The Story of Cap n Trade...

Traders haven't got much of a good press recently as they have been blamed for excessive risk taking and nearly bringing down capitalism. It's a great story, but it ain't true. Retail banks - thats RBS to you and me - took excessive risks and brought down capitalism not the traders.

And so to another great story - the story of cap and trade.


The Story of Cap & Trade from Story of Stuff Project on Vimeo.




You have to hand it to Anne Leonard and her team - they know how to get press and get a great story out there. But let’s look closely at some of the accusations:


1. The cap and give away.
The free permits. I have discussed this earlier this year. Phase 1 (2005-2008) of the European Union Emissions Trading Scheme (EU-ETS) which this story is based on was a cap and giveaway. Billions were made by the utility companies in windfall profits. Which is why in phase 2 (2008-2012) and especially in phase 3 (2012-2020) the allowances will have to be bought at auction. The proposed US cap and trade scheme is also proposing auctions and the CRC Energy Efficiency Scheme - the UK's trading scheme for smaller businesses - has 100% auctions. In fact virtually every economist argues for it. It ain't a cap and giveaway anymore.


2. Caps too loose
In phase 1 for the EU-ETS, the caps were too loose which meant the carbon price fell sharply. But it’s been suggested that this was deliberate to secure buy-in from industry. Get them in, and then tighten the cap. In Phase 2 the EU rejected most national allowance plans - not the UK's - but virtually everyone else's. For phase 3, member states won't be allowed to set them - only the European Commission which means a tighter cap AND a wider cap that will include aviation and more industries. There is also a strong argument for a price floor which basically makes it a tax and cap and trade. The US proposal also suggests a price floor.

3. Offsetting
People really don't like offsetting, but lets get a few things right. There are two types - certified emission reductions (CERs) that are generated by Clean Development Mechanism (CDM) projects and voluntary emissions reductions (VERs) which are not.

CDM projects have to get verified by 12 UN bureaucrats and need to show that they are providing additionality (that a renewable project, for example, would only go ahead if there was income generated from CERs) AND that they are not just replacing home country emissions. If a utility company funded a project in China to reduce emissions of a coal plant, they would have to prove that they have reduced emissions at home first.

So, a utility company within the EU-ETS, may decide that it is more cost-effective to reduce emissions in another country (where coal fired stations are less efficient) than to reduce emissions further at home (where coal fired stations are more efficient). First, they have to get the project approved and that takes 18 months; remember, there are only 12 of these UN bureaucrats to approve 1000s of projects. Second, the EU-ETS only allows a small percentage of offsetting - around 10% - and once this has been reached there is no more allowed. Finally, they have to hope that their project in another country is built to spec and works to spec and reduces emissions. Oh, by the way, they can't use voluntary emissions to offset their own emissions as they are not regulated by the UN.

When CDM works well it can benefit countries through increased income and technology transfer. If China, India and Brazil want to grow, CDM projects can facilitate this without increasing carbon emissions.

So where does this leave us? Well, it's great story, but it's spoilt by the facts. Leonard is short on alternatives, but let’s visit them, briefly. First, we could have a carbon tax and there is a strong argument for this over cap and trade. The problem is that businesses and the public don't like them, accountants are great at reducing tax burdens and how do we harmonise a global carbon tax? There's no precedent.

What about simply telling business to meet a standard? Well, how do we define a global standard? Should it be the same for all countries? Also, command and control systems tend to reward complacency and companies that do the minimum. Companies that go beyond the minimum are simply not rewarded.

Ultimately, in my view, it's down to two things: first, the trading of carbon blows people's minds away. Think about it, it doesn't physically exist like coffee or oil or other commodities. Second, a vocal section of environmentalists don't like the profit motive or capitalism and see cap and trade as part of this problem. I don't see it as that way: it's government regulation using the profit motive. Without government, the carbon market wouldn't exist. The other benefit is that cap and trade is on the brink of securing a better climate change deal - that's some achievement.

Prosperity without growth?

Professor Tim Jackson of the Sustainable Development Commission has made the case that we have been living the myth of economic growth. This myth has led to widening income inequality, stagnated our wellbeing and is leading us to environmental catastrophe. He suggests that we need to recalibrate - perhaps revolutionise is a better word for it - the economy to restrict economic growth to ensure a more even distribution of wealth and to avert climate change: Prosperity without growth.

How? Jackson groups his 12 solutions into three key areas: building a sustainable macroeconomy; protecting capabilities for flourishing and respecting ecological limits.

Building a sustainable macroeconomy
First, we need to reconfigure how we measure growth. Not as radical as it sounds. The Stern Report was essentially a new way of looking at long term growth taking into account externalities.  Jackson argues that we need to consider caps or rationing and to embed them into our economic modelling.  Second, he argues for a Green New Deal. Third, financial capital needs to be reined in using a tobin tax or tighter regulations. Fourth, a new model of economic accounting is required to take into account economic wellbeing. President Sarkozy of France has argued for this following Joseph Stiglitz and Amarta Sen as well as other eminent economists.

Protecting capabilities for flourishing
Fifth, we need to move towards a much better work life balance - perhaps following France's 35 hour maximum working week. I'm not quite sure how that fits in with Sarkozy's current thinking as he got rid of this on an election platform! Sixth, Jackson argues for a redistribution of wealth on a large scale. His seventh suggestion is a reiteration of measuring wellbeing - he quite likes this one. The eighth suggestion is interesting as it argues for strengthening human and social capital creating resilient communities. This could involve increased participation to protecting our libraries to making sure we fund our museums. Nine is to restrict and reverse consumerist culture. This could mean more funding to the BBC and restrictions on advertising especially for children.

Respecting ecological limits
The tenth suggestion is a cap on on emissions or resources. Nothing too radical here, the EU-ETS and CRC are essentially emissions caps and more are being planned. Perhaps he refering to emissions caps for individuals that Milliband suggested a few years back. Jackson doesn't sell this one very well by referring to war-time rationing or cuban-style living! Suggestion 11 argues for the greening of the taxation system - something that is slowly happening. There is no mention of what happens to tax revenues when people stop using carbon or resources. Finally, suggestion 12 argues for technological transfer and for the protection of biodiversity.

Remember this is a government commission which highlights how mainstream these ideas are becoming and businesses need to be aware that some of these ideas may be policy in the next few years. What I think is interesting is the language or "discourse" of the argument. It doesn't engage business, if anything business causes the problem. The market is a problem and government is the solution. There are three key issues, though.

First, governments have to be elected. David Cameron gets all touchy feely about wellbeing indicators and at the same time suggests that his government will slash spending on, well, museums, the BBC and other things that arguably enhance our wellbeing. Governments, however, do want to make radical changes - they know the seriousness of climate change, but try to tax more on cars or petrol and you have a revolt. They back down. They back down as the public don't want to be told by the "nanny state" what to do.

The second point is that businesses and markets can work more quickly within a boundary dictated by the government. The EU-ETS and the CRC are examples of this. The government basically got businesses on board by saying: "we're going to cap your emissions, but you can do what you like to reduce them or to buy carbon credits". Very little fuss. Personal Carbon Credits could do just that. Let the market dictate within a boundary dictated by the government. Who has a smaller carbon footprint? The less well off. Who has the largest footprint. The middle classes. Let them trade - it sounds nicer than redistribution of wealth. People who consume less are now rewarded. Of course, it's not as simple as that - there are a whole host of questions on how to decide the cap and whether it should be household based or individual based and so on.

The final point goes back to a theme I keep refering to. Get business on board with these ideas and you will have much greater change. It's easier to change 10 multi-nationals corporations than to change the citizens of ten countries.

Climate Talks Jargon buster

With many thanks to The Guardian's Damian Carrington

Copenhagen: The venue in December for the final UN negotiations to deliver a successor to the Kyoto treaty. There are preparatory meetings in Bangkok and Barcelona before then.

Carbon intensity: How much fossil fuel you have to burn to make something or deliver a service. Reducing carbon intensity does not mean cutting overall emissions, but it does mean that a country can expand its economy without driving up emissions at the same rate.

Implicit targets: A diplomatic phrase deployed by India to describe targets India has chosen for itself and for which it will not be held to account by anyone else. Appearing to cave in to foreign demands for specific cuts would be political poison in Dehli.

Mitigation: This simply means actions to reduce global warming, most importantly cuts in greenhouse gas emissions.

Afforestation: The replanting of trees. About 20% of all global carbon dioxide emissions come from the destruction of forests. Preventing that is the main focus of the UN talks but China is also keen on creating new forests.

Cap and trade: One way of setting a limit on greenhouse gas emissions for a region or industry. Polluters are given carbon permits that add up to the cap. They can then sell permits if the have cut their emissions to those who have not. In theory, it allows a market to deliver cuts efficiently.

Carbon tax: A direct tax on activities that result in carbon emissions. Much less bureaucratic than cap-and-trade but cannot deliver an exact cut in overall emissions.

Offsetting: Paying for reductions in emissions elsewhere to compensate for polluting activities. Popular on a voluntary basis for flights, but criticised on a national level for allowing rich nations to butt their way out of making cuts at home.

Peak emissions: The time at which global greenhouse gas emissions stop growing and begin to fall. Scientists say that year must be 2015 if dangerous climate change is to be averted but current trends will not achieve this.

Intergovernmental Panel on Climate Change (IPCC): The international scientific body, involving thousands of scientists, used by the UN since 1988 to provide a neutral source of information on climate change. Its reports are approved by national governments. It was awarded the Nobel peace prize along with Al Gore.

Waxman-Markey Bill

US law makers always have great sounding names for their bills and acts as they are normally named after the legislators themselves rather than some drab sounding government diktat.


One bill that is going to potentially change the world is the Waxman-Markey bill. The bill attempts to replicate the EU-ETS in the US creating a federal cap and trade scheme. It passed the first hurdle getting through the House of Reps after some last minute compromises to appease the farm and coal lobbies. In the end, Republicans saved the bill from Democrats who represented the rust belt and the coal lobby. It now has to go through the Senate in September where a tough fight is expected.

So what does it entail? The Grist has a great summary of the 1000 page bill. First, the bill is asking for cuts of 17 % from 2005 levels by 2020 and an 80 % reduction by 2050. Sounds impressive, but it's only 3.6% below 1990 levels by 2020 compared to the EU where the reduction is 20%. However, the scope is far wider in the US system. It includes transport fuel, aviation and covers 80% of emissions compared to 46% in the EU.

Included in the bill is a standard requiring utilities to meet 20 percent of their load needs using renewable sources or energy efficiency by 2020, with at least 15% coming from renewable electricity and new funding for new clean energy technologies, including renewable-energy, energy-efficiency and clean-coal technologies

Unlike the Phase 2 EU-ETS, where 90% of carbon allowances were granted free to industry, the US system is auctioning 60% of theirs. Those allowances that are free will be granted to the usual industry sectors such as gas and coal, but also to adaptation which might mean renewable energy companies. There is also a price floor of $10/tonneCO2 which many have argued for the EU-ETS.

Offsets will be allowed but capped and 50% must be in the US with farming and forestry to play a large part. The EU has the CDM and JI Kyoto Protocol initiatives which may change after Copenhagen in December.

The bill is a radical departure from the Bush years and is receiving fierce criticism from everyone: farmers, the oil business, greens and the coal lobby. It won't please everyone, but if it gets passed we have a real chance to make progress on climate change. Americans, the world needs you to make the right choice!

Selling hot air

It's coming up to the euro elections: the beginning of the silly season where you can vote for silly parties like UKIP and they actually get seats! Nobody seems to vote on European Union (EU) issues which is a shame because whether we like it or not, most of our laws are EU laws.

Environmentally, there are some interesting things going on at the EU level. For example, just over 40% of EU carbon emissions are covered by a cap and trade system known as the EU Emissions Trading Scheme. Capped in the sense that emissions are not allowed to go over a certain amount, and traded in the sense that businesses can buy and sell carbon to and from each other. Each business gets an amount of carbon credits and they then have to decide whether it's more profitable to reduce their emissions and then sell their surplus credits, not to reduce emissions and buy credits or do a mix of the two. The current price of carbon is around €15/tonne of CO2 and rising.

So far so good: we have emissions reductions and the cap and trade system appears to be working. Well, look more closely and we can see some issues. First, the carbon price has fallen sharply as energy prices have fallen. It was nearly €30/tonne. Some companies - thought to be coal dependent companies - are deliberately buying up the carbon at low prices to continue to invest in coal. There is an alternative: a price floor - the price will not be allowed to fall below a certain amount. This matters as it incentivises firms to invest in renewables and it acts as a carbon tax which many environmentalists have argued for.

Second, so far, most of the credits have been given away for free. So an electricity company can sell its free credits on the open market and make millions of euros. In other words, your electricity bill funded the energy companies' windfall profits. Why not auction them? The government gets the money and can redistribute the funds elsewhere, perhaps to pay for insulating all homes. It's not as silly as it sounds as the mobile phone companies paid billions to buy licences for 3G phones.

Finally, transport is not included in the cap and trade scheme. The fastest growing source of carbon emissions? Aviation. We need to ensure that transport is included with no get out clauses. Nor do we want industries claiming they need a relaxation of the emissions cap due to the recession.

This matters and we need to ask our wannabee MEPs their thoughts on this. We need people who can ensure the people have a voice at the table. You can be sure that aviation, coal and other big businesses do. There's only one political party that seems to have an answer, and it ain't red, blue or yellow.