Is the Bank’s carbon markets approach an effective way to address climate change?

The Bretton Woods Project (“Critical voices on the World Bank and the IMF”) has perceptive, worthwhile dialogue about carbon trading. The voices are Janet Redman, Sustainable Energy and Economy Network, Institute for Policy Studies, taking the critical position. She says, “Despite promises at the outset to the contrary, by the end of 2007 only five per cent of the World Bank’s entire carbon market activities were in wind, solar and small hydropower generation. And only one fund, the Community Development Carbon Fund, focussed funding on local sustainable energy projects. If the World Bank is going to be a major player in fighting climate change it should start by ending its own fossil fuel funding. After that, public and private finance should be directed to existing clean, renewable technologies that promote local control of energy development and consumption.”

Arguing the pro-carbon-trading side is Jon Sohn of Climate Change Capital: “It is true that financing emissions reductions through the CDM in countries without a cap does not provide additional reductions beyond the agreed cap; CDM is designed to meet the caps of industrialised countries more cost-effectively while accelerating and scaling up technology diffusion globally. However, there are proposals for CDM reform that involve setting progressive baselines that would result in greater net contribution to the atmosphere, i.e. by moving beyond 1:1 offsetting. CCC supports these proposals as a desirable evolution in carbon finance for developing countries that have the technical capacity (e.g. data gathering and monitoring) to deploy these more advanced policy tools but are not yet ready to take on hard caps.”

"Energy Transitions: A Curious History," by Richard Rhodes

Author Richard Rhodes has written several superb histories of the atomic age, such as The Making of the Atomic Bomb and Dark Sun: The Making of the Hydrogen Bomb. Back in September of 2007, he gave a talk about energy transitions at the Center for International Security and Cooperation. His focus was on nuclear energy, and yet some of what he said is quite relevant for the alternative energy business. He talks about the importance of preadaptations — conditions that predate the adoption of a new energy option that help shape it. He has some fascinating comments about how the nuclear energy business’s origins as a source of weapons have continued to haunt it, as well as an early U.S. commitment to pressurized water reactors.

Probably few readers of this blog are so interested in nuclear energy. But Rhodes’s paper raises the question, what are the preadaptations that will shape the adoption of solar and wind technologies?

U.S, hearing examines cap-and-trade

In the blog Hill Heat, the Cunctator presents the gist of the day’s hearings about carbon trading, with plenty of additional commentary. Well worth a look: At this morning’s House Global Warming Committee hearing on Auctions and Revenue Recycling in Cap and Trade, the witnesses presented some of the first Congressional testimony on the economic implications of a greenhouse-emissions cap and trade system such as the one proposed in Lieberman-Warner (S. 2191). A summary of some of the analysis presented in the written testimony:

1. Power generators will raise prices the same whether allowances are given away for free or are auctioned, because the price is set by the limitation in supply (the cap)
2. Investment in energy efficiency provides greater immediate taxpayer return than technology investment
3. Because power generators are free from competition they don’t need any protection through free allowances
4. A European Commission analysis found no macroeconomic negative impact of moving their cap-and-trade system to full auction
5. Free allocation to load-serving entities is a subsidy to electricity consumption, which leads to an increase in allowance prices and requiring greater decreases from other sectors
6. The “virtual tax” a cap-and-trade system imposes can be greatly alleviated if revenues are used to reduce pre-existing taxes
7. To fully offset the costs on the electricity sector through free allocation of allowances would cost the government 2.5 to ten times the value of the economic harm to the emitters, depending on whether the free allowances are narrowly targeted (15% of sector allowances) or nationally distributed (65% of sector allowances)
8. To fully offset the costs on the poorest 20% of the American public takes about 14% of total revenues of a 100% auction system….

Why green power has left us all in the dark

Julie Jowitt in the Guardian (UK) raises some doubts about offsetting and kindred issues: … Critics’ primary concern is whether the clean energy being paid for is really ‘additional’ – that is, more than companies are supposed to supply by law anyway. Under the Renewables Obligation (RO), introduced in 2002, electricity companies must supply a rising proportion of the energy they sell from renewable sources, or pay to ‘buy out’ their obligation. This year the RO is 7.9 per cent – a level clearly not met overall because only 4 to 5 per cent of all supply is currently from renewables. Not surprisingly, many providers offering green tariffs did not meet their minimum obligation. Concern is heightened by the fact that suppliers can already charge every household £10 a year to help meet the costs of the RO – a figure set to rise to £20 by 2015 – meaning customers potentially pay twice for it….

Cap and trade not enough to cut carbon -Goldman

The Guardian, via Reuters: Capping and trading carbon emissions will not be enough to fight output of the gases blamed for warming the planet, the managing director of Goldman Sachs’ U.S. carbon emissions desk said on Thursday. The bank’s carbon head Ken Newcombe was emphatic that cap and trade has huge potential in the United States, the world’s largest energy consumer.

But government research and development budgets should also be boosted to complement cap and trade’s potential to spur innovations and investments in carbon-cutting techniques, he said.

“I’m not at all convinced from what we’ve seen internationally that a cap and trade regime and a price on carbon is going to motivate investment in truly transformational technologies,” Newcombe said at a carbon policy forum in New York.

Capturing carbon dioxide emissions at coal and natural gas-burning power plants for permanent burial underground is one unproven technology that is expensive, while other technologies, such as cutting vehicles emissions, may also need research funds. The U.S. Congress is considering several bills that would aim to cut emissions by capping them and creating a market to trade credits representing them.

So far, the center of global climate trade has been based in Europe, which ratified the Kyoto Protocol and set up mandatory emissions trade. Billions of dollars worth of emissions credits have traded hands in Europe, but red tape has also delayed trade in carbon offsets, or investments in emissions reductions in developing countries. Banks like Goldman Sachs and Credit Suisse have formed New York climate desks ahead of U.S. regulations, in part because the country could be a big buyer of global credits if world carbon markets eventually link up.

“A remarkable transformation is about to take place,” said Newcombe. “The U.S., which is not significant in the global carbon market today at all, (and engages in) purely voluntary trade…will become not only a major player in its own right, but potentially a major source of demand in the Kyoto-based markets,” he said.

Ten of the largest U.S. power utilities that have coal-fired plants emit 1 billion tonnes of carbon dioxide annually, he said. “The U.S. in 10 utilities alone, matches the scale of a relatively mature, although emerging global carbon market,” Newcombe said.

Among other things, the U.S. carbon desks have looked at buying voluntary and regional emission reduction credits that have been generated ahead of national regulations, in the hopes that the credits would increase in value as time goes by and after a national scheme forms.

A Goldman source told Reuters that the bank’s carbon desk is “big, but not too big” explaining that it was being set up to allow many of its commodities traders to flow through it, and return when needed.

Ray Kopp, the director of the climate change program at the nonpartisan Washington-based think tank Resources for the Future, echoed Newcombe, saying that any U.S. climate change policy has got to be followed up with more robust research, development and deployment programs for clean technologies. He said some federal research and development programs have had a mixed record, but that broadly, ones that have been insulated from political favors, have been effective. (Editing by Marguerita Choy)