Report: Investment in sustainable energy soaring
The UN Environment Programme reports on the astonishing recent growth in clean energy funding. Here are the most quotable factoids:
Sustainable energy investment was $70.9 billion in 2006, an increase of 43% over 2005.
Venture capital and private equity have increased from $2.7 billion in 2005 to $7.1 billion in 2007.
Research and Development increased to $16.3 billion in 2006, from $13 billion in 2005.
New asset financing in renewable energy generating plants in 2006 was $27.9 billion, an increase of 23% over 2005.
Carbon funds now total $11.8 billion.
The investment climate changes as the planet’s climate changes. One conclusion is worth singling out:
Energy efficiency is a significant, but largely invisible market, which is now attracting an increasing share of the limelight as investors realise its role in addressing growing global energy demand.
Kudos to UNEP for not focusing purely on clean energy supply, as so many reports do.
June 26th, 2007 at 3:16 pm
Please let me know your comments on my following article from the non-profit educational resource, www.ClimateHealth.net:
“Carbon Trading and Offsets Ineffectual Compared to Equitable Carbon Tax”
by businessman/scientist Sylvester Johnson, Ph.D. Applied Physics
Introduction
Citizens are already suffering the repercussions of climate change, with trends of increased weather extremes and spreading insect-borne diseases. Human-induced emissions of heat-trapping greenhouse gasses need to get reduced as soon as possible to avoid exacerbation of impacts that may otherwise become extreme. Objective appraisal of the unwieldy form of cap-and-trade and the counterproductive potential of offsets forces the consideration of a carbon tax as the most effective path to emissions reduction as well as energy independence.
Carbon Trading Open To Abuse
In emissions trading (or emissions “cap-and-trade”), the government sets a limit or cap on the amount of pollutant that can be emitted. The overall total amount of caps gets reduced each year. Companies that pollute beyond their cap must buy credits from those who pollute less than their cap, or face penalties. This transfer is referred to as a trade. In effect, the buyer is being fined for polluting, while the seller is being rewarded for having reduced emissions. Thus companies that can easily reduce emissions do so and those for which it is harder buy credits, which reduces greenhouse gasses at the lowest possible cost to society. However, a straightforward carbon tax also motivates everyone to reduce emissions by increasing efficiency or purchasing renewables, with companies that can easily reduce emissions doing so more rapidly, lowering the cost to society of effective emissions reduction.
The potential transfer of wealth from polluters to non-polluters may provide incentives for polluting firms to change. However, the incentives could be removed by politically-motivated “grandfathering” exemptions that involve the government giving established polluters carbon credits, thereby undercutting the incentive to reduce.
Carbon trading may distract attention from the broader governmental action that needs to take place, such as improving public transportation. In addition, determining the caps on an industry by industry, and company by company basis requires an extension of federal bureaucracy, further misdirecting effort to management rather than substantive action and investment. The caps get allocated based on past usage. During the period required for political implementation of cap/trade, a perverse incentive is created to pollute more to increase the eventual base for allocations of caps. This consequence would increase emissions during implementation.
It’s often cited that a cap-and-trade market in sulfur dioxide permits has already been functioning successfully to reduce those emissions. However, the analogy of the cap/trade in greenhouse gasses with the market in sulfur dioxide permits breaks down because of the greater multiplicity of varied sources of gasses and the unmanageably large scale of oversight for a similarly structured market in permits for heat-trapping emissions compared with the smaller number of transactions in sulfur dioxide permits. Setting caps among competitors lobbying for marginal advantage becomes a tangled political exercise on a grand scale. Monitoring compliance is yet another. The potential for abuse and corruption is correspondingly greater for cap/trade in greenhouse gasses than for the smaller scale of sulfur dioxide permits.
Design and implementation of cap/trade could become complicated, contentious, and quite prolonged, as political disputes get settled over: 1] Level of overall cap 2] Timing 3] Allowance allocations 4] Certification procedures 5] Offsets 6] Penalties 7] Permit banking from year to year 8] Inevitable requests for exemptions. The many negotiable features of cap/trade take longer to implement than a straightforward carbon tax. Several of these components of cap/trade may need re-negotiation annually, making the administrative expense even less palatable.
Truly effective action on climate change requires reducing emissions at the source, not trading. In the cap/trade system, many companies have insufficient direct financial motivation to reduce carbon emissions to levels below the caps set for them. Carbon trading may not prove an optimal response to the need for emission reduction. Reductions in emissions must be motivated across the board without the loopholes and delaying strategies afforded by cap/trade, no matter how politically powerful.
A potentially useful aspect of cap/trade is that the overall total amount of caps gets reduced each year, hypothetically forcing reduced total emissions if the system functions without exemptions, abuse or corruption. However, the bill introduced by Senator Sanders already stipulates exemptions if the market price of allowances exceeds a set “stop price”, in which case the price is maintained at that level, delaying reductions. If offsets get built into the program, it’s even less likely emissions will get reduced regularly.
Offsets Circumvent Emission Reduction at the Source
A carbon offset or credit means paying someone else for reducing (”offsetting”) greenhouse gas emissions, to compensate for one’s own emissions. A well-known example is the planting of trees to try to compensate for the greenhouse gas emissions from personal air travel. Projects specifically intended to reduce levels of heat-trapping gasses may qualify as providers of offsets for sale to gas emitters.
The criteria for accepting or rejecting an offset provider may include the following: 1] What emissions would occur in the absence of a proposed project? –Setting an amount involves considerable guesswork and uncertainty.– 2] Would the project occur anyway without the investment raised by selling carbon offsets? –The prospect of selling offsets based on the project may actually delay it indefinitely.– 3] Are the reductions already required by some other law or regulation? –The project may receive unwarranted additional income from obligations already in place.– 4] Are some benefits of the reductions reversible? –An offset could get reversed long after usage, if trees planted as offsets to avoid actual reductions of emissions get cut later for burning.– 5] Does implementing the project cause higher emissions outside of the project boundary? –It’s been proposed that seeding the ocean with iron would increase growth of phytoplankton that use carbon dioxide as part of their shells. The shells eventually get deposited on the ocean floor. However, seeding the ocean with iron depletes other nutrients as phytoplankton grow. The nutrient-depleted water circulates and mixes, so that subsequent nutrient availability is reduced outside of the project boundary. This depletion reduces phytoplankton growth that could have occurred elsewhere as the previously available nutrients mixed with waters naturally higher in iron. Because of the reduced phytoplankton growth elsewhere, the net overall reduction in carbon dioxide would be a fraction of the reduction that might be projected for the seeded area alone.–
Every criterion for becoming an offset provider listed above involves considerable subjective judgment that varies with the person evaluating the offset. Verification of these diverse criteria gets attempted by a governmental bureaucracy, although it’s challenging to find any offset that really meets all the criteria.
Beyond the additional governmental bureaucracy whose mission is to verify the offset project, offset programs create the function of middlemen called offset brokers in the private sector. Offsets purchased from brokers may plummet in value because they’re later found not to result in the emissions cuts promised.
Carbon offsets can create perverse incentives, motivating the establishment of sources of heat-trapping emissions in order to reap the reward of payments to reduce those emissions. Such abuses have already occurred in factories producing refrigerants that have over 10,000 times the Global Warming Potential of carbon dioxide. Potent waste gasses were being released during production of refrigerants. As an offset, companies from the European Union paid excessively large amounts for the installation of low cost incinerators to destroy the gasses before release, motivating the construction of further factories to produce refrigerants in hope of getting additional excessive windfall payments for destroying waste gasses. In general, some product refrigerants also eventually escape from leaking coolers after they’re eventually discarded. Since extra factories were built to produce refrigerants that may eventually escape, net warming may occur due to this supposed offset project.
In another example of an unwarranted windfall payment, an offsetting company invited consumers to offset carbon emissions by investing in enhanced oil recovery, which pumps carbon dioxide into depleted oil wells to force the remaining oil upward. However, this process was profitable in itself, meaning operators were making extra revenues from selling redundant “carbon credits” for burying the carbon. The carbon sequestration would have occurred anyway, without extra payments that could have been invested in efficiencies to reduce consumers’ own fossil fuel usage.
The bureaucracy to investigate abuses and recommend remedies such as de-listing the abusers would have to be enormous. Yet the investigations would likely be substantially less than 100% effective, so that new abuses would continue to proliferate. In addition, a shortage of verification may make it difficult for buyers to assess the true value of carbon credits, and allow instances of people buying worthless credits that do not yield any reductions in carbon emissions.
Carbon offsets can also create counterproductive subsidies. For example, dairy farms produce the greenhouse gas methane from both decomposition of manure and from digestion by cattle, with the substantial majority of methane produced by bacterial digestion of cellulose in the rumen-portion of the stomach. Farms may capture the methane from manure processed in “digesters” and sell or burn it as fuel, so that the methane becomes a source of income, or reduction of fuel expense. In addition, such capture of methane may qualify for sale as an offset if the verifying bureaucracy does not take into account the likelihood that the methane-capture project would occur anyway without the investment raised by selling redundant carbon offsets. Purchasing such offsets, however, subsidizes the entire farm and the production of methane by digestion as well, a larger source of methane than decomposition of manure. This subsidy increases the economic viability of dairy farms with the consequence that all other aspects being equal more farms will function and more methane get emitted than if the offset had not been sold. This result is counterproductive to the goal of reducing heat-trapping emissions.
Certainly investing in manure digesters needs to be done any case, to capture the methane. A carbon tax raises the price of fossil-fuel powered electricity, but not digester-based, motivating such investments in renewables.
Fossil fuel consumers may seek offsets that involve planting trees to sequester carbon equal to the consumers’ emissions being offset. One reason for the low price of the offset is that solar power gets employed in photosynthesis over the decades required for the tree to mature enough to store an amount of carbon equal to the carbon in the consumers’ emissions. However, warming occurs due to the consumers’ emissions acting to trap heat during that growth period. By the time the tree is mature, warming will have occurred, contributing to the melting of ice and consequent increased absorption of solar radiation. Although the intent of offsets is to reduce net warming to zero, the effect is to build in increased warming. Therefore planting trees as an offset does not work to reduce net warming during the growth period. While donating to tree-planting and funding renewables needs to be done anyway, such donations cannot substitute for critical reduction in usage of fossil fuels and their emissions as soon as possible to reduce their warming effect. Near-term reduction of consumers’ emissions is much more beneficial than offsets.
With an offset program, instead of competing on the basis of conventional products and services, businesses expend resources competing to get the cheapest offsets, a distraction from productivity goals critical to fundamental value and competitiveness.
Carbon offsets make it more acceptable to continue burning fossil fuels, excusing continuation of usual practices with regards to emissions. Funds invested in offsetting projects may reduce the amounts available for installing renewable energy power stations. Offsets encourage short-term fixes at the expense of delaying fundamental, long-run solutions.
Selling offsets is an ineffectual strategy to reduce warming. However, once the extensive bureaucracy required for carbon trading and offsets is in place, with brokers, sellers and other stakeholders benefitting, it will be very challenging to dismantle the running machine.
Unfortunately, one reason the financial sport of offsets is more popular than a tax is precisely because offsets don’t motivate reductions.
The distractions, corruption, and scandals arising from the gamesmanship involved in playing the financial sport of offset trading are not likely to result in the achievement of critical goals for reduction in emissions and warming. The European experiment with cap/trade has been a failure due to the extreme variability in cost of offsets, as well as fraud. Until recently, U.S. business and environmental groups have been favoring cap/trade over carbon tax. However, the unfavorable European experience with cap/trade had not come fully to light. Opinion may be shifting more toward a carbon tax.
Carbon Tax for Equitable Treatment and Predictability
The advantage of a carbon tax is that it associates a definite cost to the carbon content of all fossil fuels, a cost that counters pollution. A straightforward carbon tax could produce results at least as effective as those of cap/trade with considerably less extensive bureaucracy. If the tax gets applied as far as possible upstream toward the source coal soon after mining, and applied to oil upon extraction or import, then fewer entities need to get taxed, with only a minimal bureaucracy required. Therefore, unlike competing market-based approaches such as carbon cap-and-trade, little new bureaucratic machinery is needed to administer and levy a carbon tax. Cap/trade imposes a heavy hand of invasive verification, regulation and oversight, whereas a carbon tax levied upstream requires almost no oversight downstream.
Taxing upstream makes it more demonstrable that equitable treatment is being afforded to everyone, so long as no outright exemptions get made. Exemptions are likely to undermine support for any program among those who do not benefit from the exemptions.
A carbon tax can be implemented by taxing the burning of fossil fuels –coal, petroleum products such as gasoline and aviation fuel, and natural gas– in proportion to their carbon content. Carbon-taxing countries could levy carbon-equivalent fees on carbon imports from non-taxing nations.
One reason that the income tax is counterproductive is that it counteracts a “positive” for society, acting as friction on constructive, income-producing activities. A carbon tax gets applied to energy sources which emit into the atmosphere carbon dioxide, or more broadly, any long-lasting heat-trapping gasses. Thus a carbon tax is an example of a corrective pollution-tax on “negative externalities” of activities rather than on a “positive” outcome of activities, such as income. Since heat-trapping gasses cause warming that’s beginning to damage society, for example by weather extremes and spreading insect-borne diseases, a carbon tax potentially supports productivity and economic growth by reducing friction that may be caused in part by warming.
To counteract the short-term drag on the economy, it can be stimulated by allocating a portion of tax revenues to projects to reduce emissions such as improving efficiency and public transport. The jobs created fuel the economy. A part of the revenue also can be used to reduce payroll taxes with the result that people benefit more from working, while using fewer fossil fuels, a win-win for society.
Energy cost volatility hampers companies’ strategic planning. A defined tax rate makes it more feasible than does cap/trade with its associated market variation for businesses to predict the future impact of climate policy on their bottom line. Reducing at least this regulatory aspect of energy cost volatility also lessens concern among shareholders about the uncertainty and risk that currently surround planning regarding climate change.
A carbon tax doesn’t favor or disfavor one part of the economy over another, or one competitor over another. It minimizes complexity and administrative costs. Businesses may consider straightforward predictability more desirable than the distracting scramble for marginal advantage set in motion by cap/trade.
To highlight the purpose it could be called the “Climate Protection Fossil Fuel Reduction Tax”.
Taxing fossil fuels to levels appropriate to their negative externalities motivates investments in renewable energy sources by making them more competitive.
Carbon taxes provide direct, transparent and understandable price signals, and can be implemented rapidly. The many negotiable features of cap/trade take longer to implement than a straightforward carbon tax. Cap/trade is complex and subject to scandals that undermine public support.
Because a carbon tax is simpler to administer, it’s more appropriate for an international accord. Weak governments may not be able to provide effective oversight to prevent the many opportunities for corruption inherent in cap/trade.
The disadvantage of a carbon tax is that it does not in itself set a goal for emissions reduction as does cap/trade. However, a carbon tax could be used as a policy tool to arrive at a goal set by a broader agency. If it were determined that emissions were not being reduced enough to meet the policy goal, then the tax could be increased to motivate more rapid transition to renewables and increased efficiency. As manipulative as the tax sounds, the potential climate change and societal damages resulting from an ineffectual cap/trade program could be substantially more problematic.
The carbon tax is an indirect tax –a tax on a transaction analogous to a sales tax– as opposed to a direct tax, which taxes income. As a result, some conservatives may support the carbon tax because it taxes at a fixed rate, independent of income, as does the flat income tax preferred by conservatives.
Any flat tax is regressive, but wealthier households using more energy on average pay more carbon tax per household. Considering the unwieldy malfunction possible with cap/trade and the counterproductive potential of offsets, a carbon tax may be the most effective path to energy independence and to reduce the threat of climate change to everyone, especially to the children.
Legislation
At least three bills have been introduced that mandate a minimum 80% reduction from the emissions of 1990 by 2050, reducing by a small fraction per year. From the foregoing analysis, the bill advocating carbon taxes [Stark Save Our Climate Act (H.R. 2069) in the House] is preferable to those promoting cap/trade [Waxman Safe Climate Act (H.R. 1590) in the House and the Sanders-Boxer Global Warming Pollution Reduction Act (S. 309) in the Senate]. A political compromise for a lesser reduction than 80% may be seen as a political success, but could be a climatological failure, delaying the necessary levels of cutbacks for an unknown number of years as impacts accelerate, creating a need for an even more severe goal for 2050 than 80%. Meanwhile, the country would likely be awash in expenses arising from impacts, enervating the ability to invest in efficiency and renewable energy sources. The optimal strategy to mitigate climate change is entailed in carbon taxes motivating at least the 80% goal.
More information on how to reduce emissions can be found on this website at Article, Climate Change, How to Make a Difference.
June 26th, 2007 at 5:43 pm
1) Next time, add spaces, as I’ve done, for readability.
2) I agree with you about offsets — your enhanced oil recovery example is even worse than you say because the buried carbon is used to squeeze more oil out of the ground, thereby negating the benefits of burying the carbon in the first place.
3) Most of your argument is sound in theory, but a carbon tax is a political nonstarter.
4) A Cap & Trade is complicated, but I’m sure people will learn from the European experience and do at least 50% auctioning.