Are voluntary actions meaningful where an emissions cap is introduced?

Guest Post by Tim Kelly. Tim is works as a Principal Climate Change Advisor in the Water Industry.

The Federal Government released its Carbon Pollution Reduction Scheme (CPRS) in July 2008.

Whilst much debate about the Green Paper has focussed on coverage of businesses and industries by the scheme,  the impact on various industries, compensation and economic impacts, there has been little discussion on exactly what the scheme will do to voluntary market mechanisms, how the CPRS and voluntary schemes might interact and whether many voluntary mechanisms can even operate with meaning in a cap and trade based economy.

The Green Paper describes that “measures that are currently justified on the basis that no effective carbon price exists or that were introduced prior to a commitment to introduce the scheme”(such measures) “will not lead to an increase in emissions abatement – within a fixed cap, reductions in emissions in one part of the economy simply result in more emissions elsewhere”.

So what exactly are complementary measures?  Do these include GreenPower?What defines an offset? And what mechanisms are proposed to use for voluntary action?

This discussion piece identifies that CPRS Green Paper model as proposed, places many voluntary schemes at risk or their effectiveness at risk.

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The proposed Carbon Pollution Reduction Scheme (CPRS) introduces difficulties with voluntary market mechanisms.  The language of the CPRS Green Paper is somewhat vague in regarding the impact of the scheme on voluntary actions using terms like ‘complimentary measures’, but doesn’t directly spell out in plain English that mechanisms such as GreenPower (despite its current problems) are at risk nor does the Green Paper explore how such mechanisms could be made to work.  Consider the following extract:

Complimentary Measures (page 31)

“the presence of the Carbon Pollution Reduction Scheme is likely to mean that some other measures may no longer be required (for example, measures that are currently justified on the basis that no effective carbon price exists or that were introduced prior to a commitment to introduce the scheme). Continuing to use such measures will not lead to an increase in emissions abatement – within a fixed cap, reductions in emissions in one part of the economy simply result in more emissions elsewhere”.

Such measures” potentially include GreenPower, voluntary trading of Renewable Energy Certificates (RECs), new forestry credits, household and small-scale solar rebates and Solar Cities programs.

We must also consider another paragraph:

Broad coverage and offsets (Page 136)

Domestic offset projects do not add to total national abatement because offsets are issued in addition to the scheme cap and therefore allow an increase in emissions within the scheme. In other words, offset projects outside the scheme allow less abatement to be done within the scheme and, other things being equal, will reduce the price of permits. However, the cost of reducing emissions will still be borne by firms whose emissions are covered by the scheme. By contrast, abatement in uncovered sectors that does not generate scheme offsets would increase national abatement“.

Domestic offset projects do not add to national abatement” could mean that the only option that individuals and businesses have to reduce greenhouse gas emissions is to buy CPRS permits (permissions to pollute) and tear them up and throw them in the bin.

But the situation is not that simple.  The Department of Climate Change does not distinguish between different types of offset projects, or the offset products they create or how they are used. Furthermore, national abatement is portrayed as relevant only to the scheme cap, despite vast action going in the voluntary economy.  In fact, most greenhouse action in the economy to date is occurring away from Scope 1 emitters that will be covered by the scheme, and these markets have nothing to do with the scheme cap.

So we will consider different types of carbon abatement projects and offsets.

Carbon abatement projects and offsets – Offsets are not all the same.

I broadly define offsets into three categories.

Category 1 offsets relates to real tangible greenhouse gas removal from the atmosphere such as accredited carbon offsets from new Kyoto compliant forestry projects, and it is probably okay to include the avoidance from projects to recover and destroy old refrigerant gases.

Category 2 includes renewable energy projects, GreenPower and RECs.  These are generally mismanaged in accounting, because they are in fact not an offset at all; they are simply electricity from a source of zero or very low emissions during generation.  Because of badly designed mechanisms such as MRET and the NGERS, state grid factors have not been reformed to assign the greenhouse benefits to the customer, the RECs, have become a misused and misunderstood de facto offset, used as a negative to cancel out standard grid emissions.  Failure to establish a real accounting mechanism for renewables in the market has now tangled renewables up in with the offsets that the Department of Climate Change say does “not add to national abatement”.

Whether the Federal Government will regard voluntary renewable energy as an offset or a zero GHG electricity product that may sit outside the scheme, is unclear, because the Green Paper is silent on this matter, as are the National Greenhouse and Energy Reporting Guidelines.

Category 3 offsets cover the more baseline and credit schemes and efficiency based schemes.  With these mechanisms, if a person or business finds a way to do something more efficiently than business as usual, then this benefit can be quantified, accredited and sold to another party as an offset.  Showerhead exchange mechanisms that theoretically reduce a householder’s emissions fall into this category, as does avoided deforestation and some industry baseline and credit offset mechanisms.  Category 3 offsets are the most difficult to assess in terms of additionality and verification.

What sits ‘under the cap’ and ‘outside the cap’?

The CPRS will apply to direct (scope 1 emitters) that release greater than 25,000 tonnes CO2-e per facility.  Effectively these are the only participants that are covered by the cap.  Whilst the Department of Climate Change defines an Electricity Sector as being covered, non-fuel burning generators that do not cause emissions during operation and are not liable for carbon pollution permits.   One reform could be to re-define only the “Fuel burning electricity sector” as the sector covered by the scheme and free the non-fuel burning renewable generators to operate freely outside the CPRS.

When customers use electricity, their indirect emissions (Scope 2 emissions) are not covered by the scheme, and neither are other embodied emissions in purchased goods and services (Scope 3 emissions).  There is very strong carbon economy sector that is not about emitters covered by the scheme, involving different user groups and markets, which could continue to operate if the CPRS was designed well to co-exist.

So what does this mean for voluntary products when the CPRS is established?

Voluntary actions by customers that use offsets, including renewable energy customers, have only ever prevented greenhouse gas emissions being caused of equal to the value of their offset, so it is therefore unrealistic to expect that under an emissions permit and trade system that voluntary schemes should somehow reduce the emissions of everyone else.  It is true that under a CPRS it is only the scope 1 emitters that can reduce emissions under the cap and it is Government that controls how much the scope 1 emitters can pollute. But that does not mean that individuals and businesses need to be a part of this pollution.

The tragedy of an emissions cap and trade system is that no matter how much voluntary renewable energy is created, this can never reduce the number of carbon pollution permits released by Government unless permits from within the Cap are also assigned with renewable energy as a transition mechanism.   There is however, one market mechanism left that would make a difference if the rules were reformed and that is market choice.

Designing market products to work along side the CPRS.

Designing Category 1 offsets – Forestry

As well as challenges to assure that new forests are additional and protected, there is a challenge to ensure that the benefits are not lost because of the CPRS.

The CPRS Green Paper proposes that in the initial years, forest owners could opt-in or opt-out of the scheme.  For those that opt-in, the Government would assign additional carbon pollution credits for Kyoto compliant forests that achieve net benefits from taking carbon dioxide from the atmosphere.  These could be sold to scope 1 emitters.  The federal Government has also indicated that for those forest owners that opt-out of the CPRS, they could continue to create voluntary offsets for use against scope 2 and 3 emissions.

Because Department of Climate Change proposes that additional permits be assigned for forestry GHG benefits, by the logic described on page 31, this will “simply result in more emissions elsewhere”.  So economy wide, forestry achievements that are converted into additional permits will not reduce emissions.  Changing the name from forestry offsets to permits doesn’t remove the problem.  For forestry to make any difference for use in the scope 1 market, the permits would need to come out of the capped permit pool rather than just being printed as what I regard as ‘leakage permits’.

Where forestry permits are against mandatory emissions, they also remove availability from the voluntary market, restricting choices by voluntary customers to use tangible voluntary offsets in preference to the very abstract mechanism of throwing permits in the bin.

The opt-in or opt-out clause also fails to achieve the stated CPRS criteria of environmental integrity, as it allows land-clearing activities to be undertaken without liability or measurement by some entities whilst other corporations will only participate if there are rewards.

When forest owners opt-out of the CPRS and create voluntary carbon offsets this does drive increased abatement in from the voluntary market, subject to meeting accreditation standards. Also, as use in the voluntary market has no bearing on the Scope 1 market, there is an economy wide GHG reduction.

Designing Category 1 Offsets – Other tangible removals

There are other limited tangible opportunities to remove greenhouse gas emissions from the atmosphere or to prevent them from entering the atmosphere.  Opportunities include recovery and destruction of refrigerant gases, chemical removal processes and potentially some geo-sequestration might fit into this category, unless already counted within an emitter’s greenhouse reporting.  Where tangible GHG reductions are achieved they should only be used in the mandatory market as permits if these came from the capped permit pool, otherwise it would be better to leave these for use in the voluntary market only.

Category 2 Offsets – Renewable Energy

If we consider that non-fuel burning renewable energy is not part of the CPRS mechanism, would the Department of Climate Change be correct if it said that renewable energy projects made did not “add to total national abatement“?  Well no, because national abatement takes place in scope 1, 2 and 3 markets, but many businesses that don’t trigger CPRS liability and by some sectors not covered by the scheme.  Renewables can provide choice for customers to reduce or avoid their own greenhouse gas emissions for their electricity use outside the CPRS mechanism.

By confirming that non-fuel burning energy generators sit outside the CPRS and cap, permits provided for the traditional coal and gas energy producers would be more clearly seen just applying to them, rather than to a mixed sector of emitters and non-emitters.  Fuel burning generators will still have the challenge to reduce their emissions to fit within available permits controlled by the Government.  They would also run the risk of becoming redundant if the market finds ways to meet energy needs without such pollution.

So voluntary renewable energy sold in the Scope 2 market, does not displace emissions elsewhere, but it does remove clean electricity (of zero scope 2 emissions) from the pooled electricity market creating scarcity of this type of electricity that would encourage the creation of more clean electricity.

With these aspects recognised, renewable energy sold to a GreenPower customer can benefit the customer and there is an indirect argument that this will remove an equivalent amount of renewable energy that would be sought by a generator seeking electricity to keep within their permit allocation in the Scope 1 market.  Therefore, that electricity generator would seek additional low emissions energy to stay in business, creating an economy wide greenhouse benefit.

Advanced mechanisms are possible to fully integrate voluntary renewable energy markets with cap-and-trade systems and achieve both cuts to economy wide emissions as well as reducing the customer emissions.  For further reading visit the discussion pages on Michael Gillenwater‘s website.

BUT, there is one more critical thing!

An essential requirement for renewables to make a difference for customers and economy wide, is that the greenhouse reduction benefits and the use of renewable energy aspects must be legally assigned to the customer.  An adjusted scope 2 emission grid factor known as a ‘Hybrid physical – contract approach’ would exclude the voluntary GreenPower generation and RECs sold voluntarily or outside of grid to other states.  (Mandatory green power components can be fairly counted as contributing to the lowering of the state grid intensity, as they are owned by all).  When legally assigning the emissions benefits (zero emissions) to the renewable energy customer, the benefits could not be used by a generator to minimise their need for permits.

By allowing voluntary renewables to co-exist with cap-and-trade systems, businesses that choose low emissions energy over standard grid electricity to avoid carbon costs can become more sustainable for the longer term and distinguish themselves in the market.  Competitors that do not act beyond compliance, risk greater exposure to increased carbon costs and stakeholder concerns about their emissions performance.

Category 3 – baseline and credit offsets and the CPRS.

Baseline and credit offsets from participants within an emissions cap will not work, as the emitter is liable for all its emissions, meaning that even where a reduction is achieved, permit liabilities are not removed in full, so there is nothing to sell.  Even in voluntary markets, such schemes are dubious as they are really about shifting emissions around from one party that is unlikely to be carbon neutral, to another party.  There is generally no economy-wide gain, and double counting is also difficult to manage, due to the seller often still believing that they have reduced emissions whilst the buyer also claims reduced emissions.  Supporting efficiency improvements is important, but the gains should not be traded. The federal Government would be right in not including such schemes in the CPRS.

Conclusions

  1. The CPRS Green Paper model, as proposed, places many voluntary schemes at risk or their effectiveness at risk.
  2. The CPRS Green Paper runs the risk of providing little market choice and indeed is likely to cause voluntary market failure.
  3. Offsets should not be branded as one thing.  Many can work within, or alongside, an emissions permit and trading scheme, but only with careful scheme design.
  4. The CPRS proposed in the Green Paper, when combined with the current NGERS Reporting Guidelines, will result in voluntary GreenPower providing no greenhouse benefits for the customer and no greenhouse benefits economy wide and double counting would be unmanageable.
  5. Forestry schemes that create additional permits will result in zero greenhouse benefits economy wide as the benefits are free to be re-emitted.
  6. Baseline and credit offset trading schemes and efficiency based trading schemes could not be created by those covered by an emissions cap.

Recommendations

  1. The Federal Government should act quickly to design the mechanisms that will ensure co-existence of voluntary mechanisms with the CPRS, or if this is not possible, re-consider a carbon tax approach that easily facilitates and encourages voluntary actions.  Category 1 offsets and Category 2 offsets (renewable energy) have a strong role to play in the voluntary market.
  2. Fixing climate change will require market failures to be addressed to encourage voluntary action in advance of Government-negotiated targets.
  3. Forestry owners that achieve GHG benefits should be assigned carbon permits from within the capped pool only, otherwise the gains can be re-emitted and lost.
  4. Only fuel burning generators should be defined as being covered by the CPRS. Renewable energy generators act outside the scheme.
  5. The Federal Government should take steps to reform the NGERS methodologies and legally assign the greenhouse gas benefits of voluntary renewable energy and low emissions energy to the voluntary customers, netting these out of state grid factors.
  6. When it comes time for the Federal Government to set or review permit allowances or carbon prices, they must quarantine voluntary achievements as additional, or at least separate, to achieving the mandatory cap.
  7. A carbon tax should not be ruled out for many reasons, not least that a tax does not constrain or prevent voluntary actions, it encourages them.
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5 Comments

  1. Tim Kelly says:
    “A carbon tax should not be ruled out for many reasons, not least that a tax does not constrain or prevent voluntary actions, it encourages them.”

    I think this is a key conclusion – one that the government is not seriously discussing. More on this in later posts.

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  2. Barry,

    I am very interested to hear your thoughts, and those of others ,on the relative merits of CAT vs carbon tax, or other options.

    I remember a commentary piece in New Scientist about 18 months ago that promoted (unpopularly it seems) carbon tax alternatives over cap and trade schemes. I am certainly no economist but I felt that some of the arguements had merit, although many economists who I have respect for have since supported CAT. I would love to see this teased out further here, and I hope that some of the economists who frequent sites such as Deltoid and RC might add to the conversation.

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  3. The economic theory is pretty clear cut… a trading permit system is the lowest cost abatement program, with significantly greater efficiency (lower cost to economy) than a carbon tax. To me the best thing about an ETS is that, when done properly, it liberates us form all these spot-fire treatments… yep they pretty much become redundant under an ETS. No offence, but for the lowest cost abatement strategy I have to admit I’ll be heading to braveneweconomy.com ;)

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  4. Bernard J – as MattB implies, others with far deeper knowledge of economics than me are blogging about this e.g. John Quiggin: http://johnquiggin.com

    But I certainly do have a strong view on this – and definitely favour a carbon tax over an ETS (CPRS, whatever you want to call it), for various reasons beyond the simple “lowest cost abatement” justification – some of which are described so comprehensively by Tim Kelly above. I do indeed plan to blog on this point more in the near future!

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  5. Pingback: Voluntary Actions and the Rudd Government’s changes to its proposed Carbon Pollution Reduction System « BraveNewClimate.com

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