Carbon Cowboys - They are here to stay

Last week the European carbon markets were hit by yet another "scandal" - the Hungarian government sold over 300,000 carbon credits (CERs) surrendered by Hungarian installations to comply under the European Union Emission Trading Scheme (EU ETS) to an unidentified Japanese buyer for an undisclosed price. The deal was brokered by a little known Hungarian intermediary. The event led to coining of a new term "recycled CERs". Cheating cried a few. Legally correct said the Hungarians. Traders feared large scale replication by other EU countries.

The CERs sold by Hungarian government were surrendered by Hungarian companies and currently sitting in the Holding account of Hungry. They had not been retired. Economic circumstances and conditions convinced Hungry that it has excess of Kyoto allowances and hence it would not require these CERs to comply with its Kyoto obligations. Hence, they sold the same; they sold the excess.

Above behaviour by a government has found yet another loophole in the emissions trading system. The behaviour of selling excess Kyoto units in not new. Czech , Ukraine, Poland, Estonia and Hungary have sold the Assigned Amount Units (AAUs) to other European and Japanese governments. However because AAUs can be used only for country level compliance and not by private companies that are part of the EU ETS, it did not impact the price of EU ETS which is the most transparent price setter of global emissions trading system. EU ETS units, the European Union Allowance (EUA) are not Kyoto units and can't be used by countries for compliance. However, other Kyoto units that can be used by countries for compliance like CERs and AAUs trade at a discount to EUAs and are highly co-related to its movements. The policy makers till date took proud in the transparent price setting of EU ETS - not any more. EUA prices were impacted by this event, an indication of complex supply demand of the global carbon market. Though, the major exchanges trading carbon in EU have advised members to be cautious against these recycled CERs - another grey area of carbon market.

Is it ethically correct for governments to sell surrendered CERs not withstanding the legal and technical justification? Answer isn't easy. It depends on who you speak to - who is profiting and who is not. Hungary selling these surrendered CERs isn't much difference to it selling AAUs. However, CERs command a slight premium to AAUs and hence more profitable. This should be seen in context of the mega profits people have made since inception of carbon market - the sellers in China and India who made huge profits from their HFC projects to the extent they want to set up new projects dedicated to HFC abatement, EU ETS companies getting windfall profits by selling excess EUAs, people using VAT loopholes to make smart money people term as fraud, countries selling hot air AAUs, brokers charging brokerages on ERPA volume that never deliver, consultants charging huge PDD fees for projects that never take off ground. Everyone has had their chance. Everyone wants to become rich. What's the hue and cry then about? Each participant has had their chance to be the carbon cowboy. No ones seems to have left the money on table in name of ethics.

The question is - what will be the next loophole and who is the next carbon cowboy? More importantly, when will this stop?

Why do people keep saying carbon prices are too low?

Time and again we hear about calls for more agressive price on the right to emit a tonne of CO2 (or reduction of an equivalent amount) in order to have the dramatic transition of low carbon economy the climate change philanthrophists always wanted. An article published in the Independent mentions that many actors in the energy industry insist "low price of carbon is one of the biggest issues it faces as it ponders whether to invest in low carbon electricity generation facilities". 


Lets not debate the economics of having a Euro 15 or Euro 100 for an energy company. Clearly, they need a reliable number to put in their financial model being developed by an analyst for their upcoming energy generation asset - be it a coal power plant or a gas fired plant. When they don't have it, they don't know how to play with the excel model and are left in a limbo - I mean their projects. Fair point. This is how the project finance modelling works - and decision for big investments are made.


However, to argue, just because that they don't have a high enough price to justify a low carbon investment that the carbon prices are going in wrong direction is flawed in logic. Carbon prices are just reflective of what the price should be to achieve climate objectives - that is to keep the emissions below the cap in a cap and trade system. They are high when emissions far exceed the cap and low when there is a surplus due to lower emissions. The European Union Emission Trading Scheme, a pioneer in numerous aspects, reflects this logic and prices have hovered anywhere between sub Euro 10 to more than Euro 30 basis markets understanding of supply and demand. Yes, markets are short sighted - but that is a problem with our model of Capitalism. Look at the volatility in oil or power prices. Learn to live with it. Why make carbon the scapegoat? Lower carbon prices mean that the cap is too high. Well, if that is what the world needs and thinks its enough to mitigate climate change, so be it. Enjoy building fossil fuel fired power plants!


The real problem in the debate is the philosophical dilemma between "coal vs green". Policy makers tend to present an utopian picture of clean green economy in front of the world. Green's criticise coal as being dirty and want entire power generation to be green. Neither openly supports the fact that what we need is a "mix" of coal and green and the percentage of each being determined by our resolve to fight climate change. Zero coal doesn't exist. Carbon Capture and Storage (CCS) may exist - time will tell. Anyway, its too costly and needs a Euro 100 price that we don't need to pay out unless we decide otherwise. 


By presenting a simplistic view of coal vs green we do more harm to the climate change debate than good. Climate change is complex. Climate change and global warming are not synonymous. Lets get are knowledge and education right so that people make rationale choices. Lets stop playing with words and confusing people with half baked carbon concepts. Lets tell them the reality and facts - even if its more complex and takes more time to understand. Climate change won't be solved by Euro 100 per ton of CO2 price. It needs a massive low carbon lifestyle in which being low carbon means being smart. Its something people like to do out of their free will. Its like the habit of driving safely of roads or brushing your teeth every morning. We do it because its good for us and our surroundings. Its the right thing to do. This transition needs time and education. It wont be achieved by asking for high carbon prices or misleading the public to believe that carbon trading doesn't work.

IPCC Glacier Blunder and its Implications

The climate change debate has been rocked by yet another scandal. This time it hits the very foundation of it. The Intergovernmental Panel on Climate Change (IPCC), mostly known for its Assessment Report on climate change every few years, is in the limelight. This comes few months after the “email leakage” scandal at Tyndall Climate Research Centre. Doomed is climate change science, the flat earth climate change sceptics are shouting.

"Himalayan Glaciers could be gone by 2035" - this is what the IPCC said in its Assessment Report 2007. An alarm was raised in most academic and policy circles. The implications could be catastrophic. These glaciers provide water to some of the most densely populated regions of the world, like the Indian Gangetic plains, and also feed into the water systems in South China. Turns out that IPCC was wrong. A hot debate and inquiry is now underway to detect as to how the error crept in the "peer reviewed" process of the IPCC that often labels its results superior and rubbishes anything against it as "voo-doo" science. Were they talking about 2350 or 2035? Were they looking at entire glaciers of world or just Himalayan glaciers? Where did the first figure come from - a WWF report or the Down to Earth Indian magazine? The blame game, so typical of climate change politics, has started.

More dangerous is the thought that IPCC came to know about this blunder before Copenhagen conference last December and yet did not immediately act on it. The jury is still out if this was actually the case. At time of writing this article, Rajendra Pachauri, IPCC's boss has categorically denied that he knew about the discrepancy before the conference – that’s what the media is coming out with. There is pressure on him to resign, something he is resisting. If he does, it will serve as a massive blow to the credibility of the IPCC and climate change scientists in general and give more fodder to climate change sceptics.

The real problem in these developments is the unfortunate timing of all these events. It comes just after Copenhagen jamboree that did not meet most people's overly optimistic expectations. It comes before the likely voting on climate change bill in US Senate - and this IPCC fiasco may prove detrimental to passage of the bill. The passage of bill will be a historic moment in climate change history with the USA, once and forever, firmly deciding to cap its emissions growth. The simple passage, that is struggling anyhow, is in even greater danger now. A recent report by Yale University regarding American's perception of climate change came out with the following facts:

· The percentage of Americans who think global warming is happening has declined 14 points, to 57 percent.

· The percentage of Americans who think global warming is caused mostly by human activities has dropped 10 points, to 47 percent.

· Only 50 percent of Americans now say they are “somewhat” or “very worried” about global warming, a 13-point decrease.

Now what? Will it drop down further? The answer is probably yes. But what are the implications? We need to analyse the implication for various players, including the Obama administration on this – it may not be as disastrous as it looks. No doubt most visible stakeholder blocks involved in crafting a long term climate policy will be impacted by the IPCC fiasco. The greens and NGO community; the European Union, till now the frontrunner on climate change policies; the developing country bloc lead by BASIC countries; and, of course, the private carbon market investors. The last and most important one will be the Obama administration.

Greenpeace and other activists who tried their best do create chaos, and rightly so, at Copenhagen should be worried - a nightmare scenario is playing out here. With science being termed as dubious, their arguments hold lesser weight. With Americans waning away from climate change, the need to find extreme and creative ways to attract attention on climate issues increases. All in all, they will have to work harder in even more challenging circumstances. More opportunities to climb chimneys and chain themselves to polluting cars? Probably yes.

The EU 27 bloc that has already set their clear climate policy upto 2020 comes next. Staunch supporters of the US$ 125 Billion carbon market and increased cuts by 2020 to halt emissions growth, without a strong American support, their sole political actions won't matter much for the climate. Their own people who have been asked to replace all incandescent bulbs by energy efficient CFLs this year may eventually question the science behind climate change. However, we shouldn't forget that Europeans have been exposed to an overdose of climate change horror scenarios. The UK has the vested interest of making London the carbon trading capital of the world, France is looking at lucrative contracts for its nuclear industry while the Germans and Danes would continue to bank on export oriented innovation in traditional renewable sectors such as wind and solar. Europe has invested massive amounts in trying to a leader in climate change research, policies and markets. Europe has too much at stake to question the science now and hence it never would.

What about the developing world? Will they now use this new found controversy to further delay climate change mitigation actions? Unlikely. China is leapfrogging its western counterparts to become the renewable energy equipment manufacturer of the world. Low government supported interest rates, the ever present energy security and job creation incentive has prompted the renewable boom. Last year it installed more wind turbines than any other country. China is expected to announce a target soon for about 150 gigawatts of wind power by 2020. While dwarfed in comparison to China, India with its solar missions and Brazil with its Amazon rain forest preservation programmes have their own incentives. All in all, these countries have realised the non climate benefits of climate change polices and will pursue them aggressively no matter what.

Besides the governments, its the private sector investors in clean technology industries and carbon markets that may be hit by the negative climate science publicity. Really? Many people would argue that the image of greedy investor expecting unrealistic returns from any boom had already taken a massive hit during the recession and recently again for supporting sleazy bonuses from public money. They don’t care. Be it clean tech or horses; be it carbon or uranium – they will invest in it as long as it makes money. Image doesn’t yet impact the bottom line in climate change.

The real player that has to handle this IPCC fiasco most carefully is the Obama administration. After getting the American Clean Energy and Security Act passed in House of Congress last year that had definite provisions for a cap and trade system, hopes were high for a global carbon market. However, the recent loss in Massachusetts has the democrats worried about a similar result in the Senate. IPCC’s false claim has given yet another gun in anti global warming (and do nothing) camp that mostly consists of Republicans and they will fire it in the Senate sessions. However, the real problem in front of America isn’t science of climate change, but recession and jobs. And that’s the precise reason President Obama did not mention carbon markets in his State of Union address delivered on January 28. And now with science being questioned, he will further avoid mention about climate change or carbon markets in public and while lobbying for the bill to be passed in Senate. This is good and fits with what is realistically required. Americans haven’t reached the same point on learning curve like Europe to throw their weight behind climate change. They understand simple things – build a wind mill, secure your energy supply by biofuels and in the process create jobs. The eventual result will be the same as an efficient carbon market would have delivered in terms of climate change mitigation. Though, now the costs will be higher and process lot more different. IPCC glacier “prophecy” will push Obama to exploit the non climate angle to the extreme – something that should be done anyways to get any clean tech revolution going in America. It thus may be seen as blessing in disguise.

IPCC has committed a mistake and it should be corrected. But the implications would not be as grave as many people might think at first instance. This is mostly due the non climate benefits stakeholders now see in climate change mitigation – jobs, economic growth and money. Debate has now shifted away from climate change. IPCC blunder just helps the process further.

Seven reasons why Copenhagen was a success

The 15th Conference of Parties to the United Nations Framework Convention on Climate Change held in the Danish capital Copenhagen in December was perhaps the most widely talked about event globally after the US presidential elections last year. It captured the imagination of millions and media prime time across the world. Surprisingly, like the US elections that pronounced the first non white man the winner, the Copenhagen conference was also based on “hope for a better future”. On Copenhagen were resting hopes of die hard green activists and more importantly future generations who would be burdened with the carbon debt of our age. Critics would argue, as many vehemently are, that all hopes from Copenhagen have been dashed and the accord agreed is nothing more than a document packed with empty words. If one were to start counting the accusations, the list would probably run into hundreds. But hold on; will the most powerful head of states, that include the US President elected on promise of delivering a better future and Oxbridge trained economist PM Manmohan Singh responsible for opening up the economic potential of India, ever try to agree on something that would have no practical benefit in the real world? Doubting their intentions and judgement is like doubting the millions of people who elected them; Copenhagen must have something positive to it.

While the non legal binding nature of the accord has given more fodder to the sceptics, as the first positive, we shouldn’t overlook the fact that the accord has finally committed the most powerful nations to a clear set objectives guided by climate science. Agreed the accord is not yet legally binding, but that is because of difficulty in agreeing to architecture of the future global agreement and not with the principle of agreement itself. Do we need one single treaty like the Kyoto? Or two separate ones, one for USA and another extension of Kyoto? These unanswered questions are more to do with the arrangements rather than the objectives themselves.

Secondly, never before have so many power nations together agreed and taken note of the need to limit temperature rise to 2 degree Celsius by 2050. This may be below what the ardent climate change campaigners want and will lead to some sea level rise, but it is an acceptable trade off between preventing dangerous climate change and giving us enough time to adapt to the harm that is now done.

Thirdly, the agreement does not mention anything about the “peaking year” or cap on emissions that developing countries furiously oppose, yet involves voluntary pledges by major developing countries. This reinforces the principle of common but differentiated responsibility and hence resolves one the major stumbling blocks that had characterised the climate change negotiations for long.

Fourthly, the agreement explicitly mentions the need to Reducing Emissions from Deforestation and Forest Degradation (REDD). Deforestation accounts for anywhere between 12% to 20 % of global emissions, yet was never part of Kyoto Protocol. Repeated studies have pointed out the reducing deforestation is the cheapest mitigation option available to mankind and must be controlled if we are to meet climate objectives. The Copenhagen accord has finally put a stamp to this.

Fifthly, the agreement puts hard numbers for cash on the table - US$ 100 billion per year by 2020 and US$ 30 billion between 2010 -2012. Considering that the current UN offset mechanism of Clean Development Mechanism (CDM) has generated only US$ 6.5 Billion of offsets till date, these figures are impressive. While this may not be enough in the long run, it is a sizable amount to start with. Questions remain as to how the exact financial transfer will happen, but the fact that countries are ready to talk about concrete big numbers is definitely a positive step.

Next, the agreement mentions that developing country actions for voluntary reductions of emission can be verified subject to national sovereignty being respected. This was a major sticking point till last day of negotiations. However as President Obama mentioned in his address at Copenhagen that no deal is possible without full transparency, and such developing country transparency will only add to status of emerging powers like China and India.

Seventhly, the accord gives the US President a greater chance of passing of the Kerry-Boxer bill currently in US senate. The bill will create a US carbon market and its importance cannot be underestimated. Everyone has to gain by passing of the bill as it is likely to allow import of offsets from developing countries into the USA. The US demand will be close to three times, on an annual basis, to the current European demand and open up the multi-billion dollar US market. Much more money will flow to developing countries than currently flowing under the UN offset scheme of CDM.

The real problem is that many people went into Copenhagen expecting clear rules, timetables and emission targets – something that the leaders have left their subordinates deal with over next one year. The prices of carbon in the European Union Emissions Trading Scheme, the only scheme currently operational in the world, tumbled by 8% after Copenhagen reflecting this frustration on clear cut rules. Uncertainty seems to be re-occurring problem in the climate change debate. Climate change politics and markets have been uncertain for last 18 years, since Rio 1992 and will remain so for next 10 year at least – learn to live with it. However, we can’t wait to know all the facts and for the precise and correct rules of engagement to be defined. We must start walking in the right direction with a clear objective in front of us. And Copenhagen does just that.