World Bank President: "End Fossil Fuel Subsidies"

Last June I commented on the lack of joined-up thinking when it comes to fossil fuel subsidies.  World Bank President Jim Yong Kim seems to share this sentiment.

According to the Thompson Reuters news agency, Kim spoke out against fossil fuel subsidies during a U.N. meeting of climate and environment ministers in Bonn, Germany.  As he rightly noted, “They are regressive, negatively impact the environment and act as a barrier to progress on clean technology."

The World Bank has long been a champion of free markets, so perhaps it should not be a surprise when the World Bank's President calls for an end to government subsidies.

What is even more noteworthy, then, about Kim's speech, is that he followed up his criticism of subsidies with a call for more government involvement to price greenhouse gas emissions.  Carbon dioxide, nitrous oxide, methane and other GHGs are atmospheric pollutants whose uncontrolled release is causing the planet's average temperature to rise. This in turn is affecting the frequency and intensity of storms, floods, droughts, glacier retreat, the spread of pests and disease and species loss.  For 90% of the planet's population, governments have given a free pass on emissions, by failing to force companies and individuals to incorporate the price of pollution into their everyday decisions.

Kim advocates a change of direction, encouraging governments to adopt one or more carbon pricing mechanisms, "whether this is through a tax on carbon, indirect taxation, regulation or the creation of a carbon market."

President Kim's comments are noteworthy because they come from an institution not known for encouraging governments to meddle in the market.  They bring to mind an observation I and my colleagues at Carbon Clear have made many times before: climate change is that rare global problem that humanity actually has the power to tackle.  We know what causes it, we know what it will take to address it, and we have at our disposal the technological and policy tools to make the transition to a low-carbon future.  We even know how to turn climate change from a challenge to an opportunity.  What we need now is the courage and conviction to act.

An End to Magical Thinking on Climate Change?

Mickey Mouse (c) Disney

Quick quiz: What's the link between the recent measles outbreak in the UK, fiscal austerity as a way to restart economic growth, and the news that global CO2 emissions are about to surpass the 400 parts per million mark for the first time in millennia?

Answer: All three reflect the dominance of magical thinking - or rather, the willingness of citizens and policy makers to make decisions based on supposition and gut feel rather than an understanding of cause and effect or relying on data.

Humans are notoriously bad at math.  It is extremely challenging for most people to identify more than five items in a group without counting them out.  We can rarely perform more than the most basic calculations in our heads.  Statistics, percentages, data analysis - these concepts do not come naturally.

This is a problem because society needs to base its important decisions on sound information.  When we make major decisions using bad information, the results can be catastrophic. As a result, we need to be very careful when we make decisions that affect the rest of society. Science and data are the order of the day, checking and double-checking, not gut feel or wishful thinking.  Unfortunately, that does not always happen.

In 1998, news outlets in the UK reported the results of a study that claimed a link between the measles-mumps-rubella (MMR) triple vaccination and autism.  Other researchers immediately questioned the study, and no one demonstrated a verifiable cause-and-effect relationship between the vaccine and the condition. It didn't matter.  Thousands of parents, responding to screaming headlines, refused to have their children immunised, believing that somehow avoiding vaccinations would make them safer.

Fast forward to 2013.  The original report has been thoroughly repudiated, and the doctor who published the research has been struck off the General Medical Council register. Meanwhile, over 1,000 children have contracted measles, a dangerous and easily preventable illness and many more are at risk.  The British government is now spending vast sums on a massive vaccination "catch up" campaign to halt the spread of measles, as well as mumps and rubella. These are diseases that were nearly wiped out in Western countries a generation ago.  They have made a comeback  thanks to over-reliance on shoddy data, and now all of us are paying to clean up the mess, not least the families of children who have contracted this horrible disease.

In 2010, Harvard economists Carmen Reinhart and Kenneth Rogoff published a research paper claiming a link between countries' national debt levels and economic growth. In particular, they argued that growth falls dramatically when debt levels exceed 90%.  No matter that the paper had not undergone peer review, that other economists questioned the report and that other researchers were unable to replicate the results.  And no matter that it was hard to work out a cause-and-effect mechanism that would kick in only above a certain threshold.  The report was seized upon by fiscal hawks at think tanks and in governments across Europe and in the United States to justify massive government spending cuts.  The resulting "age of austerity" has seen a change of  government in Italy, riots on the streets of Athens, cuts to public services and benefits in the United Kingdom, and across-the-board budget cuts in everything from air traffic control to national parks in the United States.  One might argue that politicians would have embarked on these measures in any event, but the fact remains that this paper provided intellectual cover and was cited far and wide to justify fiscal cutbacks.

Fast forward to 2013. The original report claiming a link between debt levels and economic growth has been debunked due to questionable methodological techniques and a particularly glaring Excel formula error.  Even the International Monetary Fund, which championed "structural adjustment" and similar austerity measures for developing countries in the  1980s and 1990s, has begun to rethink its initial support of fiscal austerity.  In the meantime, economic output remains anaemic, unemployment has skyrocketed across southern Europe, and in the UK slow growth means that government debt has risen not fallen.

Whether it's in social sciences like economics and sociology, or in the physical sciences like biology and physics, we can make the most confident predictions when there is a logical link between cause and effect, when the research is subject to peer review, and when other resaerchers using the same data reach similar conclusions. To quote the late astronomer Carl Sagan,

"What counts is not what sounds plausible, not what we would like to believe, not what one or two witnesses claim, but only what is supported by hard evidence rigorously and skeptically examined. Extraordinary claims require extraordinary evidence."

And so to climate change.

Scientists have for decades been researching the link between human-induced greenhouse gas emissions, rising global temperatures, and changes to the global and regional climate. Every ten years, the UN-mandated Intergovernmental Panel on Climate Change (IPCC) publishes a summary of these research findings, along with recommendations for government action.  The IPCC is comprised of thousands of the world's best climate scientists - physicists, meteorologists, chemists, computer modelers.  Their research is published and subject to international peer review.  They flag past errors and describe how they have subsequently updated their findings.  The findings and recommendations represent the consensus view of  over 120 governments, are cautiously worded and full of caveats regarding potential uncertainties.

The IPCC assessments reports are a triumph of science and data over gut feel.  The process is slow, methodical and cautious.  After all, climate change is a global problem that affects almost every aspect of how we live, work and play.  It is important to make sound decisions based on good information.

So what to make of the news that global CO2 concentrations are about to exceed 400 parts per million for the first time since the Pliocene Era, 3.5 to 5 million years ago?

More magical thinking, I'm sorry to say.  Politicians worry that setting ambitious targets to tackle climate change will cause economic hardship and continue to subsidise fossil fuels, ignoring the costs of climate related disasters like heatwaves and drought, floods and storms, and irreparable damage to our forests and other ecosystems.  Journalists looking for balance have given equal voice to a handful of climate skeptics and recognised scientists who quote the peer reviewed IPCC data.  And the general population, unable to see directly the link between their lifestyles and rising global temperatures and lacking any direct incentives to take action, refuses to change its behaviour.

But all is not lost.  The sudden push to vaccinate children in the United Kingdom shows that we can overcome magical thinking to make rational decisions.  The rapid shift in opinion against a once ubiquitous study on debt and economic growth shows that people can change their minds and consider alternatives when new data becomes available.

The IPCC 5th Assessment Report will be released in late October 2013.  As the impacts of climate change become more apparent to people around the world, I'm hopeful that governments, businesses, communities and individuals will review the IPCC findings, abandon gut feel, and seize this latest opportunity to tackle climate change and embrace a lower-carbon future.

Previously: Science- It Works on Mars and on Earth
Previously: Welcome to the Reality-Based Majority

Voluntary Offsets and the Backloading Brouhaha

My previous posts about "backloading" and the EU ETS have focused on the implications for the compliance markets in Europe and elsewhere. In compliance markets, government regulators set the rules governing the supply of emission reduction allowances and offset credits.  They also govern demand by setting the emissions targets that firms must meet by making internal reductions or purchasing permits and offsets.

Now I'd like to focus on what the backloading debate means for the voluntary carbon markets.  The short answer is that backloading will have little direct impact, but the reasons are worth a longer discussion.

The voluntary market is much smaller than its government-created sibling, but it is difficult to overestimate its importance. The voluntary market is self-regulating.  Its carbon offset credits are issued by independent standards bodies, and an increasing number of its largest market makers  follow a Code of Practice governing how they do business.

This self regulation makes the voluntary markets exceptionally flexible and a source of innovation that helps improve the slower and more bureacratic compliance markets.  All four of the protocols initially approved in California's cap-and-trade system were developed initially under the Climate Action Reserve, a voluntary carbon standard. A number of the carbon credit innovations that were pioneered by bodies such as the Gold Standard and the Verified Carbon Standard have allowed the United Nations carbon credit system to expand beyond large, industrial project types like refrigerant destruction, large hydropower and waste heat recovery. The project types favored by the voluntary carbon market, like clean cookstoves, village lighting, forest conservation and water purification can deliver greater sustainable development and have helped bring the benefits of carbon finance to poorer nations.

Voluntary market innovation is not limited to the projects. It's notable that California's fledgeling carbon market California has decided to use for its cap-and-trade transactions two private sector registries that were created for  the voluntary carbon market to - due in large part to their responsiveness, quality and cost-effectiveness.  And when the British government launched a short-lived effort to develop its own voluntary offset quality scheme, the market launched a more thorough and far-reaching system, twelve months faster, and for only one-tenth of the cost.

But perhaps the most important point that helps understand what makes the voluntary market special is that its carbon offset buyers choose to buy carbon credits! Voluntary market buyers take action of their own accord beyond or in advance of legislation to tackle their climate change impact. 

This difference more than anything helps explain why the backloading brouhaha has little direct impact on the voluntary market. In the compliance market, emitters tend to reduce their emissions just enough to avoid paying penalties. If they cannot meet their reduction targets, they tend to buy just enough offset credits (called CERs) and allowances (EUAs) to avoid those penalties. And when those firms find they have exceeded their reduction targets? They sell their surplus allowances, even if their footprint is still far above zero.  The economic recession made it very easy for many companies in the EU ETS to meet their reduction targets, nearly eliminating demand for allowances and offsets.  Supply and demand - too many permits and insufficient demand drives CER and EUA prices in the compliance markets towards zero.

Compare that to buyer behaviour in the voluntary carbon market.  The demand drivers for carbon credits could not be more different. Here companies pledge to reduce their net emissions - often
to zero - through a combination of internal reductions and voluntary offset credits. When voluntary customers fail to meet their reduction targets, they must buy more carbon credits to make up the difference.  When they exceed those targets, they buy fewer credits - but they keep buying.  Their reduction goals are sufficiently ambitious that it would be nearly impossible to reduce demand for offset credits to zero - at least for the foreseeable future.

Buyer behaviour in the voluntary market differs from the compliance market in another way.  Absent the carrot and stick of government regulation, buyers use their carbon management programmes as a way to demonstrate good citizenship.  As a result, many companies seek carbon offset credits from projects that do much more than reduce greenhouse gas emissions.  Emission reduction projects that improve local livelihoods help corporate offset customers achieve their broader CSR goals.  After all, which would you rather have on the cover of your CSR report, a photo of an industrial gas destruction project, or a photo of a family enjoying the benefits of solar powered lighting and safe drinking water? It is the value of these co-benefits that helps maintain prices in the voluntary carbon market, even during an economic recession.

With such different motivations for buyer behaviour compared to the compliance market, it is little wonder that the impact of policy measures like backloading would have little direct impact on the voluntary market.

However, compliance market policy failures can have an indirect impact on prices in the voluntary market. Actors in the compliance market have begun to take notice of the relative buoyancy of voluntary prices.  In September 2012 the UN Framework Convention on Climate Change included the following statement in its meeting notes:

"Project participants and others engaged in the [Clean Development Mechanism] will soon be able to voluntarily cancel their CERs into an account in the CDM registry at the UNFCCC secretariat in Bonn, Germany. This could encourage expanded use of CERs for voluntary emission reduction, such as by companies using credits as part of a social responsibility programme, by event organizers wanting to offset their emissions, or even by individuals wishing to reduce their carbon footprint."

Just a few months later Christiana Figueres, the head of the UNFCCC, made the following Tweet:

It appears that a number of people are hoping that the relatively buoyant voluntary market can support CDM  by serving as a source of demand for compliance credits.  This is a great idea in theory.  However, the primary CDM market was created to feed national and regional compliance schemes.  The promise of CDM has mobilised a tremendous amount of climate finance to feed the compliance market.  In 2011, the latest year for which figures are available, CDM was five times larger than the voluntary carbon market.  Since that time, we have seen record issuances of carbon credits on the CDM.

It would be wonderful if demand in the voluntary market expanded rapidly enough to absorb the surplus from the CDM (or at least from the CDM's more community-oriented and renewable energy projects).  The short-term impact of such an influx, however, would be to overwhelm completely the absorptive capacity of the voluntary market, driving prices towards zero and removing incentives to develop new and innovative voluntary projects.  It would be akin to fitting all the passengers from the Titanic into one lifeboat.  Rather than rescuing the compliance market, we would damage the voluntary carbon market, perhaps irreparably.

It's clear, then, that for all its inherent strengths, the voluntary carbon market remains vulnerable to poorly executed attempts to rescue elements of the compliance market. The most robust and sustainable fix for the compliance market's woes remains in the realm of politics. More specifically, national and regional leaders must show the courage to set ambitious reduction targets that accelerate the pace of action to fight climate change.  The depressed prices on the EU ETS show that companies have been able to meet their current emissions reductions obligations more easily than we ever thought possible.  Deepening emission reduction targets will accelerate the transition to a lower-carbon economy and strengthen the carbon markets by driving demand for compliance carbon credits and provide a sustained boost to prices.

Meanwhile, the voluntary carbon markets will continue doing what they do best: driving innovation and providing a vehicle for companies who want to take action beyond compliance to demonstrate their environmental leadership.

(Jamal Gore is Managing Director of carbon management firm Carbon Clear.)

More on Fixing the EU ETS

The other day, I pointed out that the collapse in the carbon price on the EU ETS compliance market was down to politics, not an inherent failing of cap-and-trade.  I concluded by pointing out that we need courageous political leaders willing to take faster action against climate change.

It seems I'm not alone in reaching this conclusion.  Here's the article lead from yesterday's Point Carbon news website:

Of course, the voluntary carbon markets are relatively less likely to be held hostage by politics.  Companies around the world increasingly are going beyond any compliance obligations to set ambitious emission reduction targets and buy quality carbon offset credits that reduce GHG emissions outside their organisational footprint boundaries.  Carbon Clear is committed to helping companies control their carbon impact - we look forward to working with you.