Re: Climategate: How To Follow the Money
noob
http://pajamasmedia.com/blog/climategate-how-to-follow-the-money/?print=1
Posted By Charlie Martin On December 23, 2009 @ 9:05 am
There's big money in climate.
That became strikingly obvious in Copenhagen. The conference itself cost in
the neighborhood of $30
million, but that was only the visible tip of the melting iceberg. Add to
that the celebrities, the
demonstrators, the congressional delegations, and the corporate displays,
and you can bet something
closer to $60 million was really spent on the conference - along with, of
course, a carbon
footprint the size of Morocco's. The one significant outcome of the
Copenhagen conference was an
agreement to continue the international market in carbon offset trading that
would otherwise have
expired in 2012 and to prevent a crash in the carbon credits market.
It appears that most of the participants saw the money spent as an
investment.
To see why, we need to look at the way Kyoto has turned into cash for many
of the biggest names in
the climate change world, and to do that we need to understand how the whole
carbon trading scheme
works.
Simple Carbon Trading
Start with the simple proposition that you want, for whatever reason, to
reduce the amount of
greenhouse gases (GHGs) being emitted by human activities worldwide. The
reasons, of course, are
all based on the idea that humans emitting GHGs are causing unexpected and
unacceptable changes in
the climate. Whether that's true or not is a topic for other articles; for
now, just take it as
given.
There are actually a number of GHGs that could be an issue, but the largest
share of human-produced
GHGs is in carbon dioxide (CO2). So for simplicity, the Kyoto Protocol
normalizes everything in
terms of CO2 alone, using a number called the global warming potential
(GWP). By definition, the
global warming potential of CO2 is 1; the highest GWP is for sulfur
hexaflouride, a gas used mainly
in electrical equipment. Sulfur hexaflouride has a GWP of 23,900, so for
Kyoto Protocol purposes,
releasing 1 ton of sulfur hexaflouride is considered to be 23,900 tons of
CO2.
Now, if there were a king of the world, that dread sovereign might just say:
"Hey! Stop emitting
GHGs!" And that would be that. In the real world, if you want to reduce
GHGs, you have to come up
with some kind of scheme to get people to do it (more or less) voluntarily.
Governments do this,
normally, with taxes. The simplest scheme is just to tax anyone who emits
GHGs, charging them
enough to pay for the bad effects. Reduce the amount you emit and your taxes
go down.
Of course with a government program, and particularly with the UN, nothing
is that simple.
Developing countries, particularly India and China, have rapidly growing
economies and populations
that really enjoy that their standards of living are rising toward
first-world levels. These
countries, as they improve their standards of living, are necessarily going
to release more CO2. In
the simple model, they would be expected to pay for those emissions.
Carbon Trading after Kyoto
India and China, with rapidly growing economies and populations that are
really enjoying progress
towards a first-world standard of living, didn't like this scheme at all. To
them, the simple
carbon tax is just a massive tax, reducing their GDP and impeding their
progress. Add to this the
historical resentment of colonialism, and the simple carbon tax was a
non-starter.
The Kyoto plan was intended to solve this - at the cost of more complexity -
by using a carbon
trading scheme. For example, imagine China is going to build a new power
plant that would have
emitted 1,000 tons of CO2 a year. If China instead builds that plant with
new technology that
reduces the emissions to 500 tons a year, they get 500 tons of carbon
credits in the form of a
certificate of emission reduction (CER). The theory is that they can then
sell those CERs to other
places as "credit" in place of CO2 emission reductions, something we'll
discuss below.
The devil is in the details, of course. If you can get a 500 ton CER for
building the power plant
better, shouldn't you get 1,000 tons of credit for not building the power
plant at all?
That could be a pretty sweet deal - you can not-build a lot of power plants
in a year. If there's a
market for these CERs, that's a license to print money. So there's
immediately a problem - you must
somehow establish that you only provide CERs for projects that would
otherwise have been built
anyway.
The Kyoto Protocol establishes a mechanism to certify these emission
reductions called the Clean
Development Mechanism [1] (CDM), which establishes a bureaucratic process
under the supervision of
the UN to do this certification. The purpose of the CDM is to keep the
process honest. Only certify
emission reductions for projects that would have been built anyway and that
would have had a
greater carbon footprint if they had been built the way they would have been
built.
Got that? You have a CER, with real cash value, as long as a UN organization
will certify what you
might have done, and the way you might have done it, if you had done it, and
done it that way.
Now, let's leave the third world and go to the developed world, the first
world, or what the Kyoto
Protocol calls the Annex I countries. In fact, let's go to the the U.S.,
where there is a power
plant that already emits 1,000 tons of CO2 a year. They can offset that
emission by buying the CER
from China - but why would they bother?
Of course, some people would buy CERs out of commitment or guilt - say
Hollywood folks who want to
continue to use their private jets - but the market in guilt is actually
pretty limited.
For this scheme to work, there has to be some reason why the power plant
would be forced to reduce
their carbon emissions. That's where the Kyoto Protocol come in. Part of the
protocol is an
agreement by each of the Annex I countries that they will reduce their
carbon emissions by some
amount, but that reduction can either be in actual reductions or by buying
CERs.
Put together, these two parts - an enforced reduction or "cap" on carbon
emission and a way to
trade CERs - are the key components of a "cap and trade" scheme, which is
the basis of the Kyoto
Protocol.
Carbon Markets
There's one more missing component here. There has to be a way for people
with CERs to find people
who want to buy CERs - in other words, there has to be a market. This market
operates, just like
the New York Stock Exchange, the Chicago Board of Trade, or the rug merchant
in a bazaar in
Istanbul, as a profit-making entity. Every time Wayne in Chicago buys a CER
from Wang in Shanghai,
the guy facilitating the market - call him "Al" - takes a little off the top
in the transaction.
Now we've got a picture of the whole transaction:
1. Wayne in Chicago needs to reduce his CO2 emissions by 500 tons, so he
contacts Al.
2. Wang in Shanghai has a 500 ton CER.
3. Wayne and Wang agree, through Al, that the 500 ton CER is worth $1000.
4. So Al takes the CER from Wang, paying him $980 (subtracting a $20
commission from the $1,000
trade price) and gives it to Wayne in exchange for $1,020 (because Al is
charging Wayne a
commission too.)
Now, on paper at least, Wayne is only producing (net) 500 tons of carbon
emissions.
Perverse Incentives
"On paper" is the key here. In reality, Wayne alone used to be emitting
1,000 tons of carbon. Now,
Wayne and Wang together are emitting 1,500 tons in total. Wayne is out
$1,020 for the CER, Wang is
$980 richer, and Al has made $40.
On paper, it's a reduction of 500 tons of CO2 emissions, but it's only a
real reduction if Wang
really would otherwise have built a power plant to emit 1,000 tons. But
because Wang knows he can
make money on the CERs, that is going to factor into his decision to build a
power plant at all -
all the incentives in Wang's case are to build more power plants and emit
more CO2, as long as he
can convince someone (in this case a UN organization) that he "really would
have built the power
plants anyway."
Of course, Wayne could have kept his $1,020 if it weren't for the government
forcing him to reduce
his "carbon footprint." So this is effectively a tax. The effect is that
Wayne is paying $1,020 in
taxes, of which $40 goes to Al and $980 goes to Wang in China, and there is
a net reduction in
carbon output only if the CERs really represent carbon that "would have been
emitted anyway."
And this all managed by the paragon of incorruptible altruism, the United
Nations.
Follow the Money
The frightening thing, at least for Al and Wang, is that this was all set to
go away. The Kyoto
Protocol expires in 2012, and without an agreement to extend it, new Chinese
power plants would
have to be built without cash coming from the developed world and carbon
trading markets would have
nothing to trade.
The amount of money involved isn't trivial. According to Richard North at
the Daily Mail, the
carbon trading market last year was worth about �129 million (or about $205
million U.S.) and was
heading toward trillions of dollars by 2020. So it's probably not a
coincidence that, for all the
discord in Copenhagen, the one thing to which all the parties did agree was
to extend the Kyoto cap
and trade system. The market in carbon offsets or CER would continue.
Who benefits from this?
An interesting question. Of course, it's well known that Al Gore is heavily
involved in the carbon
offset market and in other environmental ventures. There is speculation that
Gore could be the
world's first green billionaire.
Another beneficiary is the UN itself. All of these international processes
happen under the
supervision and control of the UN and UN-chartered nongovernmental
organizations.
The most interesting connection that's come out in recent days is Dr.
Rajendra Kumar Pachauri - the
chairman of the IPCC. Pachauri, an engineer and economist by training,
joined the Tata Energy
Research Institute (TERI) in April of 1981 as managing director and
continues to be employed there
to this day. TERI was renamed in 2003. According to the Science and Public
Policy Institute, at the
time of the name change TERI communications director Annapurna Vancheswaran
said:
We have not severed our past relationship with the Tatas. It [the
name-change from Tata Energy
Research Institute to The Energy Research Institute] is only for
convenience.
Pachauri, and TERI, maintains close ties with the Tata Group.
Pachauri, it turns out, has a number of interesting connections. Beside the
connection to Tata -
TERI insists it has terminated the official connection - Dr. Pachauri is a
director or advisor to
many other organizations involved in the "climate industry." The Telegraph
[2] puts it like this:
What has also almost entirely escaped attention, however, is how Dr.
Pachauri has established an
astonishing worldwide portfolio of business interests with bodies which have
been investing
billions of dollars in organizations dependent on the IPCC's policy
recommendations.
These outfits include banks, oil and energy companies, and investment
funds heavily involved in
"carbon trading" and "sustainable technologies," which together make up the
fastest-growing
commodity market in the world, estimated soon to be worth trillions of
dollars a year.
Today, in addition to his role as chairman of the IPCC, Dr. Pachauri
occupies more than a score
of such posts, acting as director or adviser to many of the bodies which
play a leading role in
what has become known as the international "climate industry."
Roger Pielke Jr. looked at the conflict of interest policies [3] at the UN
and concluded that Dr.
Pachauri's business connections appear to conflict with the normal UN
policies, but that it's not
clear that the IPCC is covered:
Based on the WMO and UN discussions of conflicts of interest, it seems
clear that Dr. Pachauri
has, at the very least, several associations that raise the appearance of a
conflict of interest in
such a way that does not preserve and enhance "public confidence in their
own integrity and that of
their organization." Since we do not have details on Dr. Pachauri's
activities or compensation from
these various organizations and businesses, it is impossible to tell what,
if any, conflicts
actually may exist.
It is perfectly reasonable to expect high-ranking IPCC officials to follow
the WMO and UN
guidelines for conflict of interest and disclosure. Apparently, they
presently do not follow these
or any other such practices. If the IPCC does not have any policies
governing these issues, it
certainly needs to develop them, lest they give the impression that climate
scientists play by
different rules than everyone else.
Lord Monckton, in an open letter to Dr. Pachauri and the IPCC [4], made
another point. In one
specific instance, Tata industries owns Corvus Steel, which owns a steel
mill in the UK. Monckton
wrote:
The Tata group is now owner of Corus Steel, which, not long ago, closed
down the steelworks in
Redcar, UK, putting 1,700 workers out of their jobs. Corus stands to make
billions by cashing in on
now-surplus EU "carbon credits" given to the steelworks. It stands to make a
great deal more, via
the Clean Development Mechanism that is one spin-off from the IPCC process,
by transferring steel
production from the Redcar works to India.
Tata stands to gain from the Clean Development Mechanism by receiving
credits for notional carbon
"savings" obtained by investing in a new steel plant in the Indian province
of Orissa, which will
initially produce 3 million tons of hot rolled steel - exactly the capacity
of the now-closed
Redcar plant.
From the discussion above, it's clear what happens here. When they close the
still mill in Redcar,
that is a lot of carbon emissions they no longer make; that's a large CER.
At the same time, they
open a new steel mill in Orissa that produces exactly as much steel. If they
can convince some UN
functionary that this new mill "would have" been built anyway, and "would
have" produced much more
carbon emissions had they hypothetically built it in that alternate world,
they can realize more
CERs that can be exchanged for real cash in the carbon markets. At least,
they can if they can
convince the UN. Remember that you need a UN certification of what you might
have otherwise done,
and how you would have done it, if you had done it and done it that way.
And Dr. Pachauri, with his extensive ties to Tata and his leadership
position in the IPCC, seems
likely to have substantial influence in the UN.
Who Benefits?
At the conclusion of the Copenhagen talks, what was the actual result? The
Obama administration
hoped for an agreement with developing countries, particularly India and
China, that would include
binding targets for GHG reductions and verification procedures to ensure
that carbon credits
represented "real" reductions.
What they got was a non-binding agreement that basically has no effect
except that the existing
Kyoto agreement for cap and trade continues. This seems unlikely to limit
carbon emissions much -
after all, the theoretically binding agreements of Kyoto weren't
particularly successful. (In fact,
the U.S. has been closer to meeting its announced goals than the EU, even
though the U.S. didn't
ratify the treaty.)
What's interesting is that carbon offset prices collapsed along with the
collapse of the Copenhagen
talks. It's pretty straightforward to understand what this market is saying.
Up to the last gasp in
Copenhagen, the betting had been that there would be even more restrictive
limits on carbon in the
developed countries and so greater demand for offsets. The markets didn't
get those and so
"decided" offsets were worth less. On the other hand, with no agreement at
all, the value of a
carbon offset would be near zero, and China, India, and people who invested
in the carbon markets
would be seriously hurt.
This eleventh-hour non-binding agreement, made by just a few participants,
seems to have primarily
had the effect of preserving the carbon market's existence.
Which means that the existing carbon trading scheme continues. China, India,
Tata Group, Rajendra
Pachauri, and "Al" are still in business.