Sandbag's blog

The chances of federal cap and trade legislation in the US being passed any time soon appear to be receding, however, this means the spotlight will inevitably fall back onto state-level proposals.

In total, some 50 States could be included in a future capped carbon market, made up of three linked regional schemes: the existing Regional Greenhouse Gas Initiative (RGGI) in the east, the Western Climate Initiative (WCI) and the Midwestern Greenhouse Gas Reduction Accord (Midwestern Accord).

All eyes are currently on the WCI where 7 US States, (representing 20% of US GDP), and 4 Canadian provinces, (representing 76% of Canadian GDP), have come together to develop a common framework for implementing a scheme by the start of 2012. However, at the moment only two US states (California and New Mexico) and 3 Canadian provinces (Quebec, British Columbia and Ontario) have passed the necessary legislation to introduce a scheme, so other partners may only join at a later date .

And in California – the largest of the partners – there is a cloud hanging over the scheme’s future. A referendum has been called to suspend the regulations until such time as unemployment in the state decreases below 5.5%, it is currently at 12.6% (and not expected to drop below 8% any time soon). The vote will take place in November with energy companies largely funding the lobbying effort behind it. If successful it would severely reduce the likelihood of the other partners proceeding with their plans.

Despite this potential set back, WCI issued detailed design details for how the scheme would operate at the end of July.

Here’s a quick summary:

- seeks to reduce emissions by 15% compared to 2005 by 2020 ,
- intended to cover 90% of all greenhouse gases,
- could mean up to 1.3 bn tonnes capped by 2015,
- applies to installations responsible for emitting over 25,000 metric tones per annum,
- starts in 2012 capping power and heavy industry, with transport and heating fuels joining in 2015,
- mixture of benchmarked free allocation and auctioning for distribution of allowances,
- initial allocations to match projected BAU emissions in starting year and then steadily decline year on year,
- no restrictions on who can trade,
- floor price introduced into auction to stem supply if overallocated,
- no price cap but the price safety valves include three year compliance periods, limited used of offsetting, linking to other schemes, limited borrowing and potential reserves and ‘special purpose pools’ of permits being set aside and released under certain scenarios,
- a set aside of permits to be retired for voluntary renewable investments,
- importation of electricity from non-capped states to be included in the scheme,
- penalties for non-compliance require purchasing of excess plus a multiplier of 3 applied.

Comparing the scheme to the EU’s scheme there are some welcome differences but also some unfortunate similarities. The most problematic are the relatively low ambition (a reduction of only 1% per annum) and the decision about which sectors to include from the start. Beginning with heavy industry alongside power follows in the EU’s footsteps but it will inevitably hinder the development of the scheme by antagonising powerful lobbies, who can use competitiveness concerns to attack the scheme. If the scheme survives, regulators will inevitably come under pressure to agree generous free handouts of inflated allocations to these sectors. To give the scheme breadth and liquidity, it would have been better to include transport and domestic heating fuels from the start and to leave trade exposed industries to the very last.

Introducing an auction floor price to choke off supply in the event of an oversupply of permits is a good idea and one the EU would do well to copy. The absence of a price cap is also sensible, though it will be important that the various other proposed mechanisms for relieving high prices maintain the integrity of the cap.

Overall, if the scheme succeeds in getting off the ground, it will be a welcome step forward. RGGI, the pre-existing scheme on the eastern seaboard, though well designed, is currently floundering under a huge over-supply of permits. There is already talk of caps there being tightened in order to make a link with the west coast initiative possible – something which is long overdue.

A lot therefore rests on the good citizens of California and how they vote in November. Let’s hope they see beyond the industry lobbying and scare tactics and allow things to proceed.

While Australia has been forced to put emissions trading plans on ice until 2012 and the US struggles to achieve the 60 votes necessary to pass any kind of progressive energy policy (that may or may not include the creation of a carbon market), China it seems is quietly moving forward with plans to introduce its own internal market in emissions reductions.

According to an article in China Daily this week, the next five-year plan beginning in 2011 could contain an emissions trading policy to help create a broad based stimulus for lower carbon investment. Until now China has focused on more command and control policies designed to shut down the least efficient of its industrial plant and to spur development of specific renewable technologies. This article states that China has realised that there are limits to how effective such policies can be and that a broader, outcomes based approach would be less costly and more efficient.

This is welcome news. As ever the devil will be in the detail, with China developing at such a pace arriving at any kind of cap that doesn’t create hugely inflated volumes in emissions rights will be a big challenge. But the report hints that on at least one detail they may have already learned a valuable lesson from the European ETS experiment: it makes sense to start with a limited number of participants and that should be those in the power sector. If we’d done that in Europe we’d have created a much less cumbersome and much more ambitious scheme. The UK Government is consulting at the moment on the hugely complex rules for handing out free permits to heavy industry according to benchmarks. Anyone contemplating introducing a trading scheme would do well to read this document and take note that starting with 100% auctioning from the outset is by far and away the easiest option and that can be introduced from the start in the power sector.

Part of the reason China’s per capita emissions are catching up with the West – recent figures suggest they already match those of France – is because the carbon intensity of their electricity system is so high. According to the website CARMA, China’s emissions per MWh generated are over 850 kg – much higher than the US’s (600kg) or UK’s (550 kg) where old coal is less dominant. A well-designed carbon market which meets targets for achieving a lower carbon intensity, even while overall demand grows, could stimulate investment in efficiency upgrades and fuel switching to lower carbon fuel sources such as gas and energy from waste. It will also help to make renewables, nuclear and carbon capture storage more cost competitive.

If this report is true, and let’s hope it is, then by 2012 the dominant players in the carbon market may well be Europe and China. If Europe can implement some important changes and China gets the design right it could mark the beginning of a genuinely impressive market for delivering global emissions reductions. One that the US should pay close attention to since it may find that as well as being reliant on imports of expensive fossil fuels it will also be reliant on importing all the technologies it needs to wean itself of them.

European companies, whilst claiming tougher emissions targets would be ‘impossible to meet’ [1] and are damaging their competitiveness, are making extensive use of offsetting to meet their targets and even using it to directly subsidising their international competitors by for example purchasing offset credits originating in Chinese and Indian steel works.

A new report by climate campaign group Sandbag into the use of international carbon offsets to meet legally binding caps in Europe in 2009 reveals for the first time direct evidence of how Europe is subsidising its competitors and calls for reforms.

In 2009, European companies used 78 million international offsets, with an estimated value of €860 million, from developing countries (CERs) to comply with their caps under the EU emissions trading system (ETS). This represents 4.2% of total emissions from capped sectors, which include all power generators and many heavy industry sectors such as iron and steel works.

The vast majority of offsets used in 2009 (84%) originated from industrial gas projects in China, India and South Korea. These provide healthy profits to chemical companies in these countries and in China provided a source of tax income for the Government. However, a significant number have also been sourced from more directly competing sectors, For example over 2 million steel CERs worth approximately €22 million were used for compliance in 2009.

EU steel companies have been very vocal in pointing out that they compete in a global market and that caps on emissions have to potential to force them to move overseas resulting in so-called ‘carbon leakage’ out of the EU. Sandbag can reveal, however, that iron and steel companies are voluntarily sending cash to their competitors in developing countries – undermining their claims.

The single biggest purchaser of offsets in 2009 was steel company Salzgitter’s ‘Glock Salzgitter’ plant, which offset 99.5% of its emissions in 2009 using CERS. 89% of these CERs used were from HFC and N2O projects but an additional 40,000 were sourced from an Indian steel work CDM project.

The report and interactive map published today which uniquely link the types and locations of offsets with who has used them, recommends the EU reform its rules to phase out the use of credits from industrial projects in rich developing countries in favour of more sustainable projects in least developing countries.

The report’s author Sandbag’s Rob Elsworth said,

“The EU’s policy on offsetting needs updating – it has great potential to harness the flow of capital to deliver big advances in clean technology in developing countries but at the moment it is being used to make industrial companies in rich countries even richer. The EU can and should introduce changes both to protect our own industries and make sure finance flows to the most deserving projects and countries.”

Sandbag founder and director, Bryony Worthington said, “Frustratingly, it seems that EU installations seem to have a greater incentive to fund abatement projects amongst their competitors rather than invest in these improvements themselves. While it is perfectly legal and on one level economically rational to do this, it begs the question of why companies would choose to send a direct subsidy to their international competitors if fears of carbon leakage were so pronounced.”

For more information contact Bryony Worthington +447876130352 / bryony@sandbag.org.uk or Rob Elsworth +447771871448 / rob@sandbag.org.uk

Notes to the Editor

Sandbag is a UK based not-for-profit campaigning organisation dedicated to achieving real action to tackle climate change and focused on the issue of emissions trading.

The full report can be accessed at: http://sandbag.org.uk/files/sandbag.org.uk/offset2009.pdf

Our new and improved interactive maps can be accessed at: http://www.sandbag.org.uk/offsetmap

Salzgitter’s ‘Glock Salzgitter’ surrendered 40,000 steel CERs from CDM project (id 696) ‘Usha Martin Limited - Waste Heat Recovery Based Captive Power Project activity’.

All value estimations are based on the assumption of an €11 CER price

One of the many disappointments in one of the least green budgets you could imagine was the lack of detail about key elements in the coalition Government’s green agenda. Having announced that they intend to intervene in the energy market in various ways to support low carbon investment it is important that a clear timetable is adhered to and yet there were no more details made available in yesterday’s budget. If ideas such as the green investment bank and introducing a carbon floor price take a long time to be realized, rather than encourage more investment, they are likely to dissuade investors who will not want to commit funds to projects if the rules of the game are about to be changed.

The issue closest to our heart is the potential introduction of a floor price into the carbon market in the UK and we’ve written a briefing looking at what I means and how it might operate.

The basic idea is to reform the existing Climate Change Levy so that it applies upstream and acts as an insurance policy against lower than expected prices in the carbon market. There are lots of details that need to be fleshed out before a conclusion can be reached about whether it is a sensible policy or not.

A few things can be said already, however:

Reform of the CCL is long overdue as it currently taxes energy use not the carbon content of the energy used, so looking again at its design is a welcome development.

The carbon floor price may create a clearer investment opportunity in the UK, however, it will not save a single tonne extra of carbon unless fewer permits are issued into the market. (This is because caps are preset by the number of permits handed out so any policy that just affects price and not the supply of permits has no additional environmental impact overall). So in terms of value for money it must be assessed as an industrial rather than environmental policy. And it must not become an alternative to seeking the long term solutions to the problems in the carbon market which are tighter caps, more use of auctioning and more limits on offsetting.

Finally, if introduced now it has the potential to deliver large windfalls to existing low carbon generation currently on the system and already paid for/ subsidised by the public purse or via our energy bills. One of the main beneficiaries would be EDF/British Energy who currently operate a large portion of the UK’s existing nuclear power stations. They also have public plans to build more.

Call me cynical but this could be a well-timed windfall-generating policy mainly benefiting one major company. UK consumers of electricity should be very interested in this and demand to know the proposed details as soon as possible.

Judging from last night’s address from the Oval Office it seems Barack Obama is moving away from a policy of introducing a price on carbon via comprehensive cap and trade legislation in favour of more specific energy policy regulations.

In the 18 minute long speech last night he set out a plan of action for addressing the Mexican Gulf oil crisis which included clean up plans, sorting out corruption in the Minerals Management Service and requiring that an independent third party administer the handing out of compensation payments provided by BP.

Many people had expected the plan also to contain a reference to the need to pass legislation to deliver on the US’s climate reduction targets. There was speculation that he would use the opportunity to reaffirm his backing for the need to introduce carbon pricing to help wean the nation of fossil fuels in favour of cleaner alternatives. They were disappointed. Instead the President said he was 'open to ideas' and that inaction was the only idea he would not consider. He name checked a few: applying similar regulatory standards to buildings as have been passed for vehicles, requiring higher percentages of energy to come from wind and solar and as yet unspecified ways of encouraging industry to invest more in energy R+D.

This appeared to be an open invitation for legislators to bring forward 'energy only' bills without cap and trade elements. On Monday Senator Jeff Merkley unveiled his proposals for how the US can end its addiction to oil taking a regulatory approach to improve energy efficiency, boosting use of alternative fuels, including biofuels, and encouraging modal shift. There was no mention of carbon pricing or cap and trade. He it seems may now have the ear of the President who may see this as a less politically contentious way to move forward on an agenda to reduce dependence on oil and emissions.

This new turn of events was perhaps inevitable given the vehemence of opposition towards cap and trade in some quarters and the apparent difficulty in securing the required number of votes for legislation, but is still nevertheless disappointing. To achieve absolute emissions reductions in a cost effective and efficient way there is no better policy that a cap and trade system using auctioning of permits. Other countries who have tried to use less comprehensive energy regulations to reduce emissions, such as the UK, have found that such measures are not able to keep pace with the rising demand for cheap energy and consequently emissions keep rising. Energy efficiency may reduce emissions per vehicle or appliance but the total use of energy can continue to rise as more units are used more often. Increased use of renewables and alternate fuels can reduce emissions but only on a relatively small scale initially and they do nothing to stimulate the important switch from high carbon fuels such as coal and oil to the low carbon fuels such as gas and nuclear. Modal shift in transport is also a difficult and expensive thing to achieve if it goes against market realities and consumer and business preferences.

Obama says he is open to ideas but sadly I suspect the one idea that is no longer on the table is the application of cap and trade on emissions from power and transport. Both sectors are not exposed to international competition and both have the potential to deliver large volumes of emissions reductions quickly. It is still possible that the EPA will press ahead with plans to introduce caps on large stationary sources of emissions using existing powers under the Clean Air Act but their confidence may also now be dented thanks to the lack of mention of carbon pricing in yesterday’s speech.

And although making oil companies pay for the pollution arising from the use of their product would clearly be the best way to steer investment into alternatives it now seems this has little to no chance of being passed in the near future. This is a great shame and one which both the US and world may live to regret.

There was some very good news for the environment and for supporters of emissions trading in Europe this week. The move to a higher 30% emissions reduction target is, according to the Commission, looking much more affordable and, importantly, the German Environment Minister, Norbert Roettgen, has said he backs it. Such a move would trigger tighter caps under the trading scheme helping to re-balance supply and demand, leading to less emissions and higher prices.

One of the first actions Commissioner Connie Hedegaard took on taking office was to ask for a report into the implications of a move to a higher climate change reduction target. The official report is not expected to be made public until late May but leaked copies of the consultation draft are already circulating. The EU’s number crunching appears to conclude that it would now cost only around €11 bn more to meet a 30% target than the original estimated cost of hitting 20%. The cost difference has reduced drastically as a result of the recession. The Commission originally predicted carbon would trade at around €30 tonne in this trading phase, however, the large surpluses of emissions accruing to industry under the recession have contributed to permits trading at around half this value.

When emissions data for 2009 was published at the start of April it revealed emissions had fallen by 11%, compared to the year before, which followed a fall in the previous year of 6%. The net result: emissions are now below the caps for the first time. Next week Sandbag will launch a new and improved interactive map of all the installations in the EU scheme, illustrating the huge number of installations currently sitting on caps that are comfortably above their emissions. The only way to re-create incentives for investment in abatement in these plant is to shorten the supply of permits. To do this Europe can and must move to a higher target.

Since the failure of Copenhagen, a number of countries have been vocal advocates of the EU adopting the higher target unilaterally, decoupling the decision from the fraught international negotiations. France and the UK have led the way but Germany, until now, has remained quiet. But on Wednesday Environment Minister Norbert Roettgen indicated his support for the policy, making it much more likely it will be adopted. The main blockers remain Italy and Poland but it remains to be seen how strong a resistance they can muster if all the other major countries are in favour. Since Connie’s arrival, the Commission, who had previously been cited as being against the move, have adopted a neutral stance and are busy preparing a scenario for how the higher target could be achieved if it were adopted.

The logic of a higher target and tighter caps is inescapable for those who support the principle of carbon pricing via emissions trading. Rather than creating regulatory uncertainty through discussions about price floors or limits to banking, a tighter cap would be the most efficient way to increase the value of investments in abatement technologies. There is more than enough slack in the system to reduce allocations and still not require drastic cuts from industry. The power sector has always been required to shoulder the effort to meet reductions and is almost certainly set to continue to do so. According to leaked information contained within the Commission’s report, all it would take is for 1.4 bn tonnes of permits to be set aside in a reserve and the ETS could comfortably take us to our higher target. This is important, as Yvo de Boer correctly said, it would be a piece of cake for the EU to meet its current unilateral target – if we want to keep pace with other countries who are embarking on large investments in low carbon solutions we need to up our game. The signs this week indicate that this is more likely than we had thought and this is very welcome news for the environment and for the carbon market.

New data released today reveals greenhouse gas emissions across the EU are in steep decline. Emissions covered by the EU Emissions Trading Scheme between 2008 and 2009 dropped by 11%, following on from a cut of 6% the year before.

This would be welcome news for the environment and provide a silver-lining to the grim economic recession that has contributed to the cuts, if it were not for one thing: unless caps are tightened there will be no overall reduction in pollution levels. Permits issued under the EU trading scheme can be banked forward indefinitely meaning they will sooner or later be used to pollute.

The 11% drop in 2009 has left the caps on European emissions higher than actual emissions for the first time since the second trading phase started in 2008. The first phase of trading from 2005-07 had exactly the same problem with caps languishing high above actual emissions thanks to Member States handing out overly generous allowances. This phase was meant to be tougher but the effect of the recession combined with continued generous allowances to heavy industry has but pay to that.

Overall there were 62 million more permits in circulation last year than there were emissions. An additional 70 million were released for sale in auctions taking the total surplus to 142 million. But this masks the fact that there is a tug of war going on between the power companies of Europe and heavy industry. Power generators saw their emissions fall by 119 tonnes (8%) last year but that still left them 124 tonnes short of permits. On the other hand heavy industry including steel and cement saw a fall of 96 million tonnes (18%) leaving them with 185 million tonnes of permits spare or 30% more than they needed. If they were to sell them at today’s prices this would raise €2.4 bn with most of this money would coming from consumers of electricity.

This is significant because it is the heavy industries who have been the most vociferous opponents of Europe taking on tougher emissions targets. In fact these surpluses give them a very comfortable cushion against the effect of any future caps and enable them to make a profit if they choose.

A decision about future caps on emissions between 2012 and 2020 has to finally be reached in June of this year. At the moment, under the EU’s target of a 20% cut in emissions by 2020 this would mean a reduction in the cap of 1.74% a year. Today’s figures revealed that we are already half way to achieving that reduction level with a decade still to go. Given the cuts achieved to date, which can be banked, and the levels of reductions rich countries like the EU are now expected to deliver, it would seem tighter targets are the only sensible way forward.

Nevertheless some oppose tightening caps in a recession for fear that it will lead to demands for caps to be loosened in a period of economic growth. However, the purpose of the laws introducing caps is to deliver an environment outcome – tightening caps is completely in line with that objective whereas loosening them is not.

The arrival of Connie Hedegaard as the new Climate Action Commissioner has seen a subtle shift in the Commission position on whether or not to take on tougher targets and caps, hinting that a more ambitious target could be adopted ‘when the time is right’. In an article today she was quoted as saying: “To achieve a 20 percent reduction by 2020 is not nearly as ambitious today as it was two years back before the crisis”. A move to the higher 30% target would help to save the EU’s flagship emissions trading policy from becoming irrelevant by taking more permits out of the system more quickly.

The biggest challenge for the UK and the EU is to ensure that its growth out of the recession is sustainable – this means delivering real economic investment in new more efficient technologies. Flaccid caps on emissions will slow down this investment and mean a return to the status quo meaning more severe and costly cuts in emissions have to made later.

The rapid decline in EU emissions was predicted by many analysts in the carbon market so there is unlikely to be a sudden drop in price resulting from this new data. But it is certain that the lack of demand for permits is acting as a break on the market. With so many permits spare in the system the need for overseas offsets is very likely to decline.

More ambitious targets and tighter caps must be set if we want strong investment signals and the growth out of recession to be green. We hope the Commission will take this fully into account when it makes its recommendations later this year.

We've launched a brand new map and report today illustrating just how much offsetting is going on in Europe. Our new offset map allows you to explore where offset credits being imported into the EU originate from – for the first time it is now possible to see exactly who is buying what from where.

And what it reveals is that the majority of the offsets used come from just three countries: China, India and South Korea and that they are made up of credits generated from chemical plants, reducing emissions of HFCs and N2O. This is not a surprise since these are the cheapest credits available since it costs very little to destroy these powerful greenhouse gases. This has drawn criticism since it leads to huge profits for the companies investing in these projects. In addition, the investment delivers no environmental or social benefits beyond the carbon saving. Many argue specific regulations banning these emissions would be far more cost efficient way of uncovering these emissions cuts. However, without these regulations in place these emissions would have occurred so there is at least a clear carbon saving.

We’ve also been able to identify which companies are doing the most buying of offsets thanks again to a collaboration with Carbon Market Data. Spanish power company Endesa tops the list with their part-owners ENEL, an Italian power company, coming in second. Power companies are in general subject to tight caps so it is not surprising that they are big users of offsets.

But companies with as many or more permits than they currently need are also using offsets. ThyssenKrupp's Duisburg steelplant in Germany offset 56% of its emissions in 2008 and in the UK Corus is a big buyer of offsets despite having surplus emissions permits. It makes sense for companies to do this since they can either use the cheaper offset credits to comply with the caps and then sell the EU allowances they have been given for free for a profit, or bank them for use in the future when they will be even more valuable.

Our aim in releasing this new information is twofold. Firstly to demonstrate how well companies in the EU are adapting to the carbon constraints they now operate under and to challenge the assertions by industry lobby groups that a higher climate target in Europe would be ‘physically impossible’ to meet (as claimed by ENEL) or "fatal" to our steel companies as claimed by Eurofer.

But secondly we also wanted to open up the offsetting market to more public scrutiny so that companies using offsets would be more discerning in their choice of offset credits in the future. The next stage is to add more information to the map to make it easier to identify projects which are doing a lot for the environment from those that might actually be doing very little or even having an overall negative impact. If anyone has information that can help us do this we’d love to hear from you.

We published a new report today focused on the companies under the EU ETS who are currently building up nice fat surpluses of emissions permits. We launched it at a briefing for MEPs in the European Parliament - we got a good turn out and quite a heated debate ensued. There appeared to be quite a distinct North - South divide on this issue with representatives from Italy and Greece both stoutly defending those they fear will lose out if Europe goes ahead with a tougher target. But the overall message was that some of the biggest corporate lobby groups, currently trying to ensure Europe's targets remain weak, are also some of the companies currently profiting greatly from the scheme.

We were very grateful to work with the company Carbon Market Data to establish a picture of how the EU ETS is working at a company level since the information made available to the European Commission doesn't actually enable you to see this, as it just deals with individual installations. For companies like ArcelorMittal, the number one carbon fat cat, who own many sites in a number of countries they might have been hoping that nobody ever worked out just how flush they are in credits. Today we also heard that their ridiculous legal challenge against the EU ETS was defeated which ironically they might now be quite relieved about, given just how much money they can make from the position they find themselves in. But sadly this won't stop them and the trade association they work through, Eurofer, claiming that the sky will fall in if targets are increased. Hopefully at least there are now some MEPs armed with enough real information to challenge them on this.

Our aim in publishing the report was as ever to point out that trading can be effective if implemented correctly and we also focused on the companies who are being required to make deep cuts - the power companies. Sadly a lot of their effort is being cancelled out by buying spare credits from the fat cats who were handed credits far too generously. In fact, this scheme would have had more effect if we had just included the power sector and left most of the others out. Hindsight is a marvelous thing - perhaps the US can learn this lesson though as they consider what shape their legislation should now take - power first is the key.

Next up this week will be a second report accompanying an interactive map focused on the use of offsetting to meet caps in the EU ETS. For the first time exactly who is offsetting, what type of projects they are using and where they are getting them from will be revealed in a glorious technocolour googlemap. Again this reinforces the message that companies will find it far easier to hit future targets than they are claiming. More on this to follow shortly.

Environment Ministers meet on March 15th to discuss the EU's climate targets - we hope they will reach the obvious conclusion that caps can and must be tightened irrespective of what happens internationally. Only then can we cut down on the excessive profit making and start getting companies to make real investments in emissions cuts.