Thursday, 3 December 2009

Cap, Trade and Offset

Nations are now busy negotiating and proposing various carbon emissions targets ahead of the upcoming Copenhagen meeting. Unfortunately, many of the targets being proposed are far too weak to avoid the worst effects from climate change, according to the latest science. However, even the targets that are being proposed may not be as strong as they appear. Most countries plan to use various cap and trade schemes, including the use of carbon offsetting. Unfortunately, these methods are largely ineffective, can be counterproductive, and are subject to fraud and corruption.

The core idea, and the entire point of the Copenhagen meeting, is to set limits ("caps") on carbon emissions. This is the reason for negotiating emissions reduction, after all. Over time, these limits or caps will be reduced with the eventual goal of having carbon emissions cut by at least 80 percent by 2050, though the latest data suggests we will need greater cuts sooner. This is the part everyone agrees on. The use of carbon permit trading and the practice of purchasing offsets, however, is more controversial.

In a cap and trade scenario, a government will generally set a cap on total carbon emissions, and then issue allowances, or permits, to companies and any other significant carbon emitters, such that the total emissions allowed do not exceed the cap. In some proposals, individuals are included as well. The theory is that companies (or individuals) that reduce emissions below their allowance can then sell their remaining quota to others. This is intended to encourage emissions reduction by providing a financial incentive to do so.

One of the major problems with cap and trade is that it benefits the largest polluters, and doesn't rein them in as quickly as we need. In most schemes, permits are allocated for free, based on current pollution levels. This means the largest emitters, such as coal plants or tar sands projects, get the most permits. At the same time, efficient companies, who generate few emissions, are penalized for their efficiency by receiving few permits.

This could be mitigated to some extent if permits were allocated on a more equal basis, perhaps related to company size, economic output, number of employees, and other factors. This would mean that those companies and industries causing the most pollution would begin with a deficit of carbon permits, and those causing the least would have a surplus. This would put in place an immediate financial incentive to reduce emissions for the worst polluters, rather than only a future incentive, and would reward low polluters for their behaviour. In other words, this would give us a much fairer starting point. We should not be rewarding past bad behaviour.

Another problem with cap and trade is that it puts the focus on short term financial incentives, rather than long term environmental benefits. Quick changes to reduce carbon in the short term may be incompatible with (or even contrary to) a greater reduction over the long term. In the long term, for example, if we were to decrease the use of cars and trucks and increase passenger and cargo travel by rail, this would greatly reduce carbon emissions. However, this type of infrastructure change is not something any individual company can do, and cap and trade provides no incentives to encourage large infrastructure changes.

Another issue is that the focus on just carbon emissions, as important as it is, ignores other environmental factors, which can result in negative side effects. For example, old growth forests absorb carbon at a slow rate, but they are very important ecosystems, and deforestation is a serious problem. However, razing a forest and planting fast growing plant species would, technically, increase carbon absorption. Clearly, however, this is not the type of behaviour we want to encourage.

A focus on cap and trade can also distract us from other important actions that can be taken to reduce carbon emissions and other environmental damage. Some projects, such as the tar sands in Canada, are so destructive they need to simply be banned. Some products are so wasteful (and unnecessary) we need to eliminate them as well, such as plastic water bottles and junk mail.

Of course, even if we do engage in cap and trade, that does not preclude the above actions, but it is important we recognize cap and trade is not a complete solution. Additionally, any emissions reductions obtained from such efforts need to be deducted from the total cap, which needs to be reflected in the permits. If the tar sands were banned, for example, this shouldn't "free up" carbon permits for other companies to make up the difference. This would, of course, completely defeat the point.

Most cap and trade proposals also include the idea of carbon offsets which is extremely damaging, and can, in fact, undermine the entire scheme. The theory here is that if a given company is going to emit more carbon than they are permitted, they can "offset" this by paying someone else to reduce emissions or store carbon. There are many problems with this approach.

A common way of getting offsets is by planting trees. However, a forest may take decades to grow to maturity yet the carbon "credit" is fully given up front. That means that a company can increase its carbon output today, with the theoretical potential of carbon emissions elsewhere being reduced in the future. In other words, this raises carbon emission globally, as many companies purchase similar offsets, which allows them to bypass their caps.

There is also no guarantee that planted trees won't simply be harvested or otherwise removed a year later. In other cases, the plantation fails because it was ecological unsound, which might end up causing more damage than if the effort had never been undertaken. These type of ecological problems can result if a monocrop is planted (which is susceptible to disease or forest fires), or if invasive foreign species are introduced. Of course, the companies purchasing carbon offsets may be unaware of this result, or may simply be unconcerned. Their only interest is in purchasing an approved carbon offset.

As the above suggests, the entire idea of carbon offsets is subject to fraud and manipulation on a large scale. In many cases, offsets are claimed for activities that would have been undertaken anyway, which means the company claiming the offset has actually done nothing, yet still receives the right to emit more carbon. In other cases, companies may simply claim they have scaled back plans for future industrial activity, and receive a credit today for this theoretical (and often fictitious) change in future behaviour. This is similar to marking up a product at retail before having a sale. Again, the result is increased emissions.

Emissions trading, or cap and trade, has serious flaws. It rewards past bad behaviour, focuses on the short term, and distracts us from more effective solutions. Nevertheless, if we do engage in it, we must ensure a more fair allocation of permits, and we must also undertake other important action in parallel with it. The use of carbon offsets, however, are completely unacceptable. They allow for widescale fraud, more environmental damage and can even allow for increased carbon emissions, completely negating the entire basis of cap and trade. We must remember to remained focused on the goal and not the mechanism.

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