How Congress Threatens to Undermine the Clean Energy Future: Handouts and Offsets

The new Greenpeace report Business as Usual describes "five maximum points of danger" in the House and Senate climate bills. SolveClimate will be reposting each of those arguments over the course of the week.

“Handouts and Loopholes.” Those three words constituted the headline that The Economist used on its May 21 article on the American Clean Energy and Security Act (ACES). “America’s climate bill is weaker and worse than expected,” the magazine elaborated in the sub-head.

This should come as no surprise. One of the consequences of imposing a price on carbon is that it creates a new currency called carbon credits, and everyone on K Street wants to get their hands on this new money. Congress has complied with one of the biggest proposed giveaways in American history.

There are three fundamental industry giveaways that individually and together constitute an existential threat to the cap and trade system the bill is aiming to create:

1. The scheme for allocating carbon credits;
2. The set of provisions permitting an enormous number of offsets to substitute for pollution reduction; and
3. The forest offset mechanism that will undermine the effort to protect the world’s tropical forests, whose continuing destruction contributes to 20% of annual global carbon emissions.

Carbon Credit Allocations

Pending legislation creates a new carbon currency, and then proceeds to give most of it away for free to polluters.

The single largest share goes for free to companies that distribute mostly coal-fired electric power, and another large slice goes for free to merchant coal generators and local natural gas distribution companies. The polluters have done a good job of getting the lion’s share of this new currency, worth hundreds of billions of dollars.

This is not what President Obama asked Congress to do in his speech to the joint session in February 2009, just weeks after taking the oath of office. The president asked lawmakers to craft climate legislation with 100% of credits being auctioned off to the highest bidders. His public budget request assumed $650 billion in new government revenue from these auctions between 2012 and 2019.

Obama understood that these auctions would raise the money needed to implement the climate legislation and uphold the fundamental principle that polluters must pay for the pollution they cause.

Every American traveler knows that when you enter a new territory, you need to take your dollars and buy the local currency. No one expects to be able to walk up to the window at the currency exchange and receive a handout for free, but that is exactly what will happen as we enter the new territory of carbon regulation under the current provisions of pending legislation. Freshly minted currency is about to be handed over to polluters for free in the form of free carbon credit allocations.

The pending legislation attempts to hide this act of brazen robbery from public coffers by adding a vague proviso that the free carbon credits given to power distributors must be used “for the benefit of consumers.” And so in the summary of the bill’s allocation structure and in the ensuing spin, supporters of the bill claim that all those allocations will go “for the benefit of consumers.” Just how, precisely, no one knows, so it is nothing more than an enormous instance of wishful thinking.

It will be up to the Public Utility Commissions in each of our 50 states to individually decide how they will use the windfall influx of billions of dollars “for the benefit of consumers.” It will require a Herculean effort of policing to make sure this open invitation to corruption is not wholeheartedly embraced.

Economists have been deployed to make the common-sense-defying argument that it really doesn’t matter whether the credits are auctioned off or given away. They assert instead that what really matters is what happens to the value of the credits, and in a purely abstract and theoretical realm, they are probably right.

But that’s like saying it doesn’t matter that you gave the thief the keys to the cash register. What matters is what the thief does with the keys or what happens to the money. Our point precisely.

Lawmakers in New York recently provided a concrete counter-example for federal lawmakers to consider, a lesson not only in how to really use the value of carbon credits “for the benefit of consumers,” but also in how to leverage it for tens of times its value to kick-start job creation and economic development.

New York is one of 10 northeastern states participating in the Regional Greenhouse Gas Initiative (RGGI), the nation’s first and only carbon cap-and-trade system. In most states, RGGI auctions off 100% of available carbon credits rather than giving them away to polluters for free. In New York, lawmakers are leveraging $112 million of that revenue over the next five years to kick-start a state-wide $5 billion energy efficiency effort called the Green Job/Green New York Act that will pay for itself. The proceeds of the carbon auctions will deliver almost 50 times their value “for the benefit of consumers.” In the process, 1 million homes will be retrofitted to generate energy savings and create up to 16,000 new jobs.

The New York law, passed with overwhelming bipartisan support, creates a partnership with the private sector to jump-start economic activity that will be self-sustaining. It is that free-market formula which in the end attracted conservative Republican lawmakers to make common cause with the progressive Working Families Party, which spearheaded the legislation.

There is no local electric distribution company or Pubic Utility Commission on that would or could do what these lawmakers in New York have done for their constituents with proceeds from the sale of the new carbon currency.

Using this concrete example, a little simple math applied to the federal budget delivers a most hopeful result. The president's budget projects $650 billion flowing to federal coffers from the auction of carbon credits between 2012 and 2019. If those funds were similarly leveraged to return 50 times their value in economic development, we would be looking at more than $32 trillion in economic development deployed for the benefit of consumers. That is almost three times the size of current annual U.S. GDP.

That’s an awfully big handout for Congress to be giving away, with the lion’s share going to utilities and coal companies instead of directly to the American people.

There is another set of reasons that the allocation handout is counter-productive. It has to do with the perpetuation of our existing energy infrastructure.

Point Carbon analysts conclude that the free allocations act as a fixed subsidy to utilities that encourages them to maintain current technology. Why change if you are getting paid to pollute with your old technology? Why adopt new technologies or build cleaner power plants if you’d stop getting free carbon currency when you decommissioned the old ones?

The free allowances work to conserve the existing capital structure instead of incentivizing a move to a clean energy future.

Offsets

The point of a cap-and-trade system is to do something long overdue that has never been done before: impose a price on carbon emissions, so that there is a cost associated with contributing to global warming pollution.

The cap-and-trade system is a mechanism that relies on the functioning of free-market forces. The theory behind it expects that the market will find the cheapest way to squeeze carbon out of the economy if allowed to function unhindered. The cost of carbon will rise until its true cost to society is reached and balanced against alternatives.

The pending legislation creates a cap and trade system, but additional and extraneous provisions in the bill interfere with its functioning, and chief among them are the “offset” provisions. The bill allows 2 billion tons of offsets to substitute for pollution reduction.

It is as if a man with heart trouble and diabetes who weighs 360 pounds is encouraged by his doctor to pay someone else to go on a diet for him.

To be fair, the economic thinking behind offsets has a narrow theoretical validity. Since the atmosphere is one entity, it really does not matter precisely where or how CO2 emissions are reduced. So the rational thing to do is scour the planet for the cheapest opportunities to reduce CO2 emissions, or their equivalent.

One problem with this approach is a moral one — it skirts complex issues of social justice — because it enables wealthy nations to pay poor ones to go on a carbon diet for them. It allows polluters to continue polluting by buying indulgences that clean the conscience more than the environment.

Another problem is that this approach avoids the practical reality that it has not been possible to generate real offsets in any meaningful quantity. The academic analyses of Michael Wara and the recent arrests in Europe over massive fraud in carbon trading provide ample evidence for us to relinquish belief in workability of the offsetting theory.

The fact is that the allure of immense profits has mostly produced massive instances of cheating in the offset market, with the environment left to suffer the consequence. We are on the brink of witnessing the creation of another sub-prime bubble, a global trade in ostensibly halted CO2 emissions that in reality are in the atmosphere.

The fat patient will stay fat; the other man paid to go on a diet will do no such thing; and the doctor will walk away satisfied. It is a healthcare system for the environment that will be in need of reform the day it is created.

This is why the California legislature voted to strictly limit the use of offsets in the cap-and-trade program it is developing to regulate emissions of the state economy. The California economy by itself is the eighth largest in the world. By forcing polluters to take action in-state, legislators are keeping new green jobs at home and bringing associated health benefits of cleaner air to their own constituents.

It is unfortunate that the federal and international discussion of offsets is usually a jargon-laden affair, with experts talking about how to guard against “leakage” and assure “additionality.” These are euphemisms for the question how do we make sure no one cheats. The jargon has assured that the general public has little access to the discussion. If it was conducted in plain English, we’d understand that the offsetting conversation is really about how to design a loophole to allow polluters to keep polluting and continue with business as usual. Everyone already knows — wink, wink — that the cheating will continue because there is no practical way to stop it.

The number of offsets pending legislation authorized on an annual basis is truly astonishing: 2 billion tons worth. That is equivalent to one quarter of annual U.S. emissions — or the first 75 pounds of flesh our fat man would shed on a diet. That’s why many analyses conducted by both the EPA and EIA have shown that the offset provisions will mean that the U.S. will not have to start reducing its own industrial emissions for almost two decades. If that is not business as usual, nothing is.

When the number of allowable offsets was first revealed, in the climate community it had the impact of a punch below the belt. Some picked themselves up off the canvas; others found ways to rationalize the offsets as necessary, even playing the role of apologist for bad policy.

They make the argument about offsets that there simply won’t be enough to go around. There is no way that the world can supply 2 billion tons worth of verified, quality offsets to hungry markets, so the unmet demand will drive up their price and render them unattractive substitutes for real pollution reduction.

They are saying, in essence, see, don’t worry, offsets won’t be a problem, they don’t really exist. What’s interesting is that the same argument is being used by others to call for the imposition of a price collar on top of the offset provisions, lest the price of carbon rise too high and force a change to business as usual.

We would be naive to assume that corporate lobbyists secured authorization for 2 billion tons of offsets without having a plan for where to find them and how to use them. It is money that no profit-maximizing organization is going to leave on a table unclaimed. Without much effort, we can already identify two enormous pools of potential offsets that could go a long way in supplying a hungry market.

One of these pools of potential offsets are hydrofluorocarbons (HFCs), “super greenhouse gases” with a global warming potential many thousands of times greater than CO2. These HFCs are part of the Kyoto basket of gases and already account for 25% of the total offset market (CDM) in the current EU trading system.

Even though the likelihood is good that the production and consumption of these extremely dangerous substances will be phased out through the Montreal Protocol, there will still be a steady supply of HFCs available for the offset market in coming decades. International negotiations have made it clear that China, India, Brazil and many European nations are counting on being able to get credit under a climate treaty for reducing HFC emissions even as production is ramped down.

Experts forecast that HFCs equal to 3 billion tons of CO2 will still be produced in 2023 alone, the peak year under an aggressive HFC phase-down scenario. Substituting alternatives for HFC use or destroying banks of HFCs (or CFCs for that matter) could cheaply and easily provide verifiable sources of offset credits to allow polluters to otherwise continue with business as usual.

The other enormous pool of offsets — and this one the pending legislation specifically identifies — will come at the expense of the world’s tropical forests. This requires a special discussion of its own.

Forest Offsets

The provisions relating to the world’s forests accomplish a similar give and take as the rest of the bill, leaving us again with the continuing prospect of business as usual.

This is particularly dangerous when the planet’s remaining tropical forests are at stake. At once the great carbon sinks of our ecosystems, the locus of the richest stores of biodiversity, and the great moderators of our climate, these forests are in danger of being transformed into mere carbon commodities, used to fill a demand for cheap carbon offsets. It is crucial to preserve the “give” that is in the bill and remove the “take.”

The “give” to the forests that is in the bill provides a good down payment for the international effort that will be needed to achieve zero tropical deforestation. The bill sets aside 5% of carbon credit allocations to fund tropical forest conservation. In 2020 alone, at an estimated carbon price of $17 a ton, those allocations would be worth almost $5 billion. The bill aims to have these allocations cut deforestation enough to result in emissions reductions of 6 gigatons by 2025. That would be almost equivalent to shutting down current U.S. emissions entirely for a year.

But one of the primary purposes of these funds serves corporate polluters: “preparing developing countries to participate in international markets for international offset credits for reduced emissions from deforestation.”

In other words, lawmakers are saying to developing nations with tropical forests, we’ll pay you develop capacity to monitor and preserve your forests because we want to turn them into carbon commodities to side-step pollution cuts in the U.S. and keep the cost of carbon low.

There is widespread agreement that efforts to reduce emissions from deforestation and forest degradation (REDD) should be a part of U.S. legislation. The question is not whether to include REDD, but how to administer and fund it. Though they are potentially cheap and plentiful, REDD offsets are also particularly problematic.

There are four main reasons — leakage, additionality, permanence and measurement.

Leakage refers to displacement of deforestation from one area to another. The drivers of deforestation, such as the demand for timber, or for land to grow soy beans or palm oil or to graze cattle are highly mobile in a global economy. If deforestation is restricted in one location due to an offset project, it can be extraordinarily difficult to prove part or all of the avoided deforestation (and associated greenhouse gas emissions) did not simply happen elsewhere. This is especially problematic with so-called “sub-national” REDD offsets allowed in the ACES bill. The potential for leakage is extreme with sub-national REDD offsets because they are not even tiered to country-wide accounting. So, deforestation could actually increase in a nation while isolated parcels of forests are used to justify polluting activities in other parts of the world.

Additionality is another issue that is difficult to prove with REDD offsets. It is very difficult to prove that a piece of protected forest absolutely would have been deforested without the offset project. With volatile, dynamic drivers of deforestation, changing politics and economies in developing nations and a host of other factors, assessing additionality often requires shaky predictions and guesswork.

Permanence is also another real challenge for forest credits. Guaranteeing that a given forest, and its estimated carbon value, will stay the same a long period of time (100 years or more) is difficult to do. Tropical forests are dynamic, living ecosystems that are easily affected by changes in politics, human activity, insects, disease, fires and global warming itself.

Finally, simply estimating and crediting carbon values from avoided deforestation is hugely problematic. When trading an avoided deforestation offset for industrial emissions like those from a coal plant, we are comparing apples with oranges. Our ability to come up with a value for avoided deforestation initiatives has improved with advances in technology, but there are still large margins of error when compared with measurement of industrial emissions.

We must also remember that, unlike tailpipes or smokestack, forests are places inhabited by indigenous peoples around the world. In the rush to supply massive amounts of REDD offsets, serious ethical questions are raised. Who owns the land? Who owns the carbon rights on that land? Can revenues from carbon trading from these forests be equitably shared with indigenous communities? How can we be sure they rights are fully respected?

To answer these questions, long, involved and expensive stakeholder processes are necessary; process that add to the cost and bite into the profits of offset project developers. With powerful financial incentives to create as many “certified” REDD offset projects as possible at the lowest possible cost, the likelihood that the rights of indigenous peoples and local communities will be infringed is high. Similarly, biodiversity values could be ignored as carbon markets reduce diverse rainforests to little more than a collection of “carbon sticks” to generate cheap offset credits.

With an offset approach to REDD, the higher the baseline deforestation rate in a region or country, the more money could be generated from REDD offsets; this is because offsets only pay for avoided deforestation.

This rewards nations with a history of undesirable behavior and leaves out countries with large tracts of forests with low deforestation rates (like those in the Congo Basin). This not only creates a perverse incentive, it increases likelihood for leakage in a dynamic global economy.

Despite these issues, industry lobbyists have worked hard to make REDD offsets a critical piece of the bill, playing both a huge role in supplying cheap offset credits and supporting the Strategic Reserve, a key “cost containment” mechanism in the bill.

Mr. President, all of these handouts and loopholes — and many others — are maximum points of danger that need your immediate attention.

The report Business as Usual was written on behalf of Greenpeace by SolveClimate founder David Sassoon.

See also:

How Congress Threatens to Undermine the Clean Energy Future: The Clean Air Act

How Congress Threatens to Undermine the Clean Energy Future: Weak Carbon Caps

How Congress Threatens to Undermine the Clean Energy Future: Protecting Coal

Greenpeace Warns Obama: Congress is Undermining the Clean Energy Future

Carbon Offsets Abroad Likely Greater Than Emissions Reductions at Home

Greenpeace Says Model Forest Protection Project Proves REDD Offsets Don't Work

Friends of the Earth: Why It's 'Suicide to Base Our Future on Offsets'

• ‹ previous
• up
• next ›