EU Energy Policy Blog

Clean development projects reduce emissions and allow countries with emission targets to buy “carbon credits” from developing countries. This is well intentioned and appears effective. However, no matter how well intentioned, credits will eventually run into two serious problems. First, they will cost a lot, and second, they will be gamed or cheated on.

Paying Others Is Expensive. To see how buying foreign carbon credits gets expensive, consider how things are going. In twenty-five years China will be emitting twice as much as the United States, Europe, and Japan combined. So if we do our part to buy China back down to our level, we will have to buy credits from China equal in amount to our own emissions. At $30 a ton, that would cost about $200 billion. I can’t see us sending China that much money every year. That’s more than $2,500 paid by a family of four.

Gaming with Carbon Credits. Gaming poses an equally intractable problem. And there is no way around it—it’s just in the topsy-turvy nature of paying people not to do bad things.

For example, the operators of a coal-fired power plant in South Africa said they would keep using dirty coal unless they got carbon credits to buy some natural gas instead. But then someone found out that they had signed a gas contract before the U.N.’s certified emission reduction (CER) policy went into effect. That is, they had already planned to cut their carbon dioxide emissions. They were simply hoping to defraud the United Nations, which administers the CER program.

Though someone detected the fraud in this case, eventually it will become impossible to know what the company would have done, because, with a carbon credit policy now already in place, the firm’s operators have time to cover their tracks. If they plan to buy natural gas, they won’t tell anyone until they lock in the credits.

This is why few markets sell negatives. People do plenty of annoying things, but rarely do we pay them $20 not to do this or $50 not to do that. Blackmail and protection rackets are two unpleasant exceptions.

In the long run, markets for not doing things just naturally end up in disarray. Say the city paid people for not parking too long in downtown parking spaces. You pull up to the curb, and the meter maid says, “If you leave in less than an hour, I’ll give you $2.” So you do, and she does. But when you get home, you tell your teenager about this, and the wheels start turning. Pretty soon your kid parks downtown, leaves his parking space after ten minutes, and collects $2. He then parks two blocks away and collects $2 more, and so on. Pretty soon downtown has turned into a game of musical cars for teenagers. The payments are for leaving parking spaces, but the result is parking spaces mobbed by teenagers.

Perhaps you still think people wouldn’t do things like that or that we could catch them. But consider this example: Certain chemical plants around the world emit just about the worst greenhouse gas imaginable. The refrigerant HFC-23 is 11,700 times worse than carbon dioxide. But a European company can pay a chemical plant in China to stop emitting HFC-23. The Chinese plant puts the gas through an incinerator to avoid emitting it into the atmosphere. Incineration is a cheap process, and for every ton a plant burns it earns 11,700 tons of carbon credits, which the European company purchases. In early 2008, international carbon credits were worth about $25 per ton. So incinerating a ton of HFC-23 was worth close to $300,000, while incineration cost only about $5,000. Most of the credits granted in the first few years of the CER program have been for HFC-23 incineration.
So how is this story like the one about the teenagers parking downtown so the city can pay them not to? There are rumors that Chinese companies have built chemical plants mainly to cash in on carbon credits.

But even if no one intends to misbehave, the CERs encourage it. Whoever takes most advantage of them makes the most profit and can sell their product for less and undercut their competition. Businessmen fear their competitor will employ such a strategy, and so, in self-defense, they feel they must employ it themselves. Paying for negatives—giving out carbon credits for not emitting—can corrupt honest people.

In fact, the United Nations has known of the CER problem from the beginning and terms it “additionality.” That is, the United Nations requires projects to be “additional” reductions to emissions. Now my copy editor asks “additional to what,” and that is exactly the question the United Nations did not, and can never, answer clearly. The answer will always be, “additional to some hypothetical future world.” The idea of enforcing an “additionality” requirement is just wishful thinking.

Just for comparison, consider what would happen if instead of the United Nations giving China carbon credits, China had agreed to put a tiny $1-per-ton tax on greenhouse gas emissions. That would mean $1 per ton of carbon dioxide and $11,700 per ton of HFC-23 emissions. That’s more than it costs to incinerate HFC-23, so chemical plants would incinerate and pay no tax at all. In fact, many developing countries—and, to some extent, the United States as well—subsidize fossil fuel. A requirement to stop subsidizing greenhouse gas emissions and to impose even a small tax would be a huge step in the right direction—not least because developed countries would then have to meet their caps by cutting emissions at home.

Charging people who park too long is a better idea than paying them to leave sooner. Every city in the world has figured this out. The same principle holds for taxing emissions instead of paying people not to emit. Sooner or later, this will become all too apparent.

Steve Stoft

P.S. These are excerpts from chapter 23 of my book Carbonomics.

This entry was posted on Friday, January 30th, 2009 at 9:45 am and is filed under Climate Change. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.