Carbon Markets | Learning by Proxy

Almost nobody knows how carbon markets work. This is a problem because it keep the conversation from moving forward.

May 28, 2021

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Learning by Proxy is a weekly newsletter that covers things happening around the world, along with some context that helps you understand it better. 

This is the 61st edition of the newsletter.

I am going to try to take something insanely complicated and make it as simple as possible. I hope to get some distance to it if not all the way. Carbon markets are a complex construct stuck in myriad legislative hurdles and national agendas. What makes it all the more challenging is how it is thought about or implemented.

Carbon Markets

The World War came to an end in Asia with the dropping of two atom bombs at Hiroshima and Nagasaki. It takes about 1.5 hours for Shinkansen (Bullet Train) to travel from Hiroshima to Kyoto.

In 1997, at Kyoto, 84 countries signed the Kyoto Protocol which laid the framework for global action against Climate Change and also created certain standards which we are fighting with even today.

One of the terms agreed upon in the Kyoto Protocol was called Assigned Amount Unit (AAU), which we today refer to as a Carbon Credit. A Carbon Credit represents the allowance to emit greenhouse gases comprising one metric tonne of Carbon dioxide equivalents. This is calculated using the Global Warming Potential of the gas being emitted. For this purpose, the Intergovernmental Panel on Climate Change has created several tables.

The Agreement also created three groups of countries - Annex I, Annex II and Non-Annex. Each would commit to differing emissions from their economies. Most of the countries were part of Non-Annex, which commit to nothing, including the US. Almost every other major western economy is part of either Annex I or Annex II including Russia.

As an incentive to those countries that were part of Annex I or Annex II, a proposal was put forth to make it possible for them to trade the accumulated AAUs that they were able to generate through their commitment to reduced emissions to countries that were producing excess AAUs.

The Challenges

There was no formal agreement between all parties on how this would work
There was no standard price that was fixed for the AAU and the hope was that the market would help define it
Haggling over how the initiative would be executed continued for years
A horrible patchwork of schemes began to emerge from the Annex I and Annex II countries but nothing centralised or connected.

The formal crediting period for Joint Implementation (JI) was aligned with the first commitment period of the Kyoto Protocol, and did not start until January 2008 (Carbon Trust, 2009, p. 20). In November 2008, only 22 JI projects had been officially approved and registered. The total projected emission savings from JI by 2012 are about one tenth that of the CDM. Russia accounts for about two-thirds of these savings, with the remainder divided up roughly equally between Ukraine and the EU's New Member States. Emission savings include cuts in methane, HFC, and N2O emissions.
Source: Wikipedia

The Sinister Mind

Now, this political complexity is further complicated by what constitutes the accumulation of an AAU. Most companies are helmed by those who would like to pay themselves 300 times what they pay their average employee. They have to have some of the most sinister minds.

Classically, Carbon Emission Reduction should mean - I was using fossil fuels for this activity, now I am using clean energy and hence have reduced carbon, so I should get carbon credit. Say you got Solar Panels for your house.

Slightly sinister interpretation - I was running a coal-powered plant, it was anyway going to shut down. But because I shut it down, there is so much reduction in carbon so I should get carbon credit.

Incredibly sinister interpretation - I could have grown my business 100% and used only carbon sources and since I am not going to be growing my business and doing that damage, I should get carbon credit.

This makes the entire carbon credit business that much more challenging. A company like Shell can say that they are not drilling an oil well that they could in Alaska and therefore should be rewarded for avoiding a profitable activity that they would have otherwise undertaken.

Further, you have cases like Tesla. Tesla claims every car that it puts on the road takes out one petrol vehicle and should get equivalent carbon credit. And that carbon credit is the only reason the company is profitable and solvent. The truth is the electricity that is used to charge the Tesla often comes from coal-powered plants.

We even have the country of Brazil asking for 'protection money’ for not cutting the rest of the Amazon forest!

More specifically, there are things like this that start to happen.

The Massachusetts Audubon Society has long managed its land in western Massachusetts as crucial wildlife habitat. Nature lovers flock to these forests to enjoy bird-watching and quiet hikes, with the occasional bobcat or moose sighting.
But in 2015, the conservation nonprofit presented California’s top climate regulator with a startling scenario: It could heavily log 9,700 acres of its preserved forests over the next few years.
The group raised the possibility of chopping down hundreds of thousands of trees as part of its application to take part in California’s forest offset program.
The state’s Air Resources Board established the system to harness the ability of trees to absorb and store carbon to help the state meet its greenhouse gas reduction goals.
The program allows forest owners like Mass Audubon to earn so-called carbon credits for preserving trees. Each credit represents a ton of CO2. California polluters, such as oil companies, buy these credits so that they can emit more CO2 than they’d otherwise be allowed to under state law. Theoretically, the exchange should balance out emissions to prevent an overall increase in CO2 in the atmosphere.
The Air Resources Board accepted Mass Audubon’s project into its program, requiring the nonprofit to preserve its forests over the next century instead of heavily logging them. The nonprofit received more than 600,000 credits in exchange for its promise. The vast majority were sold through intermediaries to oil and gas companies, records show. The group earned about $6 million from the sales, Mass Audubon regional scientist Tom Lautzenheiser said.
[…]
But it didn’t work out as well for the climate, unless Mass Audubon actually intended to start acting more like a timber company. The project wouldn’t achieve anywhere near the claimed levels of reduced carbon emissions if the nonprofit was getting credits for forests that were never in danger of aggressive logging. And every time a polluter uses a credit that didn’t actually save a ton of carbon, net emissions go up, undermining the point of the program.
Source: MIT Technology Review

This is tantamount to extortion!

Carbon Offsets

Carbon offsets are derived from activities that draw carbon out of the atmosphere—forest conservation is the most common—and ostensibly allow their purchasers to move toward decarbonization while continuing to produce an equivalent volume of emissions. Oil companies, airlines, and other high-emitting sectors have touted the purchase of offsets as a promising way to make immediate progress on climate while technology catches up and the fossil fuel market winds down. In early May, for example, the US gas company Cheniere Energy said it had sold a “carbon-neutral” shipment of liquified natural gas to Royal Dutch Shell—one matched with offsets.
[...]
Companies are clamoring for offsets, and more are becoming available. In the first quarter of 2021, 38.6 million metric tons of offsets were purchased globally, according to the analytics firm Ecosystem Marketplace, a record. That’s equal to the annual emissions of 10 coal-fired power plants and a jump of 81% compared to the same period last year. Meanwhile, the volume of new offsets “issued” (certified in some way and available for sale) globally jumped 76% in 2020 from 2019, and 2021 is well on track to break another record. Analysts predict offset purchases could reach the equivalent of 500 coal plants by 2030, growing the market 15-fold in value to more than $50 billion.
But just as they’re stepping into the spotlight, carbon offsets are facing more challenges to their credibility than ever. In the last few months, one investigation after another by journalists, environmental groups, ratings agencies, and even offset-brokering companies themselves has unearthed dubious assumptions, willful misrepresentations, and systematic accounting errors in the offset market that ultimately drive emissions up, not down—and permit offset purchasers, intentionally or not, to greenwash their image without actually addressing the climate crisis.
Source: Quartz

And then came the Paris Climate Agreement. While it was obvious that something needed to be done and soon. The Agreement produced little value. In Promised Land, Barack Obama writes how he tried to explain to his European counterparts that he would be unable to push the Agreement with strong words through his senate. But weaker words meant more countries signed up.

The idea is that, under Article 6 of the 2015 Paris Agreement on climate change, if one country pays for carbon emissions to be reduced in a second country, the first country can count those reductions towards its own national targets. If done right, analysts at the Environmental Defence Fund (EDF) say this international emissions trading could almost double global emissions reductions between 2020 and 2035. It could also cut the financial cost of meeting current Paris Agreement emissions pledges, which aim to keep global average temperature rise well below 2 degrees over pre-industrial era, by 59% to 79%.
But Article 6 is controversial, which may be why it is the last section of the Paris Agreement still under negotiation. If the rules governing the emissions trading market are lax, it could become a “massive loophole” for emitters, allowing them to continue polluting at home without taking serious action, says Gilles Dufrasne, policy officer at Carbon Markets Watch, an international NGO. That would severely undermine efforts to prevent catastrophic climate change that would result from missing the Paris targets.
Source: Time

And as a result

The world has never had a global price on carbon. Instead, more than 60 emission trading systems and taxes have been stitched together by national governments pricing a ton of CO₂, anywhere from less than $1(Poland) to more than $120 (Sweden). A coordinated international carbon price has been stymied by bureaucracy, jurisdictional disputes, industry resistance, and worries over international competitiveness.
Source: Quartz

A combination of the Paris Agreement and the number of carbon exchanges that are starting to pop up has resulted in some even more painful situations.

But one small Island nation is using everything in its power to create a global solution for this. The country is trying to push through a standard USD 100 per ton carbon tax. At the very least for one industry.

Global shipping accounts for 3% of the world’s GHG emissions, mostly from dirty bunker fuel burned by bulk cargo carriers, oil tankers, and container ships. By 2050, this could exceed 20% of global emissions under a business-as-usual scenario, predicts the Institution of Mechanical Engineers, which is based in London.
For the Marshall Islands, a string of 29 coral atolls in the middle of the Pacific, global warming is an existential threat. Home to about 58,791 inhabitants, and only 10 meters at its highest point, the islands could be inundated by rising seas by 2080, researchers predict.
While the island nation wields little political power in international climate negotiations, it commands enormous influence in the International Maritime Organisation. The Marshall Islands’ ship registry is among the world’s three largest with more than 3,200 ships flying the country’s flag, including the world’s largest fleet of oil tankers. The RMI is now using that influence to push for climate action through the IMO, the only international body able to sanction such action.
Source: Quartz

Using this clout the country is trying to push to get the Carbon taxes on the shipping industry started at $100 and then push it up to $250 - $300 over the coming years at which point the price will be at parity with the zero-carbon alternatives such as Ammonia, Hydrogen and Batteries.

If the proposal is implemented, shipping will have the first meaningful price on carbon beyond national trading schemes. Aviation was long seen as the most likely candidate to price its international emissions. It officially launched its own pricing mechanism this year. Airlines planned to establish a 2019-2020 emissions baseline, then purchase carbon offsets for any emissions that exceed it for international flights (domestic flights are excluded).
But the industry backtracked after the pandemic wiped out airlines’ revenue due to travel restrictions.
Source: Quartz

There will be a huge pushback because taxing shipping for Carbon. It would mean that almost every industry that moves goods will be affected. The costs will percolate down to all. But that is the hope. If the cost of buying something goes up, hopefully, we would not buy it unnecessarily and wastefully, thereby reducing emissions.

The Solution

In every way imaginable, the source of all of the problems around the world is capitalism. Capitalism demands near-infinite growth and in order to deliver that growth, there is a need to exploit every resource on the planet.

For all the chest-thumping about how good Tesla is for the environment. The car is made of steel which uses very Carbon intensive means of production.

Looks like capitalism is going to deliver the solution as well!

By making economies rich, they have in part made sure that very few want to have kids anymore.

All over the world, countries are confronting population stagnation and a fertility bust, a dizzying reversal unmatched in recorded history that will make first-birthday parties a rarer sight than funerals, and empty homes a common eyesore.
Maternity wards are already shutting down in Italy. Ghost cities are appearing in northeastern China. Universities in South Korea can’t find enough students, and in Germany, hundreds of thousands of properties have been razed, with the land turned into parks.
Source: New York Times

Certain estimates say that by the middle of this century - in another 30 years - the world will start inexorably slipping towards depopulation. This is going to be especially pronounced for the richer economies. Japan is already contracting. Europe is hanging on to parity thanks to immigration, which they detest. China pursued a two-child policy over the last 40 years which now seems impossible to reverse.

In Capracotta, a small town in southern Italy, a sign in red letters on an 18th-century stone building looking on to the Apennine Mountains reads “Home of School Kindergarten” — but today, the building is a nursing home.
Residents eat their evening broth on waxed tablecloths in the old theater room.“There were so many families, so many children,” said Concetta D’Andrea, 93, who was a student and a teacher at the school and is now a resident of the nursing home. “Now there is no one.”
The population in Capracotta has dramatically aged and contracted — from about 5,000 people to 800. The town’s carpentry shops have shut down. The organizers of a soccer tournament struggled to form even one team.
About a half-hour away, in the town of Agnone, the maternity ward closed a decade ago because it had fewer than 500 births a year, the national minimum to stay open. This year, six babies were born in Agnone.
Source: New York Times

Unintentionally, modern economics and capitalism may have delivered a solution to the problems that they helped create. Although the New York Times articles takes a very sad tone, I think this is a matter to celebrate.

Poverty

I had written a piece earlier this week about Poverty Line and how it had been artificially kept at such a low figure as to be laughable. The economists use this ridiculous number to write tomes about how the world is improving.

In India, a company launched a home test kit for COVID. It works a little bit like a pregnancy test and if it gives you a positive result, you should go get an RT-PCR test.

As the number of cases has risen in India, the country faced shortages in testing. MyLab Discovery Solutions is one of the labs processing tests that has been overwhelmed with demand, and hopes to produce 7 million of the at-home kits per week, going up to 10 million, to help fill the diagnostic need.
The test can be purchased online or at pharmacies without a prescription. It is fast, well-designed, and even linked with an app for traceability. It’s also priced far out of the reach of most Indians, particularly those who need it the most.
[...]
Rapid at-home testing is important to identify existing cases while avoiding unnecessary exposure to testing sites, to contain the outbreak, and to improve on the country’s poor performance in data and tracking. Yet the test is very limited in its potential reach. Priced at Rs 250 per test (about $3.40), it is just above the average daily income of Rs 271.
Source: Quartz

You cannot realistically expect a company to research, manufacture, distribute and make a profit at a price less than Rs. 250. The problem is not the price but the refusal to accept the fact that most of the people in the country are living at a level below the poverty line.

The problem is that once you have wrongfully determined that a problem no longer exists, you stop solving it. Not very dissimilar from the decisions the Indian govt took in March vis-a-vis COVID.

—

Then a blockbuster report surfaced from the New York Times, which estimated the best and worst-case scenarios of COVID deaths in India - till now.

Source: New York Times

The conservative scenario assumes a 0.15% mortality rate. The likely scenario assumes a 0.3% mortality rate. They have a great tool to project various degrees of infection.

I think the infection rate is 15X what has been reported and the mortality rate has been at 0.5% especially due to the lack of oxygen needed to save the people.

Also, looking at most investigative reports from Gujarat, MP, etc. The number of death seems to be at about 10X - 15X what has been reported. According to government records, 0.15 Million deaths were recorded in the last 45 days.

But...

On April 27, over three months after the vaccination drive first commenced in India, Pathan took his first shot at a vaccination camp organized in his village. That day, health workers managed to inoculate 65 residents of Janefal, or 100 percent of its eligible population, setting an example for other rural residents of the country, and prompting vaccination drives in 16 nearby villages.
Janefal stands out as a role model, says Sunil Chavan, collector of the Aurangabad district, where this small village is based. Chavan, who heads the administrative affairs of the district with 4.5 million people, lauded the initiative of local leaders and health workers in Janefal, stating that they started creating awareness when the vaccine rollout was only beginning in India, marred by staunch resistance in its rural pockets. “Now, every village wants to be Janefal,” says Chavan.
Source: National Geographic

We did it once with Polio and we can do it over and over again. Just as long as we keep political lunacy away from it.

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