Thursday, January 18, 2007
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Um.... isn't this how incentives work?
Fiona Harvey, the Financial Times' environment correspondent, reports that environmentalists are irked about the way carbon emissions trading is working out:
Factories in China and carbon traders are exploiting a loophole in climate change regulations that allows them to make big profits from greenhouse gas emissions trading.Now this is a story that the Wall Street Journal and the New York Times have also carried this story, and each time I read it I'm confused. Reading the articles, I get that CO2 and methane are the big contributors to global warming in the aggregate -- but I also get that per unit of emission, HFC is far, far worse, and far cheaper to correct. Doesn't it make sense that a market mechanism would focus on the low-hanging, cheapest fruit first?
The implication in these articles is that the carbon market is not working to reduce greenhouse gases, but from what I'm reading, it's working pretty well (though Chinese firms are reaping a large windfall). Greg Mankiw or someone else in the Pigou Club needs to explain all the hubbub to me. I understand if environmentalists want to increase incentives to cut greenhouse gas emissions even further; I don't understand why they think the current focus on HFC emission should be dealt with through direct regulation instead of the current set of arrangements.
It should benoted that there are other ways that the carbon trading scheme is imperfect. The focus on HFC can, perversely, undercut the Montreal Protocol's efforts to reduce CFC emissions (click here for more on that). The primary thrust of these articles, however, is that the market is not working -- and I don't see that.posted by Dan on 01.18.07 at 08:48 AM
Of course you are making the assumption that the average global environmental activist is actually more interested in cutting carbon emissions than limiting industry and obstructing capitalism for its own sake.posted by: Mark Buehner on 01.18.07 at 08:48 AM [permalink]
Are envivomental activists actually unhappy about this? They have quotes from two executives at carbon trading companies. I don't see any tree-hugger groups mentioned here.posted by: AlanB. on 01.18.07 at 08:48 AM [permalink]
Here's one Pigou Club member's response:
The views expressed in the above link should not be taken to be endorsed by the Pigou Club, Greg Mankiw, or anyone other me and my labrador retriever.posted by: Mike Moffatt on 01.18.07 at 08:48 AM [permalink]
"Are envivomental activists actually unhappy about this? They have quotes from two executives at carbon trading companies. I don't see any tree-hugger groups mentioned here."
The only environmentalists speaking for carbon trading are those on the carbon traders payroll.
Carbon trading, Kyoto's real goal, was and is a scam designed to be validated by attachment to the global warming debate. Milken, that old crowd, are big on it, Enron was. China need only invent reductions to receive money. Carbon traders take their percentage, big players can move money around to avoid taxes, export rules, etc.
"Distort" the market. Translated: market not working to my favored interests. Heard the same when the Euro traders complained about some East European nations recording amazing carbon reductions.
These markets was made to launder. Diplomatic note: the "father" or "grandfather" of Kyoto was Maurice Strong, now hiding in China from US authorities due to his involvement with another scam he helped construct -- UN Oil for Food.
The carbon credit markets will collapse when Bush says "no way" and the EU is blocked from increasing caps to inflate their deflated market.posted by: Karl on 01.18.07 at 08:48 AM [permalink]
Doesn't it make sense that a market mechanism would focus on the low-hanging, cheapest fruit first?
He said regulations to force factories to fund HFC reduction from profits might work better than allowing them to benefit from the carbon markets, or �perhaps the World Bank should fund the installation of scrubbers�.
These people don't understand markets, and they don't trust them. What they understand and trust are profit-destroying compulsory legislation and government subsidies.posted by: rosignol on 01.18.07 at 08:48 AM [permalink]
Isn't the gag that the Chinese are deliberately creating HFC capacity/production just to cash in on the carbon credits?posted by: Alain on 01.18.07 at 08:48 AM [permalink]
The ethical problem with carbon trading is that it establishes that the Chinese polluter has a 'property right' to pollute - in essence, the market is paying him to reduce his pollution. The problem with that is that in most people's view the atmosphere which is being polluted is community property, and the polluter should be paying to use it, not being paid not to.
The economic problem is that carbon markets are entirely artificial. Either we know how much a certain amount of emission 'costs' in damage done, or we don't. If we do, we can use a Pigouvian Tax at a much lower administrative cost than setting up this whole trading regime. If we don't, this isn't the sort of thing the market is going to tell us - the damage in question is not internalized and is communal in the 'public good' sense - I can't pay to reduce carbon emissions, and reserve that reduction to avoid sea-rise in the area of my property. So carbon trading is really either a vector for charity (if people buy them voluntarily) or a vector for caps on emissions (if government requires them). In the latter case, that implies that instead of knowing the cost emissions impose, we know the optimal amount of emission. Since, to get the optimal amount, we need to know the costs AND the benefits (i.e. the value of the product), this assumes even more knowledge that we don't have than the Pigouvian tax assumes.posted by: rvman on 01.18.07 at 08:48 AM [permalink]
Isn't the gag that the Chinese are deliberately creating HFC capacity/production just to cash in on the carbon credits?
No. The gag is that China gets carbon credits in the first place- they're exempt from Kyoto due to being classified as a 'developing nation'.
Kyoto is a bad treaty.posted by: rosignol on 01.18.07 at 08:48 AM [permalink]
In these deals, climate credits, by reducing the cost of operation, are creating economic incentives to maintain or expand production of an ozone depleting substance that countries are supposed to phase out under the Montreal Protocol, as explained in the BlueClimate entry you link to. (Credits are earned for scrubbing HFC-23 out of emissions from plants to produce HCFCs.) That seems a perfectly adequate reason for enviros to be "irked."
If the FT is correct that HCFC producers are earning windfall profits then the complaint that the market is flawed warrants serious attention. Real estate can create windfalls because unique assets reveal hidden value, or gain it due to changes in circumstances. More apropos, technological development can create windfalls where a technology is so superior that in some sense it faces no real competition. Are HFC scrubbers really so much better than other greenhouse gas reduction technologies that they can command premiums far above the norm? Is China's political and legal regime really so much more stable than competing jurisdictions that it justifies such premiums? Or are credit buyers somehow failing to acquire complete information about the available alternatives?
I agree. I don't get it at all.
If it's cheaper to reduce greenhouse gas emissions by closing an especially noxious and inefficient plant in China than installing expensive scrubbers on more efficient plants in England, then the world should choose the former. Cap and trade systems are designed precisely to identify opportunities like this. So what's the problem?
I am very puzzled about one thing, though: I was under the impression China was not part of the Kyoto Protocol. If you're not part of the "cap", then including you in the "trade" is worse than futile.posted by: Scott Wood on 01.18.07 at 08:48 AM [permalink]
Here is one answer:
The Montreal Protocol (on ozone depletion) seeks to eliminate the production of ozone depleting chemicals. HCFC-22 is one such chemical.
However HFC-23 is a byproduct of producing HCFC-22. HFC-23 is also a very powerful greenhouse gas, as you note. The Kyoto Protocol (on climate change) seeks to reduce the emission of greenhouse gases.
So there are two international treaties working at cross purposes. The credits (and $$$) available under the climate convention for getting rid of HFC-23 thus provide an incentive for the production of HCFC-22. Further, I have seen reported that the windfall gained from eliminating HFC-23 is actually being used to invest in the production of more HCFC-22, so that more HFC-23 can be produced, and more credits ($$$) obtained. And it turns out that HCFC-22 is also a greenhouse gas.
Thus you have two international treaties working at cross purposes, as well as the ability in this context to "print money." Not a good recipe for market mechanisms.posted by: Roger Pielke, Jr. on 01.18.07 at 08:48 AM [permalink]
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