A Tale… Full Of Sound And Fury, Signifying Nothing

[This is part of a ZNet debate between Robin Hahnel and Patrick Bond about the Left and Climate Change. Please view the ZNet debate page to follow the exchanges.]


I did not mention Patrick Bond, or anyone else for that matter by name, in my three part series on the Left and Climate Change posted on ZNet on December 24, 25, and 26. Nor did I speculate about the motives or political character flaws of any authors or signers of the "Durban Declaration of October 2004" and the "People’s Declaration from Climatforum09" I quoted from and criticized. Forty years ago much of what posed as debate on the Left consisted of impugning the motives and ideological pedigree of those one disagreed with over some particular matter. It is a good thing that much less of this goes on today than was all too common last century.


But as one who appreciates trash talking in sports and jest, I must admit it can be fun. I will stick to substance in the main, but since Patrick opened the door so widely I will walk through and talk a little smack about why others come to different conclusions than I do toward the end.




Here are the major bones of contention as I see them:


(1) Do Climate Justice Action (CJA) criticisms of those working to secure an effective international treaty along cap and trade lines constitute "CJ carbon market wisdom gathered up over the past decade?" (Patrick Bond) Or is much of CJ criticism of carbon trading ill-informed and misguided, and thereby undermines the credibility of the CJ movement and divides and weakens the progressive response to climate change? (Robin Hahnel)


CJ critics like Patrick complain that when carbon emission credits, or CERs, are traded "cheating" often goes undetected and when this happens it undermines efforts to achieve global emissions reduction. The claim that carbon trading under Kyoto is a scam, and therefore Kyoto only deceives people into thinking we are addressing climate change when in fact we are not, is important to examine carefully. It is also important to determine if there are easy ways to prevent cheating from undermining efforts to reduce global emissions without sacrificing equity.


Trading Between Annex-1 Governments: If Annex-1 governments meet their treaty obligations under Kyoto then it is impossible for any trading between Annex-1 governments to undermine the aggregate emissions reduction those countries agreed to.


Under Kyoto each Annex-1 country has agreed to reduce emissions from within its national territory by a certain number of tons. The percentage reductions for different Annex-1 countries are not all the same, but under Kyoto both Japan and Canada, for example, have agreed to reduce emissions by some number of tons. Suppose the government of Japan fails to meet its commitment by ten million tons. If, Canada exceeds its Kyoto reduction quota by 10 million tons then Canada can sell "credits" for 10 million tons to Japan, which Japan can use to make up its deficit.


As long as Canada actually reduced its emissions by 10 million tons more than required by Kyoto, then total emissions reduction in Canada and Japan together are exactly what they would have been had the two countries each met their Kyoto quotas through internal reductions. Moreover, monitoring to make sure this is the case requires only the ability to verify Canadian and Japanese national emissions, which is necessary even if Annex-1 countries were not permitted to trade credits with one another.


Trading Between Individual Sources in Different Annex-1 Countries: If Annex-1 governments meet their treaty obligations then it is impossible for any trading between individual sources in Annex-1 countries to undermine the aggregate emissions reduction those countries agreed to – no matter how much chicanery is involved in the certification and trading process. This is an important point many CJ critics fail to understand.


Suppose a Japanese power company buys certified emissions reductions, or CERs, for 100 tons of carbon emissions from a Canadian power company. This allows Japan to exceed its national emissions under Kyoto by 100 tons because after counting actual reductions in Japanese emissions any CERs purchased by sources inside Japan from sources outside Japan are added to Japan’s measured, national reductions, just as any credits purchased by the Japanese government from other Annex-1 governments are added to Japanese measured reductions. However — and this is the crucial point – when a source within Canada sells CERs for 100 tons to a source outside Canada, Canada must now reduce emissions by 100 tons more than its Kyoto reduction quota because after counting reductions from within Canada any CERs sold by sources inside Canada to sources outside Canada are subtracted from measured Canadian reductions, just as any credits sold by the Canadian government to other Annex-1 governments are subtracted from measured Canadian reductions.


If the CERs sold by the Canadian power company are legitimate, i.e. the Canadian power company actually reduced its emissions by 100 tons more than it would have otherwise and this actually lowered Canadian emissions by 100 tons, then it is easy to see that trading CERs did not reduce total emissions reductions in Canada and Japan combined. The 100 tons the Japanese power company did not reduce is made up for by the 100 additional tons the Canadian power company did reduce. But what if CERs are not legitimate? What if the Canadian seller of CERs is cheating?


A great deal of criticism has been focused on private parties who buy CERs that are not legitimate in lieu of reducing their own emissions. These "bogus" CERs may not deserve certification because no actual reduction on the part of the seller took place, or because the actual reduction was less than the amount certified. They may not be legitimate because the reduction would have taken place in any case, i.e. it was not "additional" and more than a business as usual scenario would have achieved.  Or, they may not deserve certification because the additional reduction that took place allowed an increase in emissions somewhere else in the country that would not have been possible otherwise. Moreover, critics point out correctly that the Japanese power company buying the CERs has no reason to care if the CERs are legitimate or not. The market for CERs is not like the market for apples where the buyer can be relied on to monitor the "integrity" of the exchange by refusing to pay for rotten apples. The piece of paper certifying the CERs is the only thing that matters to the Japanese power company because that is all they must present to the Japanese government in lieu of a 100 ton reduction in their own emissions. What really did or did not take place in Canada is of no concern to the buyer of the CERs. Nor does the Japanese government care if the CERs they will accept without question from the Japanese power company were legitimate. The Japanese government will present those CERs for a 100 ton reduction to those in charge of verifying that Japan has met its treaty obligations, who will simply add those CERs for 100 tons to the measured reductions from within Japan, also with no questions asked.


Much of the literature criticizing carbon trading consists of exposes of cases where certification and sales have taken place when the reductions were not legitimate in one of these ways. But what critics fail to understand is that if the seller of a bogus CER is located within an Annex-1 country this does not erode overall emission reductions as long as the seller’s Annex-1 country is forced to comply with its national obligations under Kyoto. Suppose the CERs for a 100 ton reduction sold by the Canadian power company to the Japanese power company is completely bogus — a pure hoax. Under Kyoto, Japan can now emit 100 tons more than it would have been permitted to otherwise. The Canadian power company, by assumption, will not emit any less than it would have in any case. However, the country of Canada will now be required to emit 100 tons less than it would have been required to otherwise because a source within Canada sold CERs for 100 tons to a source outside Canada, and those responsible for verifying that Canada has met its Kyoto treaty obligations will add 100 tons to the reductions Canada is required to make. So global reductions will be exactly equal to the global reductions agreed to by Canada and Japan even if the CER is totally bogus, as long as the Canadian government is forced to meet its obligations under Kyoto.


In other words, the effort to avert climate change is not "cheated" when sources in Annex-1 countries sell bogus CERs to sources in other Annex-1 countries. But if not the environment, then who has the devious Canadian power company cheated by accepting a handsome payment for doing nothing?  Usually when a seller cheats, i.e. sells a rotten apple, it is the buyer who is cheated. However, in this case the Japanese power company got exactly what it wanted — the CERs for 100 tons which allowed it emit 100 tons more than it could have otherwise. But if neither the environment nor the buyer of the bogus CERs were cheated by the Canadian power company scam, then who was cheated?  Could this be one of those so-called crimes without victims? Unfortunately not. The Canadian power company has cheated its fellow Canadians. By selling bogus CERs it has forced Canada to reduce its emissions by 100 more tons than it would have had to otherwise. Somebody else in Canada is going to have to reduce their emissions by 100 more tons than they should have had to. Or somebody else in Canada is going to have to buy CERs for 100 tons from a source outside Canada it should not have had to buy. Or the Canadian government is going to have to buy credits for 100 tons from another Annex-1 government that it should not have had to buy to avoid being in violation of the Kyoto Treaty. It is other Canadians who are the victims when a source in Canada sells bogus CERs to someone in another country.


For this reason governments of Annex-1 countries have good reason to prevent private parties located in their national territory from selling bogus CERs because this will harm other Canadians and make it more difficult for the government to meet its treaty obligations. But even if CERs are not "additional,"  or create "leakage," sales of bogus CERs does not erode emissions reductions for the country as a whole because national emissions in 2012 will be measured and the country will be required to make up for any bogus CER sales with real reductions elsewhere.


The key is the international treaty organization must be able to measure aggregate, annual emissions from Canadian territory in 2012. Once this is done, any Canadian government sales of credits to other Annex-1 governments, and any private sales of CERs by parties within Canada to parties outside Canada are added to measured emissions, and any Canadian government purchases of credits and any private purchases of CERs by parties within Canada from parties outside Canada are subtracted from Canadian measured emissions. Those verifying Canadian compliance with its obligations under Kyoto simply compare the resulting number to the cap Canada committed to when it agreed to (a) its percentage reduction by 2012, and (b) a figure for Canadian emissions in 1990. If measured emissions in Canada, plus credits and CERs sold to outsiders, minus credits and CERs purchased from abroad is higher than Canada’s cap, the government of Canada is in violation of its treaty obligations and subject to whatever sanctions have been established.


Most commentators believe that measuring Canadian emissions in 2012 will not be a daunting task. In particular, measuring national emissions in 2012 faces none of the difficulties involved in measuring "additionality" and "leakage" which create serious problems for anyone trying to decide whether or not to certify a particular project, and how many tons to credit the project for. Whereas the Clean Development Mechanism (CDM) Executive Board does face the difficult task of establishing a" base-line" as I discuss below, those monitoring national compliance have no need to create any hypothetical scenarios. The base-line for measuring national compliance is the level of actual national emissions in 1990. That is what actual annual emissions in 2012 will be compared to. Moreover, while Canada may question the initial estimate of its 2012 emissions and petition for adjustments, most observers believe that arriving at an agreement between countries and those charged with verifying national compliance with the treaty about what their actual national emissions are in 2012 will not be overly difficult because there are relatively straightforward ways to verify national emissions that will prove difficult for governments to deny.


Trading Between Annex-1 and Non-Annex-1 Countries: Critics point out that Kyoto allows for governments and private parties in Annex-1 countries which are capped to purchase CERs from governments and private parties in non-Annex-1 countries where emissions are not capped through the CDM. Critics argue that carbon trading between Annex-1 and non-Annex-1 countries undermines the effort to reduce global emissions since countries with caps can avoid domestic reductions by purchasing CERs from countries which are permitted to increase emissions without limit. Critics have a valid argument if the CDM accreditation process fails to work as it is supposed to. Whether this has been and is likely to be the case in the future I discuss below. However, first it is important to understand that if the accreditation process accomplishes its mission, carbon trading through the CDM mechanism does not diminish global reductions and is a powerful mechanism for making sure the costs of combating climate change are born by wealthier rather than poorer countries.


The CDM Executive Board (EB) is supposed to grant CERs only to projects in non-Annex-1 countries if: (a) the project represents a real reduction in greenhouse gas emissions, (b) the reduction is "additional," i.e. above and beyond what would have occurred had the project not taken place, and (c) the project does not create "leakage," i.e. the project does not cause an increase in emissions elsewhere in the country that would not have occurred had the project not happened. Determining (b) and (c) requires establishing what is called a "base line," i.e. a hypothetical scenario of what would have happened had the project never occurred, which is obviously the most problematic part of the exercise. However, to the extent that the CDM Executive Board — with the help of Designated National Authorities (DNAs) in non-Annex-1 countries and professional private contractors called Designated Operational Entities (DOEs) – only approves "Project Design Documents" (PDDs) which meet the three criteria above, carbon trading through the CDM does not undermine global emission reduction targets. Instead, it merely lowers the cost of reductions and distributes the efficiency gain from doing so between MDC purchasers and LDC sellers of CERs.


Under Kyoto there is a cap on Canadian emissions but not on Mexican emissions. Suppose a company in Mexico sells a CER to a company in Canada. Further suppose the CDM Executive Board did its job and the reduction is real, additional, and causes no leakage.  So far the trade reduces global emissions by the same amount as had the Canadian company reduced emissions itself and the project in Mexico never occurred. The only difference is that the reduction took place in Mexico. While the location of the reduction has changed, the trade has not changed who pays for the reduction. The Canadian company has paid for the reduction — presumably less than it would have cost to make the reduction itself in Canada. The seller of the CER in Mexico has been paid  – presumably more than it cost the Mexican seller to make the reduction. So even though the reduction took place in Mexico, not Canada, it is the Canadian company that is paying for the reduction.


However, since there is no cap on emissions in Mexico isn’t it possible that Mexican emissions will increase? Isn’t it possible that rather than achieving a reduction in global emissions by mandating a reduction inside Canada, instead we get no reduction in emissions in Canada because the Canadian company instead bought an allowance from Mexico, and even though the Mexican company that sold the CER did reduce its emissions more than it would have otherwise, and even though this did not cause an increase in emissions somewhere else in Mexico, nonetheless, other sources in Mexico will increase emissions leaving us with no reduction, or even an increase in global emissions?


With no cap on Mexican emissions this could happen. However, when CERs are legitimate it is not trading that causes this problem, it is the lack of a cap on Mexican emissions that makes it possible for emissions in Mexico to increase. Since so many CJ critics have misunderstood this issue it warrants more careful scrutiny at risk of belaboring the obvious. For those who are still not convinced that permitting trading between countries with caps and without caps does not erode global reductions as long as CERs are legitimate and in accord with CDM guidelines, let us consider what would happen if no trading were allowed between sources of emissions in Canada and Mexico. Mandated reductions for wealthy, industrialized countries, no mandated reductions for developing economies, and no trading are what some CJ activists favor. Under such a program where no trading is allowed we would get reductions in emissions from sources in Canada, but there would be no reason for sources in Mexico to do anything different than they were going to do anyway. If sources in Mexico were going to reduce emissions they would still reduce them. If they were going to increase emissions they would still increase them. It is possible that global emissions would fail to decline because emissions in Mexico might increase by more than emissions decline in Canada. But this is obviously not because we allowed trading – since we did not allow trading in this scenario. Instead, it is because we failed to cap emissions in Mexico. Moreover, both Mexico and Canada would be worse off because trading was prohibited. Sources in Canada would have to pay more to reduce their own emissions than it would cost them to buy legitimate CERs from Mexico. And sources in Mexico would

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