menu 1.2.1
menu 1.2.2

Print Follow Enerhope on TwitterRSS

Enerhope's September 1st, 2010 Newsletter - A Bullet-Proof Cap-and-Trade System


September 1st, 2010 - Newsletter - A Bullet-Proof Cap-and-Trade System  

Tom Markowitz - Tuesday, August 31, 2010

Welcome to Enerhope

The September 1st newsletter includes important news headlines from the previous month, and a special article: How to Design a "Bullet-Proof" Cap and Trade System

Enerhope is not responsible for the opinions or the facts stated in other websites.
When you click on any URL mentioned in this newsletter, you will leave Enerhope.com

August, 2010 News Headlines

India to start market-based carbon trading system 
Sify News (India)
September 1, 2010

Japan Forsees Starting Carbon-Emissions Trading in 2013, Panel Reports
August 31, 2010

Canada shouldn't wait for U.S. emissions initiative: Economists
Toronto Sun / QMI Agency
August 26, 2010

China CO2 trading scheme to start with power sector -report
Reuters Africa
Aug 25, 2010

The Case of the Missing Climate Pledge
New York Times dotearth blog
August 19, 2010
The website Whitehouse.gov has removed any reference to the $150 billion clean energy research fund, to be funded by greenhouse gas allowance sales.

Indonesia’s Foray Into Carbon Trading Ripe for Fraud: Experts
Jakarta Globe
August 18, 2010
A warning against the potential for Indonesian forestry offset frauds

NM Regulators Hear Greenhouse Gas Debate
The Associated Press
A debate on the necessity of regulated greenhouse gas emission reductions by New Mexico's large final emitters.
August 17, 2010

California Backs Away From Cap-and-Trade
August 8, 2010
The upcoming elections will include challenges to California's 2006 Climate Change Law.

Emissions scheme is `an opportunity' for farmers
Manawatu Standard (New Zeland)   
August 10, 2010
The possibility of greenhouse gas offsets for converting grazing land to forests.

New Jersey Watchdog
July 28, 2010
The RGGI emissions trading system refuses to reveal its registry to the public.

Feature Article:

A “Bullet-Proof” Cap-and-Trade System


This article is concerned with some problems that have occurred in some cap-and-trade systems, and how to design a cap-and-trade to be “bullet proof”, highly resistant to these problems.

Let’s start by reminding ourselves that three cap-and-trade systems have been highly successful in reducing smog gases from US fossil-fuel electricity generators.  The Ozone Transport Commission NOx Budget Program (1990-2001) and the NOx State Implementation Plan (2002-present) reduced emissions of NOx from fossil-fuel generation of electricity in the northeastern states by 70% by 2009. The Acid Rain Program reduced SO2 emissions from fossil fuel generating stations by 5.5 million tonnes per year between 1990 and 2005, a 35% reduction. During this time, the emissions trading systems did not raise consumer's electricity bills significantly.


New greenhouse gas cap-and-trade systems have not yet achieved the same success as the cap-and-trade systems described above.  In their first few years, the UN and European Union (“EU”) cap-and-trade systems have suffered from incidents of misunderstanding and fraud. The RGGI system in the north east USA has yet to prove its value as an emission reduction program.


Some Examples of Misunderstanding and Fraud


Paying for Future Emission Reductions

Leading our parade of woe is the rock group Coldplay, which announced in 2002 that it was offsetting all of the greenhouse gas emissions from the production of its new album, A Rush of Blood to the Head, by paying for a large tree planting project in India. When the tree planting failed, the emission reductions were zero. Note that these planned future emission reductions were never registered as offsets under any emissions trading scheme. (1)


Over-Allocation of Allowances

The New York Times on March 31st reported that the EU emissions trading system in 2009 allocated more allowances than emissions. The result of over-allocation is that the supply of tradeable units (allowances and offsets) exceeds the demand for these units on the emissions trading market. The price of a tonne of allowances drops to a trivial value. Capped emitters can meet their regulatory obligations by buying and retiring cheap tradeable units, much less costly than reducing their emissions. Capped facilities can buy cheap units and “bank” them in their accounts, waiting for a future year, when, to meet their regulatory obligations, they can retire these cheap units instead of reducing their emissions. (2)


Offsets from HFC-23 Destruction

HFC-23 (chemical formula CHF3) is a chemical byproduct in the manufacture of HCFC-22 (chemical formula CHClF2), a refrigerant gas. With a Global Warming Potential of 11,700, HFC-23 is on the UN list of greenhouse gases to be reduced.


Since the beginning of the UN and EU greenhouse gas emissions trading systems, HCFC-22 producers in the developing world have applied for offsets, to be awarded by the UN emissions trading system for capture and destruction of their byproduct HFC-23.


Projects that cut HFC-23 make up 52 percent of the current supply of offsets created under the UN’s offsets program for developing nations, which currently totals $2.7 billion at market prices.


In June, the non-governmental organization CDM Watch proclaimed that HCFC-22 plants in the developing world had boosted production, with the sole intent of maximizing their offsets from HFC-23 destruction. According to CDM Watch’s Policy Briefing, revenue from sales of HFC-23 offsets is far higher than revenue from sale of HCFC-22. The briefing claimed that one plant even stopped HCFC-22 production when it was not allowed to generate further offset credits, and resumed operation when it became again eligible to generate credits. (3)


The World Bank, a major buyer of offsets from HFC-23 destruction projects, has refuted the claims of CDM Watch. (4)

Responding to the criticism of HFC-23 destruction offsets, on August 20th, the

executive board of the UN's Clean Development Mechanism said that five chemical plants in China would no longer qualify for funding as so-called carbon offset credits until the environmentalists' claims can be further investigated. (5)

On August 25th, the EU's top climate official proposed new limits on the use of carbon offsets from industrial gas projects in the EU's emissions trading scheme after 2012. (6)


Failed Verification

In September, 2009, the Times of London reported that the United Nations emissions trading program suspended the world’s largest verifier of offset projects, SGS UK, which could not prove its staff had properly verified projects that were then approved for the carbon-trading scheme, or even that the staff were qualified to verify the projects. According to the Times, ‘The legitimacy of the $100 billion (£60 billion) carbon-trading market has been called into question after the world’s largest auditor of clean-energy projects was suspended by United Nations inspectors.” (7) In December, the UN program reinstated SGS UK as a verifier.


Carousel Fraud

In a carousel fraud, a trader buys tradeable units (allowances and offsets) in one country, fails to pay sales on these units, and then sells the units in a second country, claiming sales tax in the purchase price. The trader then disappears before the tax authorities in the first country can claim sales tax on the original purchase.


The following was reported by the British newspaper The Telegraph:



“In December, 2009, Europol, the cross-border European police force, said that carbon trading fraudsters may have accounted for up to 90% of all emissions trading market activity in some European countries, with criminals mainly from Britain, France, Spain, Denmark and Holland pocketing an estimated €5bn.

"It is estimated that in some countries, up to 90% of the whole market volume was caused by fraudulent activities," Europol said. Figures from New Energy Finance show the value of the global market falling from $38bn (£23bn) in the second quarter to $30bn in the three months to the end of September after several countries cracked down.” (8)


Night of the Living Dead Allowances

In a correct emissions trading system, each capped facility must retire tradeable units (valid allowances and offsets) equal to its annual emissions. These retired units are placed in the retirement account in the emissions trading registry, where the public can see the serial numbers of all retired units. The retirement account is the “graveyard” of retired units. Their retired serial numbers are their “tombstones.”

Unfortunately, in the EU emissions trading system, with considerable trading across national borders, some retired units have been brought back to life, and have escaped the graveyard, like zombies in a George A. Romero movie. (9)


Allowances, Offsets and the Derivatives Market

Two writers have raised the alarm about the potential toxic interaction between the poorly-regulated derivatives market and emissions trading systems.


Michelle Chan, of Friends of the Earth US, is the author of

Subprime Carbon, rethinking the world’s largest new derivatives market. (10)


Sophie L’Helias, a corporate governance expert at the Cardozo School of Law and the Telfer School of Business, is the author of Ready to Burst (11) and Rookie of the Year (12) in Canada’s Corporate Knights magazine.


Both authors raise dire warnings about the possibility of an investment bubble in futures and options for emissions trading allowances and offsets. Such a bubble would eventually collapse, bringing down a large part of the world economy. In addition, such a bubble would be destructive to the environmental objectives of emissions trading. Allowance prices would be padded by the costs of speculative investment, and would be subject to wild swings, ruining the ability of capped facilities to plan for emission reductions in the long term.


One cap-and-trade system that is already vulnerable to the distortions of the derivatives market is the RGGI system in the north-eastern United States.


The report, RGGI Emission Trends (Environment Northeast, June, 2010) states that carbon dioxide emissions from RGGI power plants in 2009 totaled 123,718,594 tons, 9% below 2008 levels, and 34% below the regional cap of 188,076,976 tons. The report concludes that RGGI emissions have decreased significantly due to cheap natural gas, increased non-emitting generation, more efficient use of electricity, and – to a lesser extent – economic trends and mild summer weather. (13)


The RGGI allocated far more allowances than emissions for 2009, and it has already begun to auction allowances for future years, at low prices. A large number of unretired RGGI allowances will be in the speculative investment market for many years. At the same time, RGGI does not have a vigilant, transparent registry to show to the public the ownership of every allowance. This lack of transparency was identified by New Jersey Watchdog in July. (14)


How to Design a Cap-and-Trade System,

Resistent to the Above Problems,

without hiring an army of investigators


For a description of a cap-and-trade system with integrity, please consult Enerhope’s introduction to emissions trading, http://www.enerhope.com/islandcapandtrade.pdf


Basic Definition of Cap and Trade System

A “hard” cap, specified large, direct emitters “under the cap”, free allocation of allowances to capped facilities according to a fair scheme, a lively offsets system, trading, monitoring and reporting, retirement.


Government – Run Registry

The Registry shows to the public the history of every allowance and every offset in the cap-and-trade system. Every organization which has ever owned an allowance or an offset in the system has an account in the Registry, including the government itself and the Retirement Account.


A Manageable Number of Allowances and Offsets

Create one allowance or offset for each 1,000 tonnes of greenhouse gas equivalent, not each 1 tonne.


Scheduling of Creation, Allocation and Retirement

Allocate (free) allowances to capped facilities on December 1st of each retirement year. The capped facilities will have one month to trade allowances before retirement.  Do not create or allocate allowances for future years. Do not create offsets for future emission reductions.


Capped Facilities Hold Their Allowances Tightly

After free allocation of the (scarce) allowances, capped facilities hold them tightly until retirement, keeping them out of the speculative market.


International Trades

Allow trading across national borders through national registries (or the UN Registry) only.


Revising the Cap

Empower the Minister of the Environment with the authority to revise the future caps to meet unforeseen economic situations, e.g. a recession.



Provide educational materials and services to the public and to the cap-and-trade community, explaining the mechanics of a correctly functioning cap-and-trade system.


Do you agree with this analysis?

If you wish to comment on this analysis, please join the discussion.



































                                                          Copyright © EnerHope 2011. All Rights Reserved.                      
                                     Terms and Conditions    Privacy Policy   Disclaimer