Has the UN-Governed Carbon Trading Scheme Had Its Day?

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There is a large and largely unseen transfer of money going on between the west and Asia (principally China and India) that if the average citizen were asked they would most likely have trouble seeing the value. I talk of carbon-backed offsets formerly known as Certified Emissions Reductions that are issued under the U.N.’s Clean Development Mechanism. The scheme is intended to reward investors in clean energy projects in developing countries. The logic is fine at face value, investors backing new power station projects have the option of various fuel sources and technologies, some cost more than others and some create more carbon emissions than others per unit of input material be it coal, natural gas, nuclear or whatever. By giving credits to projects that choose the most efficient technologies and the least polluting fuels the west encourages developing countries to make the “right choices. CER’s are internationally tradable and according to a Reuters article major buyers – usually large European polluters can buy the offsets and use them to meet the mandatory emissions reductions under the EU’s emission trading scheme.

Of the 425.4 million CERs issued so far by the UN panel managing this scheme, India has received 79.2 million and China 209.7 million. Each CDM trades for around 13 euros, meaning EU corporations have paid Indian companies something like one billion euros and paid Chinese companies not far short of three billion euros for the right to continue emitting carbon dioxide. Ultimately the shareholders and customers of these European corporations foot the bill in lower profits or higher fees respectively. Has it resulted in less carbon dioxide being emitted? Well no, in the case of all these CER’s purchased by European companies you have to say that in the year(s) they were purchased those companies did not reduce their emissions. Does it encourage them to reduce their emissions in the future? Possibly depending on whether it is cheaper to go on buying CER’s at 13 euros a shot or to invest in technology to reduce emissions in the future. To the core of the project does it encourage lower emission projects to be built in emerging countries? Well let’s see.

Reuters tells us a total of 520 Indian CDM projects have been formally registered by the U.N. governing panel while more than 850 others are in the development pipeline. China has 917 projects registered out of a total project pipeline of more than 2,100. In total, there are more than 5,300 projects in the CDM pipeline of which 2,317 have already been registered. A recent report in a different Reuters article advised that a $4.2-billion 4,000-MW coal fired power plant being built in the western state of Gujarat by Tata Power will not qualify for CER’s even though a very similar project being built next door by Tata’s rival Adani Power did qualify. The Adani Power project for a 4,620 MW power station won CDM approval in December as the world’s first super-critical coal-fired plant, set to get more than 18 million CERs by 2021.

Investors claim the 26.5 million CERs the Tata project would have earned by 2020, valued at 318 million euros ($419 million) was part of the justification for going for the more expensive but less polluting super critical technology. But experts said it probably would not have been factored into the calculations prior to actually receiving approval. Which begs the question why is the EU paying all this money to Indian and Chinese investors when the projects stand up on their own account? The coal burning super critical steam technology is said to add up to 10% to the capital cost of the plant but is estimated to boost the thermal efficiency from the 36-40% range to 40-45%, gaining more than 10% more energy from every ton of coal burned. With rising thermal coal prices this is a payback investors realize many times over during the life of the plant.

Both China and India have realized they have major environmental issues with their rapidly industrializing economies and China in particular is investing billions in more environmentally friendly methods of power generation and industrial production. Why are EU countries, many of them a fraction of China’s size paying the country to invest in the latest technologies when China (and increasingly India) has already committed to doing it anyway? Meanwhile those European polluters are still polluting. You have to ask what’s the point?

–Stuart Burns

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