from 2008) so far. The top 20 installations using these credits accoung for 59.33 million of these (around 20 per cent of the total).

* The 2010 data are not disaggregated from previous years – but it seems, on initial examination, that HC Energia (Gijon, Spain, ref: ES033301000215) with 3.3 million CERs and US Steel Kosice (Slovakia) with 2.2 million surrendered CERs surrendered in 2010 are the installations that have used the most offset credits this year.

* Overall in phase 2 of the EU ETS, the largest number of CDM offset credits have been surrendered by Elektrownia Belchatow, the largest single polluter covered by the scheme. Its verified emissions were 29.66 MtCO2e in 2010. Most of these were accounted for by free permits: the plant received an allocation of 26.93 million EUAs (European Allowance Units) in 2010. As a result, it had to buy at least 2.72 million permits. In the event, however, it surrendered 4.09 million CERs (CDM credits) in 2010.1

* Glocke Salzgitter (a German steel plant) is an even clearer case of using cheap offsets to delay action to reduce emissions at source. In 2010, it had the fifth largest surplus of permits in the EU ETS (5.26 million in 2010, yielding around €62 million in windfall profits2). In other words, the scheme places no real obligations on the plant in the first place. Yet it saw fit to hand in 1.5 million offset permits (and over 400,000 ERUs.3 in 2010. This appears to be part of a strategy to stockpile surplus permits to delay emissions reductions further into the future. The majority of the CERs used by the company come from HFC projects in China.

* The largest number of ERUs from Joint Implementation were handed in by S.C. Electrocentrale DEVA S.A of Romania (1.7 million), the country's fourth largest polluter. It had not previously handed over any ERUs. This use of such a large volume of offsets is particularly notable, given that the company already had a surplus of 1.99 million permits in 2010 (it had an allocation of 3.6 million permits, and its “verified” emissions required it to surrender just over 1.7 million of these).

* It is likely that (as in 2009) the Swedish energy company Vattenfall was the largest user of offset credits. The majority of the credits that it has surrendered come to date from HFC projects in China (these are industrial gas projects that EU Climate Action Commissioner Connie Hedegaard admits have a "total lack of environmental integrity". The EU will no longer accept these credits from April 2013, and there is some evidence that companies are starting to "dump" their holdings of these worthless credits before that deadline).


1The EU offsets data released on 2 May 2011 is cumulative for the 2008-2010 period. In the case of Elektrownia Belchatow, it shows that 7.45 million CERs have been handed in (“surrendered”) to date, with 365,000 CERs handed over in 2008, and a further 3 million in 2009.

2This figure assumes a €13 per ton price of carbon permits (EUAs), and incorporates a 10 per cent downward adjustment to take account of permit transfers relating to waste gases.

3ERUs are credits issued by the Joint Implementation scheme, which is a counterpart to the CDM that operates within countries that have Kyoto Protocol targets.

10 April 2011

European Commission “Scaling up climate finance”: what does it actually mean?

The European Commission says $100 billion a year by 2020 for “climate funding” in developing countries is “challenging but feasible.” But read behind the press release, and what is actually being proposed shifts even further away from the idea that climate finance should form part of an obligation (or “debt”) incurred, alongside other industrialised nations, for playing a disproportionate role in causing climate change in the first place.

What follows are some notes on a new European Commission document prepared as a follow up on the UN High Level Panel on Climate Change Financing (AGF). The report was commissioned by ECOFIN (the Economic and Financial Affairs Council, which is the meeting of EU finance ministers) in December 2010.

Like most Staff Working Documents, its 46 pages are a dry and technical affair, but unlike most such documents it contains some interesting clues as to the direction of the Commission's thinking.

Carbon markets are central to the EU's approach, as are a broad range of other “private financial flows”. Public climate finance is defined in increasingly blurry ways, including promoting the EIB's role, double-counting aid flows, and blurring the boundary between public and private financing (eg. suggesting that more public sector equity be provided for private projects – in essence, because the banks aren't lending so much as a result of the economic crisis).

What are “private financial flows”?

* The general orientation of the document is that “Private financial flows will depend largely on developing countries' capability to create a general business environment which is attractive for domestic and international investment. ” (p.10) However, it is noted that the economic crisis has “severely limited access to private financing worldwide.” (p.45). It suggests, in this context, that MDBs and other IFIs act as “market maker” (p.45), in which the EU could be a partner through ”measures such as co-investments, risk sharing mechanisms, fee incentives, sanction mechanisms, etc. ”

* The boundary between public and private finance is becoming very blurred. For example, the document notes “The blending of grants and loans as well as equity and quasi-equity constitute innovative mechanisms to enhance support to EU external priorities and to multiply the impact of EU external assistance (p.43)

* A number of “innovative” instruments are proposed to enhance private financial flows. These include : “Instruments to improve the risk-return profile include the provision of guarantees, technical assistance or interest rate subsidies to support the issuance of debt for climate projects. Public-Private Partnerships (PPPs) can spread the costs and risks of financing of public goods over the lifetime of the asset which can considerably alleviate the short to medium-term pressure on public budgets. Using public funds to inject equity capital into companies or projects can be another mechanism to mobilise private investment. Public support for the use of market-based insurance schemes covering natural disasters can leverage sizeable amounts of private finance for adaptation. Other examples of innovative mechanisms that could raise private finance for climate actions are Advance Market Commitments (AMCs), tax discounts, access to finance, or standards of corporate social responsibility. ” (p.12) (see also p.39)

Public finance

* The document offers an “indicative table of financial contributions from Annex I states” (p.19) and suggests a central role (esp. in adaptation) could be played by the Green Climate Fund, which it sees as “likely to become bigger than the existing funds under the Financial Mechanism of the Convention ” (p.19)

* On adaptation, it is noted that“donor support for microfinance institutions (MFIs) could also be regarded as climate finance to some extent, ” (p.39)

Carbon markets

* The documents recommendations include the (predictable) suggestion that that the EU “work with other developed countries interested in setting up cap-and-trade systems, ... make progress on the reform of the Clean Development Mechanism, and ... promote a sectoral crediting mechanism; ”

* More interestingly, “Commission analysis shows that with current pledges, allowing the full banking of the Assigned Amount Unit surplus and choosing the Kyoto Protocol target as a starting level for the emission reduction paths for the period 2013-2020 would result in no demand for international credits additional to what has already been enabled.” (p.34) This begs a significant question as to what the use of the EU's proposed market mechanisms would be? In fact, it seems to signal a potential lack of demand that would undermine prices. As such, figures for the proposed “financial flows” that the EU attaches to such mechanisms should be treated with extreme caution, and may leave a large climate financing hole.

* For those with an interest in carbon markets, these projections are also useful to bear in mind (and offer one of the clearer projections relating to demand for sectors outside the EU ETS, ie. those covered by “effort sharing” Directive: “Current EU ETS legislation allows for carbon offsets of about 1.6- 1.7 Gt of CO2 in the period 2008-2020 (i.e. about 130 Mt of CO2 per year). Additional demand for credits will come from the sectors outside the EU ETS amounting up to approximately 700 Mt over the period of 2013-2020, i.e. roughly 88 Mt of CO2 per year until 2020. At the current price for CDM credits of some EUR 13 per tonne of CO2, the demand by the EU could generate roughly EUR 3 billion of financial flows to developing countries per year, not taking into account additional flows triggered by investments underlying CDM projects.” (p.35). Here as elsewhere (p.10 of the report), figures on CDM “investment” treat investment as the same thing as the cost of carbon credits sold (ie. these figures don't try to account for the large sums skimmed off by project developers, etc. ... and other financial transfers – eg. returns on equity borrowed to finance projects; intra-company financial flows from South to North).

MRV (measuring emissions)

* On MRV, it notes that “A new major challenge in the context of long-term climate finance will be the monitoring and accounting of private flows.” (p.20)

Double-counting aid flows

* Double-counting aid flows now seems to be normal Commission practice. Figures on existing climate finance are said to include allocations from the European Development Fund (EDF) (p.20), as well as a proportion of the EU's existing 2007-2013 budget that was allocated to the Instrument for Development Cooperation (DCI). (p.21), including subsidiary thematic programmes such as "Environment and sustainable management of natural resources including energy" (ENRTP) with a total amount of approximately EUR 1.1 billion.” The document notes that “The ENRTP covers the additional budget allocation granted for fast-start climate change funding and the allocation for the Global Climate Change Alliance (GCCA). ” The EU's climate finance figures also seem to include money from “the Neighbourhood Investment Facility (NIF) [which] has approved more than EUR 100 million of grants for climate related projects” since 2008. (p.43)

New EU carbon tax

* The EU is seriously considering new carbon taxes. “The Commission intends to come forward, during the second quarter of 2011, with a proposal for a revision of the Energy Taxation Directive (ETD) to bring it more closely in line with the EU's energy and climate change objectives. The proposal will aim at, on the one hand, integrating an explicitly CO2-related element into the energy taxation system which would be applicable outside the EU ETS and, on the other hand, putting the remaining part of energy taxation on a neutral basis by linking it to the energy content of the products subject to taxation. In doing so, it will ensure consistent treatment of energy sources within the ETD in order to provide a genuine level playing field between energy consumers independent of the energy source used. Moreover, it will provide an adapted framework for the taxation of renewable energies and provide a framework for the use of CO2 taxation to complement the carbon price signal established by the ETS while avoiding overlaps between the two instruments. ” (p.31) More on this is also reported here.

Privatising the commons

The document suggests that “ETS auctions of allowances for greenhouse gas emission sources in energy and industry could deliver revenues of more than EUR 20 billion per year by 2020. According to the ETS Directive, Member States should spend at least half of these amounts on activities related to climate change, energy and low-emission transport, including in developing countries ” (p.8). It should be noted that(1) these funds are not actually earmarked, and many EU Member States would resist such a move; (2) in putting a value on auctioned permits, the EU is creating property rights from pollution which are drawn from a global carbon space (that the EU has already over-used its share of).

07 April 2011

EU Emissions Trading System: phase III on course for failure

Emissions trading is the European Union’s flagship measure for tackling climate change, and it is failing badly. In theory it provides a cheap and efficient means to limit greenhouse gas reductions within an ever-tightening cap, but in practice it has rewarded major polluters with windfall profits, while undermining efforts to reduce pollution and achieve a more equitable and sustainable economy. The third phase of the scheme, beginning in 2013, is supposed to rectify the “teething problems” that have led to the failures to date.

I've written a new briefing which can be found here. It shows that:

- The EU Emissions Trading System (ETS) has failed to reduce emissions. Companies have consistently received generous allocations of permits to pollute, meaning they have no obligation to cut their carbon dioxide emissions. A surplus of around 970 million of these allowances from the second phase of the scheme (2008-2012), which can be used in the third phase, means that polluters need take no action domestically until 2017. Proposals to curtail this surplus were discussed in the context of the EU’s 2050 Roadmap, but have been watered down in response to lobbying from energy-intensive industries.

- Companies can use 1.6 billion offset credits in phases ll and lll, mostly derived from the UN's Clean Development Mechanism (CDM). Over 80 per coent of the offsets used to date come from industrial gas projects, which EU Climate Action Commissioner Connie Hedegaard admits have a "total lack of environmental integrity". The Commission delayed a ban in the use of these industrial gas offsets to April 2013 in response to lobbying from the International Emissions Trading Association (IETA) and others.

- The ETS is a subsidy scheme for polluters, with the allocation of permits to pollute more closely reflecting competition policy than environmental concerns. Power companies gained windfallprofits estimated at €19 billion in phase l, and look set to rake in up to €71 billion in phase ll. Subsidies to energy-intensive industry through the two phases could amount to a further €20 billion. This has mostly resulted in higher shareholder dividends, with very little of the windfall invested in transformational energy infrastructure.

- The third phase of the ETS will still see significant subsidies paid to industry, despite the auctioning of permits in the power sector. Industry lobbying has resulted in over three quarters of manufacturing receiving free permits, which could yield at least €7 billion in windfall revenues annually. Energy companies successfully lobbied for an estimated €4.8 billion in subsidies for carbon capture and storage (CCS), with a smaller amount for "clean" energy that includes agrofuels. In addition, the Commission is undertaking a review of its "state aid" rules which could see the granting of direct financial subsidies to companies claiming that the ETS damages their competitiveness.

- The allocation of permits according to performance “benchmarks” was supposed to encourage a fairer and more efficient division of responsibility for emissions reductions in energy-intensive sectors such as cement, steel, paper and glass. But industry has been allowed to influence the benchmarking. For example, CEMBUREAU (the cement industry lobby) was instrumental in choosing what to measure (“clinker” not cement) and how to measure it. The final agreement saw the adoption of a lax standard that was initially proposed by CEMBUREAU. This will result in a surplus of pollution permits for the cement sector, allocated in a way that rewards the continued use of dirty and outdated production methods.

-Aviation will be included in the scheme from 2012. The sector will receive 85 per cent of permits for free, and the projected carbon cost is far lower than the equivalent tax breaks for aviation fuel. Inclusion in the ETS applies only to CO2 emissions, which obscures the greater impact of contrails and other gases.

Put simply, the third phase of the ETS will continue the same basic pattern of subsidising polluters and helping them to avoid meaningful action to reduce greenhouse gas emissions.

Download EU Emissions Trading System: failing at the third attempt

01 April 2011

EU Emissions Trading 2010: analysis of newly released figures

Once again, the EU Emissions Trading Scheme has awarded massive subsidies to the steel sector and other energy-intensive industries. It has even given out permits to pollute to factories that are partially closed. This has nothing to do with addressing climate change. Emissions trading is being used as an industrial subsidy scheme for polluters....

A provisional analysis of EU greenhouse gas emissions data for industries covered by the Emissions Trading System (ETS) shows that emissions rose by over 3.5 per cent in 2010, compared to 2009 levels.1

For a fifth time out of the last six years, the “cap” that the ETS is supposed to imposed was set too high. Complete data is only available for 8,833 installations (77 per cent of the total), but this shows that the allocation of permits under the scheme was 3.2 per cent (57.36 MtCO2e) higher than the actual emissions measured from installations covered by it.

These figures make a mockery of the claim that emissions trading reduces emissions. Factories polluted more, and the scheme set no limit on this additional pollution.

The 10 plants with the largest surplus of permits are all from the steel sector, and account for a combined surplus of 54.7 million permits. These 10 plants alone have received a a windfall profit of around €650 million. 2

The plant with the third largest surplus (Teeside steelworks in the UK, which was sold by Tata to Sahaviriya Steel Industries, Thailand's largest producer, in February 2011) has been partially mothballed, yet still managed to accrue a surplus of 5.76 million permits. This amounts to a windfall profit of around €70 million.

The breakdown (in sequence) of the most significantly over-allocated plants is as follows:

Allocation Actual Surplus Owner
19622025 8695288 10926737 ThyssenKrupp Steelworks, Duisburg, Germany
11335573 4583475 6752098 ArcelorMittal Galati, Romania
6953226 1188865 5764361 Tata, Teeside, UK (since sold)
11557631 6227169 5330462 Tata, Ijmuiden, Netherlands
9276102 4011551 5264551 Glocke Salzgitter, Salzgitter, Germany
13255657 8606105 4649552 ILVA (Riva Group), Taranto, Italy
8918495 4386583 4531912 ArcelorMittal, Gent, Belgium
9323815 5291346 4032469 ArcelorMittal, Gijon and Aviles, Spain
8655981 4771369 3884612 Krupp Mannesmann, Duisburg, Germany
5832055 2245809 3586246 ArcelorMittal Bremen, Germany


1This is based on data from 9579 installations, which account for 83.9 per cent of the total. The rest are excluded because data is not available yet. It is based on a total of 11409 installations (a figure that excludes the “closed” accounts which are listed in the EU database).

2These figures for the steel sector assume a €13 per ton price of carbon permits (EUAs), and incorporate a 10 per cent downward adjustment to take account of permit transfers relating to waste gases.

22 March 2011

Environmental Justice Groups Win! California Air Resources Board Forced to Revisit Alternatives To Unjust Pollution Trading System

SAN FRANCISCO, CALIFORNIA - On March 17, 2011 a San Francisco Superior Court judge ruled that the California Air Resources Board violated the California Environmental Quality Act (CEQA) when it failed to properly consider alternatives to a "cap and trade" program in its plan to implement AB 32, the California Climate Solutions Act. Cap and trade is pollution trading that allows the worst polluters to continue or increase their pollution by buying "reductions." These polluters are disproportionately located in low income communities of color. Instead of reducing pollution and creating jobs in California, dirty facilities, like oil refineries, get to buy credits from often unverifiable projects in other states and countries.

"Allowing the most entrenched polluters to increase pollution violates our environmental rights and is not the way to stop poisoning our air and slow catastrophic climate change," said Bill Gallegos, CBE's Executive Director. “ARB was dogmatic in its focus on cap-and-trade even though it is not effective in reducing greenhouse gases, increases pollution in heavily polluted low-income communities and communities of color, and misses the opportunity to create jobs in California. Now the ARB has a chance to do it right and consider real alternatives to pollution trading. We continue to be willing to work with the ARB to make the whole plan work for everybody."

Environmental justice and air quality organizations have been fighting for years to get ARB to protect low-income communities of color in its efforts to reduce greenhouse gas emissions. In 2009, these groups filed suit to enforce their rights under AB32 and CEQA.

Full press release from California EJ groups is here

27 January 2011

Carbon Capture and Storage in the Clean Development Mechanism

The inclusion of Carbon Capture and Storage (CCS) in the UN's Clean Development Mechanism (CDM) is a boon for the Middle East and North Sea oil industries, which would use the scheme to subsidise the extraction of even more oil from the ground.

What was agreed?

“Carbon dioxide capture and storage in geological formations” is now eligible as a basis for CDM projects, as a result of the UN Climate Change Conference (COP16) in Cancun. This is likely to be of greatest benefit to oil companies, which are hastily rebranding techniques known as Enhanced Oil Recovery (EOR) as a means to store carbon underground.

EOR was originally developed as a means to extract more oil from fields that were reaching the end of their lifespan. This is still its primary purpose, rather than reducing emissions. If included in the CDM, a calculation of “reductions” would be made in relation to the amount of CO2 pumped into old oil wells. The calculation would not consider the far larger volume of CO2 released into the atmosphere through the extraction and burning of more oil. As has been seen with other CDM methodologies, the “lock in” effect of subsidising a fossil-fuel based energy model is not considered relevant to how offset “reductions” are calculated.

Looking further ahead, CCS is being promoted as “clean coal” in the electricity sector, as well as attracting interest from a variety of industrial sectors (notably, steel) that are keen to claim emissions reductions without engaging in a fundamentally cleaner development path or technological overhaul. What all of these technologies have in common is an assumption that the capture, transport and storage of carbon can be viably achieved on a large scale. This has not yet been proven, and there are many reasons to believe that this will be neither technically feasible nor economically viable.

The Cancun decision is not the end of the story of CCS in CDM. Implementing the agreement requires that a series of issues are “resolved in a satisfactory manner.” The decision catalogues a series of pitfalls, including the risk that CO2 storage is not permanent and could leak from underground geological formations. Other environmental and public health risks, and legal liabilities in the case of leaks or “damage to the environment, property or public health” remain to be addressed. The text of the decision also claims that projects will need to make “adequate provision for restoration of damaged ecosystems and full compensation for affected communities in the event of a release of carbon dioxide.” The CDM contains no mechanism to enforce such provisions, and the nature of the scheme (which is primarily a means for subsidising polluting industries) makes it unlikely that such provisions will emerge.

Read the rest of the article here

Two Pluses Don't Make a Positive: REDD and agriculture

It is one of the first laws of diplomacy: when it is hard to agree on an answer, change the question. Reducing Emissions from Deforestation and Degradation (REDD) schemes are the product of two of these diplomatic back-flips.

First, whereas the Kyoto Protocol included no forestry or land-use emissions targets or mechanisms, such measures are a central feature in negotiations for a continuation or successor climate treaty. The former caution resulted from the complexity and uncertainty of accounting for reductions in these sectors, but the fact that significant measurement challenges remain has not slowed the rush to develop REDD. This new enthusiasm is largely driven by economic calculations. According to cost-benefit analyses like the influential Stern Review on The Economics of Climate Change, reducing tropical deforestation would be far cheaper than curbing fossil fuel use in the industrialised world.

A second switch concerns the framing of the question of how best to tackle deforestation. REDD puts a cash value on forests on the assumption that this will result in their preservation and, in turn, a "carbon saving." In other words, these schemes do not ask "how best might forests be protected?" but presume that carbon pricing mechanisms are the leading solution. Negotiations on REDD are then narrowed to questions of whether it is better to make forest payments through direct financial transfers or to develop forest carbon offsets. These are more often presented as a sequence, rather than a set of alternatives: almost all potential funders view their initial outlay as a means to "kick start" what will eventually be an offset scheme. The eventual extension of REDD to encompass all forms of land use is also under consideration.

The reality of REDD is likely to be far messier, more expensive and damaging than the economists claim. It will also prove fundamentally unjust - a concept that is alien to cost-benefit modelling. Indeed, the very idea that REDD offsets could be used to allow continued greenhouse emissions from industrialised countries turns the ethical responsibility for climate change upside down: it outsources responsibilities that should rest with the very countries and corporations that have disproportionately caused climate change. Such concerns are not simply ethical but practical too. Deforestation cannot be reduced to a question of cost without losing sight of the complexity of social factors and power relations that underlie why it is happening. Agriculture is at the forefront of this debate because its encroachment into previously forested areas is generally presented as the major cause of tropical deforestation.

This article will show that REDD could favour large-scale farming and do considerable damage to the lives and livelihoods of small farmers, who play a vital role in food sovereignty. REDD "readiness plans" already include plantations and perverse incentives for the conversion of forested land for export-led agriculture. As such, REDD will not necessarily reduce deforestation, but can be characterised as a form of "structural adjustment" programme for land use.

Read the rest of the article here

22 January 2011

World Bank Partnership for Market Readiness: a critical introduction

When the World Bank gets busy, it usually spells bad news for people and the planet. The UN Climate Change Conference (COP16) in CancĂșn was no exception, with the Bank launching a flurry of new climate-related initiatives. Chief amongst these was the Partnership for Market Readiness (PMR), a new Fund which encourages the “scaling up” of carbon trading in middle-income countries. The aim is to develop carbon offsets “beyond existing CDM.” This pre-empts international negotiations on controversial new carbon markets, which made little progress in CancĂșn. In launching the PMR, it is clear that the World Bank is prepared to push ahead with new carbon markets regardless of the outcome of multilateral negotiations, using bilateral agreements if necessary, and bankrolling its initiative with “fast-start” climate financing. A closer examination of the financial assumptions behind the new Fund reveals that the major costs of the initiative will have to be met by the countries listed as “beneficiaries,” whilst the Bank and industrialised country donors retain significant control over how “market readiness” is implemented.

Read the rest of my article about this here.