Energy Probe

This is no way to run a planet

Posted on December 18, 2009 by energyprbe

William Watson
National Post
December 18, 2009

The leaders in Copenhagen will reach some agreement. Politically, they have to…

As world leaders arrive in Copenhagen, luggage filled with deficit-financed public funds to facilitate the do-or-the-planet-dies climate deal that is the object of this weekend’s last-minute, round-the-clock deliberations, the question arises: Is this any way to run a planet? “Deliberation” is not the right word, by the way. Nothing done by 200 negotiators at three o’clock in the morning on an artificial deadline will be deliberate. Yet deliberate is exactly what’s needed when contemplating large-scale changes in how the world — the world, the whole world — does business.

Even if your level of warming skepticism doesn’t reach as high as the average on this page, you’ve got to wonder whether last-minute all-nighters are the best way to do anything serious. Remember how we got the Meech Lake Accord: Brian Mulroney locked the premiers up and wouldn’t give them access to a bathroom until they’d made a deal. Or think of how the U.S. is reforming health care. It’s a political bazaar involving one president and 535 sole-proprietor politicians in Congress. Their handiwork is now at 2,000 pages and counting and only someone taking heavy doses of imagination-enhancing drugs could believe the new system they’re designing will work right.

Now multiply that by 200 countries (albeit some of them with not many more than 535 people), let many of the countries (such as ours) send over a full range of domestic political actors so that all their usual domestic peccadilloes are played out before the whole world, add in several hundred NGOs, almost as many big corporations, unknown numbers of guerilla-comedy groups, thousands of increasingly agitated protestors (many probably funded, at least indirectly, by the governments they despise), and thousands more reporters all looking for stories that are novel, dramatic and, the one absolute requirement, photogenic, and tie it all up with last-minute fly-ins by 120 heads of government and the chance of anything reasonable being decided is about as great as the chance of Al Gore and Bjorn Lomborg or David Suzuki and Larry Solomon agreeing on global warming.

Deep inside any good economist there’s a little bit of anarchist: we don’t mind disorder, we favour letting people go their own ways. But what’s going on in Copenhagen seems just crazy. The lead news story Tuesday — the very first story among all the things that had happened in the whole world that day — was how a comedy group, the Yes Men (not even the Yes People), had scammed the Canadian government by putting out a press release written on official-looking Government of Canada stationery and posted on an official-looking Government of Canada website that announced a big new shift in Canadian climate policy toward Africa. How droll! How clever!

It seems all reporters have now had courses in post-modernism, so instead of this being a bit of an outrage, and certainly a joke on the media people who initially fell for it, it turned into significant commentary — which is what reporters aren’t actually supposed to do — on the Canadian government’s supposedly inadequate climate policies. I say “supposedly” on the off chance you haven’t yet bought into the revealed media truth that our policies are in fact extremely inadequate. All the NGOs say they are, so they must be. Or at least that’s what the average reporter on the Copenhagen beat seems to think.

The average reporter had better wake up and understand that for a certain demographic out here, when this-or-that environmental group gives the Government of Canada its daily satiric award for inadequate greenhouse-gas policies, that actually persuades us that the Government’s refreshing refusal to play the hypocritical promise-anything-deliver-nothing game is really what the world needs more of.

The Government of Canada we can have some respect for. Not unconditional respect, as readers will know, but some. It was elected by several million Canadian voters. In devising its policies it probably heeds the opinions of several hundred thousand more who didn’t vote for it last time but whose minds it hopes to change next time round. But no Canadian voted for the Yes Men. Despite years of trying, the Canadian political party the Yes Men most likely favour (the Greens) hasn’t won a single seat in parliament, out of more than 300 available, this despite its leader’s dramatic overexposure in the media. Why does the Yes Men’s opinion — on anything, let alone a public policy question of considerable importance — merit our attention?

Likewise, although Silvio Berlusconi was elected by several million Italians, because his politics are not modishly Left and because he has a Tiger-ish attitude toward women, when some deranged activist breaks his nose and knocks out a couple of his teeth by hurling a souvenir at him, that is occasion, not for outrage or for universal condemnation of violence displacing democratic politics, but for something very close to amusement.

I suppose the 120 leaders will come up with a document to sign in Copenhagen. The political and media stakes are too high for them not to. We can only hope what they do sign will have been worked out weeks ago, behind closed doors, before their visit to the Copenhagen Zoo.

Aldyen Donnelly: The not-so-secret Copenhagen tax

Posted on December 17, 2009 by energyprbe

There is nothing "secret", as suggested in a recent article by Kevin Gaudet, about new global tax proposals being discussed in draft treaties at Copenhagen. Every one of the new taxes outlined in the article was included in a set of options appearing in brackets in the draft Copenhagen agreement for negotiators that was published in October and I circulated and commented on in early November.

What is happening now is that a number of different revised drafts—each containing one set of proposals—are circulating in Copenhagen. They are all labeled "secret" simply because none of them are officially sanctioned negotiating text. Each revised draft has its proponents, and few of the proponents for any one draft appear willing to consider alternatives to their draft.

This is the ultimate negotiating break down.

The single largest concern is that our negotiators are now focused on one task—finding ambiguous enough language to put in one document that parties who cannot agree on key principals can create the appearance of an agreement, of some sort, by the end of the week. It is exactly this kind of "treaty-making" strategy that led us into the Pacific Salmon War and the Softwood Lumber Dispute.

When the negotiators shift from trying to reach agreement to trying to put text in place that fakes the appearance of agreement, serious and costly future trade disputes are the inevitable result.

In the Copenhagen context, one VERY large problem is the conflict between how US/Japan and EU/China will read the wording regarding international taxation and Official Development Assistance ("ODA", "aid"). Any final test will suggest that nations must keep their pre-existing ODA commitments and any new global agency-administered taxes and developing nation assistance agreed to in the Copenhagen agreement shall be in addition to those pre-existing aid commitments. This provision was included in the Kyoto Protocol—but immediately after ratifying the Kyoto Protocol, Japan cut US$4 billion out of its long-standing international aid commitments and created:

a US$2 billion budget set aside for Japanese government CER (developing nation credit) purchases

a US$1 billion budget set aside for new international Human Resource development initiatives and

a US$1 billion budget to finance domestic tax credits to reimburse Japanese companies for their CER purchases.

Japan openly cut back their ODA budget to offset 100% of the international cost component of their Kyoto Protocol commitments (see this Japan Times article). The UN then failed to declare that Japan was breaching the Kyoto Protocol.

The US has learned from that history.

Every US contact I have assures me that every dollar that the UN/World Bank picks up in new revenues from any final Copenhagen agreement will be deducted from existing US commitments to the UN and other ultra-national development initiatives.

The huge challenge for Canada is that the implied incremental costs of the new global taxes are so large, relative to our current ODA spending, that we will be the only G8 nation unable to offset the new costs with ODA cuts—even though we already dedicate a higher percentage of our GDP to ODA than the US does. Almost 100% of EU27 ODA is tied to European direct investment in developing nations or Asian consumer product sales, particularly in the chemicals, pharmaceuticals and auto industries. Europe’s auto sector is much larger than North America’s, largely due to Asian and African export sales.

For these reasons, the quotation attributed to Alberta Minister Renner in today’s Edmonton Journal is a cause for concern: "As long as there’s limits on the amount of funds that would flow into an open market, I think we could live with that," Renner said. "There’s been talk all along to the degree of which we would participate in a North American or national market."

Not sure what this means, but it could mean that Renner is now aware of what the Japan/US play really is.

Anyway, I can assure you that if/when the US and Japan cut existing ODA to offset any new commitments outlined in a final Copenhagen agreement, the EU27 and China will immediately deem that a breach—even though they let Japan get away with it so far. This will launch trade wars which will have massive and potentially uncontrollable implications for Canada.

As an aside, Canadian negotiators should also note that President Obama has publicly stated his intent to design the US domestic offset system to ensure that it generates new revenues for large US agri-business. The President notified the industry of his desire to cut direct government subsidies to these businesses, while assuring them that they will not experience revenue losses—because the new US domestic cap and trade and offset system will replace government subsidies with offset credit revenues.

By definition, this means that:

The US GHG Offset credit market will be dominated with "hot air", because the offset market will simply maintain funding for activities that are already underway and funded, at this time, by direct government subsidy. Most of the subsidies that Obama hopes to replace with GHG offset credit revenues are from programs that essentially pay US farmers not to farm.

The President simply proposes to shift agriculture subsidy costs form the US Treasury to families’ utility bills.

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Alberta’s Wildrose leader is no shrinking violet

Posted on December 16, 2009 by energyprbe

(Dec. 16, 2009) Danielle Smith is not entirely convinced there’s a climate-change problem. And that will make the many skeptics in her province happy. Continue reading →

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Alberta’s Wildrose leader is no shrinking violet

Posted on December 16, 2009 by energyprbe

Gary Mason
The Globe and Mail
December 16, 2009

Danielle Smith is not entirely convinced there’s a climate-change problem. And that will make the many skeptics in her province happy.

If recent polls are to be believed, Alberta’s four-decade-old Conservative government could be toppled in the next election – by an even more right-wing alternative.

Only in Alberta.

The Wildrose Alliance Party seems for real, however, even though it has only one MLA. Party leader Danielle Smith possesses an intelligence, charm and charisma that belies her days as a newspaper columnist. Her speeches and public writings are receiving more attention – and scrutiny. As such, remarks she made this week concerning the United Nations climate-change summit in Copenhagen caught many people’s attention.

In an address to the Canadian Club of Calgary, Ms. Smith urged Ottawa not to sign on to any accord in Copenhagen. Instead, she said, Canada and the provinces should find their own homegrown measures to slay the problem of rising greenhouse-gas emissions.

That is, if there’s a problem at all.

Ms. Smith, it appears, is not entirely convinced. And that will make the many climate skeptics in her province – and across the country, for that matter – deliriously happy. “The science isn’t settled,” Ms. Smith told her Canadian Club audience. “If we’re going to embark on this path, we’ve got to be darn sure that the science makes sense.” She quoted from Lawrence Soloman’s book The Deniers , which details studies that contradict the science supporting claims of man-made global warming.

The crowd lapped it up.

But Ms. Smith wasn’t done.

In an opinion piece that appeared in the Calgary Herald this week, Ms. Smith questioned spending billions of dollars on carbon-capture technology that “won’t yield results for decades,” denounced cap-and-trade schemes and carbon taxes and pretty much gave the thumbs down to UN plans to send billions to help developing countries cope with the impact of climate change.

As top-to-bottom denunciations of climate-change strategies go, it was quite impressive.

Not even Alberta Environment Minister Rob Renner denies the existence of global warming. Or that the art of extracting oil from Alberta’s oil sands contributes to it. And he’d like to do something about it, honestly. As long as it doesn’t hurt the economy. Not the most progressive outlook on climate change, admittedly. Yet, it seems almost Suzukian compared with the view taken by Ms. Smith.

For someone emerging as a major player on the Canadian political scene to come out and effectively question the existence of global warming, well, that takes more than a little chutzpah.

Or maybe just naiveté, of which I think Ms. Smith can certainly be accused.

Whether or not she accepts it, the world is moving on climate change. Achieving consensus will be difficult, but even reluctant joiners such as China and India now understand that the world’s economy will be powered, in part, by the changeover from fossil-based fuels to clean technologies.

They accept, too, that their countries are contributing to a carbon dioxide problem and that they’re going to need to address it sooner than later or risk facing the wrath of a world with which it hopes to trade.

If nothing else, U.S. President Barack Obama is driving a green agenda and is going to force trading partners such as Canada – and provinces such as Alberta – to play the game according to new, environmentally friendly American rules or risk losing billions in investment opportunities. Polluters need not apply.

So Ms. Smith can score easy points with like-minded and self-interested supporters if she wishes, getting rousing ovations with each skeptical utterance she makes. That’s fine, if not a little transparent. But, ultimately, it will be a position that hurts her province far more than it helps it.

To be fair, Ms. Smith isn’t saying there isn’t something Alberta could be doing to becoming greener – in the event this whole global warming thing turns out to be real. There are practical ways Albertans can reduce energy use and improve energy efficiency, she said this week. Tax incentives could be used to help individuals and businesses improve energy efficiency in their homes.

An idea, perhaps, borrowed from one of the many governments around the world that have been giving green tax breaks for years.

But most of these same governments recognize that sealing windows and doors isn’t going to get it done when it comes to reversing the impact of rising greenhouse gases. Then again, if you’re not sure there’s a problem to begin with, what’s the big deal?

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Copenhagen another costly UN failure?

Posted on December 14, 2009 by energyprbe

(Dec. 14, 2009) No one really has any idea what climate change deal might come out of Copenhagen. While most Albertans probably sympathize with the general objective–burning less carbon-based fuel–there are two ways to get there: A sensible way which will probably work, and the political Copenhagen way which will prove to be another costly United Nations failure. Continue reading →

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Copenhagen another costly UN failure?

Posted on December 14, 2009 by energyprbe

Danielle Smith
The Calgary Herald
December 14, 2009

No one really has any idea what climate change deal might come out of Copenhagen. While most Albertans probably sympathize with the general objective–burning less carbon-based fuel–there are two ways to get there: A sensible way which will probably work, and the political Copenhagen way which will prove to be another costly United Nations failure.

Canada was quick to sign on to the 1997 Kyoto treaty, which committed the country to reduce emissions to six per cent below 1990 levels by 2012. The federal Liberal government then proceeded to do precisely nothing for the next decade to try to achieve it, leading to a mad scramble in the last few years. Governments have pledged billions of dollars on costly schemes in an attempt to show the world they intend to catch up. Alberta’s carbon capture and storage initiative may cost as much as $3 billion per year and won’t yield results for decades. A federal cap and trade program, which will be particularly hard on Alberta and Saskatchewan, could cost our national economy as much as $46 billion a year.

The enormous global wealth transfer being contemplated under a new deal at Copenhagen is the most troubling aspect of the talks. The World Bank estimates that developing nations will need $400 billion per year to develop clean energy rather than coal, and another $150 billion per year to adapt to changing climate conditions. One proposal for how this wealth transfer would be achieved is to turn carbon dioxide into an internationally traded commodity, then tax each trade to build the fund. Who would control the fund remains an open question, but the potential for political abuse is staggering. Canadian taxpayers should not submit to being taxed by a foreign authority over which they have no democratic control–this is as true of the United Nations as it is of the United States.

Then there is the question of the science. The embarrassing revelations contained in leaked e-mails suggest some scientists have been involved in an effort to understate the extent of scientific uncertainty regarding the case for man-made emissions causing global warming. Lawrence Soloman’s book, The Deniers, details study after scientific study casting doubt on some of the key claims behind the global warming “consensus.” His conclusion? “Global warming may be a problem, but it’s not a certain problem, and it’s certainly not one of epic proportions, as Al Gore would have us believe. It is one environmental concern among many, whose science is far from settled.”

Today, however, we have politicians talking like scientists and scientists talking like politicians. “Consensus” is a political term, not a scientific one. It is fair to say that a majority of scientists agree with the prevailing view; it is not fair to say there is a consensus. There is a difference. Consensus implies that most everyone agrees. For instance, it is accurate to say a majority of Alberta voters voted for the Progressive Conservatives in the last general election. It is not accurate to say Albertans reached a consensus to be governed by the PCs.

But setting aside the climate change question, there is a practical reality. The world is plainly in a transition away from high-carbon fuels and consumers want green energy options. There are tangible and practical ways that Alberta can assist this transition. Reducing energy use and improving energy efficiency should be top priorities. We should support research into clean coal, hydro, biomass, geothermal, hydrogen, nuclear, wind and solar power, while improving how we meter and price electricity. We should provide broad-based tax incentives to help individuals and businesses improve energy efficiency in their homes, buildings, vehicles, appliances and machinery. We should address the barriers to switching from high carbon fuels such as coal and gasoline, to lower carbon fuels such as natural gas.

But most of all we must avoid the fallacy that governments can predict winning technologies by providing direct subsidies to individual firms, or that having the government ration and tax carbon dioxide is a better way to achieve the greener world Canadians desire. There is a will to reduce emissions. But it must be left to each country– and each province–to find the best way.

Danielle smith is the leader of the wildrose alliance. She can be reached at danielle@wildrosealliance.ca

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Aldyen Donnelly: Kyoto discussions hang Canada (and Australia) out to dry

Posted on December 14, 2009 by energyprbe

Question: I am concerned about this clause in the current draft of the Ad Hoc Working Group on Further Commitments for Annex I Parties under the Kyoto Protocol (AWG-KP) and the Ad Hoc Working Group on Long-term Cooperative Action under the Convention (AWG-LCA).

The clause I am most concerned about tracking is the following:

In the AWG-KP Negotiating Text:

F. Implementation
13…Annex I Parties shall not resort to unilateral measures against imports from developing countries on the grounds of protection and stabilization of the climate. Such measures would violate the provisions and principles of the Convention, in particular the principles established by Article 3, paragraphs 1 and 5.]

Brackets had already been removed from this clause in the negotiating text for the Kyoto Protocol-based version of the Copenhagen treaty in November, which normally would signal that these words are in and that is settled.

Few clauses cause me more concern than this one. First, it guarantees that the treaty will fail to deliver any global GHG reductions. More importantly, this clause delivers massive economic benefit to China, India, the Persian Gulf, Nigeria, Mexico, the EU and US at the direct expense of Canada and Australia—the developed world’s leading fossil fuel, building-product and food exporters.

If we got everything else right in the Copenhagen agreement, Canada still could not sign it if this clause is maintained. The good news is that it is most likely that a World Trade Organization tribunal would have to uphold a Canadian challenge to any tariffs on our exports based on this clause—as well as any GHG tariffs that discriminate against products on the basis of how they are made (GHG intensity), as opposed to their content (fossil carbon content).

That is, as long as Canada neither: (1) signs a treaty that includes this language, or (2) agrees to cross-border trade in any form of GHG or carbon quota instrument.

Please note that this clause graphically highlights the most significant difference between the Kyoto and draft Copenhagen treaties and the highly successful Montreal Protocol (to curb production and consumption of chemicals the release of which deplete the ozone layer, "ODSs").

In the Montreal Protocol, developed nations committed to reduce the production and import (e.g. consumption) of substances the production or consumption of which resulted in the release of ozone-depleting substances to the atmosphere. Therefore, by definition, the developed nation export markets for developing nation-produced ODSs shrank at the same rate that domestic developed nation production of those substances shrank. Developing nations also committed to reduce production and imports over a schedule that started later and was longer in duration than the schedule for developed nations.

The known success of the Montreal Protocol combined with the UN’s continued incorporation of clause 13 in the AWG-KP text is a testament to the UN’s utter lack of true commitment to the stated environmental objectives of the Copenhagen process.

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The gas of life

Posted on December 13, 2009 by energyprbe

Lawrence Solomon
Financial Post
December 12, 2009

Western carbon dioxide emissions increase plant yields in the Third World. So why are they asking for reparations?

At Copenhagen, Third World countries are demanding hundreds of billions of dollars in reparations from the West for the consequences of the West’s fossil fuel burning, among them droughts and crop failures.

Third World countries have it backwards. The West’s CO2 emissions have been increasing crop yields while helping to ease the Third World’s water shortages. Rather than plead for reparations, Third World governments should offer a paean to Providence.

The bureaucrats at Copenhagen dread high CO2 levels. The biosphere craves them. Plants evolved when CO2 levels in the atmosphere stood at a healthy 1000 parts per million, two-to-three times today’s paltry level of about 380 parts per million. Plants crave CO2 so much that commercial greenhouse operators often enrich greenhouse air with CO2 — also known as nature’s fertilizer — to levels of 1500 parts per million, or four times that of our current atmosphere.

Since humans began adding CO2 to the planet’s atmosphere, taking plants off their starvation rations by creating a planet-wide greenhouse, plants have thrived. Data from NASA satellites, which since the early 1980s have been tracking the amount of biota on Earth, vividly demonstrate the results. As CO2 emissions grew in leaps and bounds, so did plants — the data shows planet Earth is now greener than when those satellite measurements began.

Growth in greenery varies from country to country, and within countries, because climatic factors are so many and so varied, but the overall trend is clear, and especially in the Third World. The Indian subcontinent, the Amazon, the tropical countries generally, all show marked improvement, with studies pointing to improvements in carbon dioxide levels as an important factor.

China, which includes some of the most resource-stretched regions on the planet, provides the most dramatic demonstration of the boon in biota. As shown in a 2007 analysis by academics at the country’s prestigious Beijing Normal University, China’s plant growth increased by an astounding 24 % over the 18-year period studied, 1982 to 1999. The Chinese analysis, which like many others was based on satellite data, notes that China’s resource-constrained regions sometimes did particularly well. In water-constrained Northwest China, for example, plant growth increased by 29%. In Northeast China and the Tibetan Plateau, where temperatures ordinarily place severe limits on vegetation, plant growth increased by 30%. South China and East China, where sunlight is a limiting factor, saw plant growth increase by a still-impressive 19%. Changes in CO2 during those 18 years correlated well with the changes in vegetation.

That plants love CO2 comes as no surprise — CO2 is not only their food, it is a gas to which they are superbly adapted. When the air is rich in CO2, plants don’t need to work as hard to breathe it in, letting them reduce the number of stomata, or air pores, on the surfaces of their leaves. Fewer pores means the plants breathe out less water vapour, letting them conserve moisture and better survive droughts. CO2 also helps plants survive droughts and other adverse conditions by extending their root systems, allowing them to collect minerals and moisture from afar. Through other mechanisms, CO2 protects plants against insect infestations, soil salinity and other environmental threats.

This gas — also known as the gas of life — is healthful and helpful to humans, too. CO2 not only boosts agricultural yields, it boosts the antioxidant and vitamin content in plants, as well as their essential minerals. Also importantly, CO2 helps make hospitable marginal areas of the world that would otherwise be inhospitable.

Industrialization in the West, along with the fossil fuel burning that it has entailed, has been a win for the West and a win for the world, including the Third World. The colourless, odourless, tasteless gas called CO2 is indispensable to life and, because China and India are certain to rapidly increase their CO2 emissions, the world will soon be getting more of it. They say you can have too much of a good thing. With CO2, the science tells us, the planet is far, far away from reaching its cornucopia potential.

Lawrence Solomon is executive director of Energy Probe and Urban Renaissance Institute and author of The Deniers: The world-renowned scientists who stood up against global warming hysteria, political persecution, and fraud.

Sources for this column:

Comprehensive analysis of the impact of climatic changes on Chinese terrestrial net primary productivity

A signal of increased vegetation activity of India from 1981 to 2001 observed using satellite – derived fraction of absorbed photosynthetically active radiation

CLIMATE CHANGE — Statement of William Happer Cyrus Fogg Brackett Professor of Physics Princeton University

Competing roles of rising CO2 and climate change in the contemporary European carbon balance

Posted in Climate Change, Energy Probe News | 1 Comment

The gas of life

Posted on December 12, 2009 by energyprbe

(Dec. 12, 2009) Western carbon dioxide emissions increase plant yields in the Third World. So why are they asking for reparations?

At Copenhagen, Third World countries are demanding hundreds of billions of dollars in reparations from the West for the consequences of the West’s fossil fuel burning, among them droughts and crop failures.

Sources for this column:

Comprehensive analysis of the impact of climatic changes on Chinese terrestrial net primary productivity

Competing roles of rising CO2 and climate change in the contemporary European carbon balance

Lawrence Solomon, Financial Post, Dec. 12, 2009

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Aldyen Donnelly: Fiddling with Cap and Trade: The Acid Rain example

Posted on December 8, 2009 by energyprbe

The conclusions outlined in this Toronto Sun article are completely wrong.

It says "The U.S. figure [17%] is derived strictly from cuts that can be achieved by capping greenhouse gases and trading emissions permits."

This is not true.

In fact, the 17% reduction derives strictly from the normal US capital stock turnover rate (40% of US power generation capacity has to be retooled or retired before 2020 on a business as usual basis) and the "additional measures"…"fuel efficiency rules for cars, renewable electricity standards and investments in "green" development in poor countries,".

In fact, the proposed US GHG quota allocation and trading rule adds no incremental reductions before 2030. In this way, the US federal cap and trade system is consistent with the California and Western Climate Initiative (WCI) cap and trade regime. EVERY US cap and trade system in history has relied ENTIRELY on the foundation of "mandatory measures" to achieve its emission reduction objectives. There is NEVER an incremental reduction associated with the quota allocation and trading rule.

Given the mandatory measures, the quota allocation and trading rule is a mechanism that governments attempt to use to shift economic rents in a manner different from the shift that the market will reveal without intervention. The reliance of the California/WCI system on the additional or "mandatory" measures, and the limited incremental role of the quota allocation, is explained in detail in the attached analysis and decision written by California’s Public Utilities Commission and Air Resources Board.

What is not explained in this very enlightening memo is the regulators’ rational for endorsing cap and trade.

It is very, very important to note that in US history, no cap and trade regime ever generated emission reductions. Every emission quota allocation is laid on top of a foundation of regulations or "mandatory measures". Compliance with the mandatory measures achieves emission reductions. Then, the US Congress lays a GHG quota allocation on top of those measures.

Through the quota allocation, Congress attempts to redistribute economic rents according to Congress’s objectives, in effect interfering with the efficient market response to the mandatory measures and ensuring that the market operates less efficiently than it otherwise might. More importantly, Congress has never successfully achieved its agenda through the emission quota and trading rule.

In every historical example, a subset of regulated market incumbents has been able to use the quota rule to their benefit, at the expense of US consumers, new market entrants and innovators, in particular.

The US SO2 market is a case study that tells this story quite effectively.

How the US SO2 Allowance Allocation and Trading Rule Effects a Wealth Transfer Within the US

For example, under the US Acid Rain regulations, every US utility-owned SO2-emitting power generation unit was assigned at least two mandatory SO2 emission limits: (1) an intensity limit (SO2/MMBTU heat input) and (2) an absolute annual limit. The SO2 regulation obliged regulated unit operators to apply for "SO2 permits", and these two limits were incorporated in the new permits. Then there was an SO2 allowance (quota) allocation to plant owners.

No plant operator can legally exceed either of the two SO2 emission limits outlined in the unit’s SO2 permits no matter how many surplus SO2 allowances that operator might hold.

Between 1995 and 1999, the EPA issued free US SO2 allowances only to the 425 oldest (built before 1970) and highest-emitting electricity generation units in the US. Over that 4-year period, the free allocation of SO2 allowances to those 425 units exceeded those units’ maximum physical capacity to discharge SO2 (at 100% capacity utilization without scrubbing technology).

The total allowance supply set aside for these old units equated to an average of 2.5 lbs of SO2 per MM BTU of maximum heat input capacity per plant. To put that rate in context, US EPA New Source Performance Standards ensured that every power generation unit built in the US after January 1, 1970 was designed and built to discharge no more than 1.25 lbsSO2/MMBTU heat input. In 1977, the US New Source Performance Standard for power generation units was amended to 0.8lbsSO2/MMBTU heat input.

In other words, all of these old SO2 program "Phase I" units could cut their SO2 emissions below 1.25 lbsSO2/MMBTU simply by installing 30 year-old scrubber technology. In fact, over 70% of the "reductions" to date attributed to the SO2 allowance market arose from the installation of scrubbers—before the end of 1996—at the nine largest power generation units in the US.

Why did these old plant operators suddenly invest in scrubbers in the fist year of the US Acid Rain Program? It is the consistent US tradition to rule that once/when a pollutant/discharge is regulated by the US EPA, affected plant owners can claim 100% depreciation, for tax purposes, on any capital expenditures related to the measurement, control or reduction of that pollutant. In US tax lingo this is called "expensing capital in the same year".

70% of the reductions that most analysts attribute to the introduction of the permit trading rule is actually industry’s practical response to the change in capital depreciation rate that is associated with any US emission regulation—whether or not it incorporates a market provision. Most of the academics and government agencies that report on the "success" of the US SO2 allowance market fail to acknowledge the capital depreciation provision or the fact that it is unrelated to the trading provisions to which they often, incorrectly, attribute 100% of SO2 reductions in the regulated pool of SO2 sources.

In 2000, the first year of Phase II of the Acid Rain Program, the EPA freely allocated SO2 allowances to all of the rest of the existing utility-owned US power generation units (over 5,000 units), where the free allocation equaled the units’ permitted emission levels. The free SO2 allocation to all (Phase I and Phase II) units last for a 35 year term.

Starting in 2000, the aggregate free allocation of SO2 allowances to the oldest 425 units fell to, on average, roughly 1.75 lbSO2/MMBTU heat input. But when you add the excess allowances that were awarded to the oldest US generation units over 1995 through 1999 period to the continuing allowance allocation to those units, if those units hoard their allowances they could continue to discharge SO2 at 1996 levels through 2014.

But the regulation also says that starting in 2000, any developer of any new US power generation unit has to buy 100% of the allowances they need to cover their SO2 emissions from the marketplace. And any operator who has a free SO2 allowance allocation continues to receive their schedule allocation for 35 years, even if/after they shut down the power plant to which the allowances were first allocated.

So, even though the typical new US utility-owned power plant discharges SO2 at 10% the rate of the 425 oldest plants, its developer has to surrender SO2 allowances to the EPA covering 100% of its SO2 discharges, and the new plant operator gets no free SO2 allowance allocation. The old plant owner receives free SO2 allowances through 2035, even if he shuts down the plant.

In other words, most of the US SO2 emission cuts since 1990 derive directly from the 1-year straight-line capital depreciation rate that came into effect in the US simply because of the introduction of a (any) new SO2 regulation. The remaining SO2 reductions were driven by the two (this is important…two) SO2 limits—one intensity and one absolute—that were written into every covered source’s operating permits. No regulated source can exceed its permitted emission limits, no matter how many SO2 allowances the source owner might have banked.

The full and intended effect of the SO2 allowance allocation is that developers of new, clean power generation capacity have to compensate owners for shutting down the oldest US power generation units through their SO2 allowance purchases. The free allocation of SO2 allowances to old plant owners was guaranteed for at least 35 years (50 years in some cases), even if the plant ceases operating, to ensure that compensation for the plant shut downs is earned for terms of at least that length.

Wash-Trading Dominates Existing Emission Allowances Markets

The unintended effect of the US SO2 allowance allocation and trading rule is that there are effectively no new entrants in the US electricity market, and there has been no productivity increase in the US electricity sector for the last 20 years.

Owners of the oldest power generation units earn higher returns to their other assets by shutting down plants and hoarding allowances. These operators do "lease" allowances for terms of 1 to 3 years to select new market entrants, who cannot operate without access to allowances. The allowance "leases" are constructed with swap agreements. After leasing operating rights from market incumbents for a number of years most new market entrants find they have little choice but to sell their new assets to an incumbent allowance holder.

Between 1995 and the end of 2002, 97% of SO2 allowance "transactions" reported by the US EPA to be trades between economically unrelated parties were "swaps". The allowance prices reported by the EPA over that period were largely imputed prices. Relatively small fees were paid on swap agreements, which fees reflect the real cost of an allowance "lease".

Over 80% of the reported "trades" in the EU CO2 allowance market to date are also swaps/allowance leases. This explains why it is ALWAYS the case that reported prices for future vintage CO2 allowances are a relatively constant increment (roughly 4% to 5%) higher than market prices for current vintage allowances, on every CO2 exchange—even when it is evident that short and long term market prices are declining.

For most transactions, the only cash changing hands is the difference between the nearest future market price and the reported spot market price (the one-year lease rate).

The US Acid Rain Program: Really a Market Success Story?

There appears to be a global consensus that the US SO2 market rule is a major environmental success story. The US Government Accounting Office (GAO) has found it an efficient regulatory strategy because: (1) regulated sources consistently under-utilize their allowance allocations and (2) the "market price" of US SO2 allowances is lower than economists had estimated it would be before the regulation was implemented.

But, as outlined above, older plant owners are highly motivated to shut down their plants and hoard SO2 allowances. The allowance trading scheme enables these market incumbents to drive up the price of US electricity while they block new market entrants. Apparent "under-utilization" of the originally excessive allowance supply is inevitable under these circumstances.

It is true that the apparent price of SO2 allowances is less than the marginal cost of control. But most years at least 5 newer plant operators fail to comply with their allowance holding mandates, because they are unable to buy (as opposed to "lease") their full SO2 allowance requirement. The fine for an SO2 allowance shortfall is $2,000 per allowance of shortfall plus 1.30 x the shortfall in additional allowances the following year. This tells us that the real market price for allowances exceeds $2,000 per tonne, at least in the years that certain operators are unable to secure their full allowance requirements.

And while academics and the GAO interpret the apparently low market price of allowances as a market "success", actual power generation unit operators who are not among the incumbents who have secured increased market power do not express the same view. The actual marginal continuing cost (operating costs plus capital cost recovery) of cutting SO2 emissions in the US is over $500/TSO2 (with 1-year straight-line depreciation for tax-paying entities) and up to $1,200/TSO2 (for entities that are not profit-earning and cannot take advantage of the capital depreciation benefit).

The current reported (apparent) market price for SO2 allowances is essentially meaningless. If you track SO2 allowance futures and spot market trades on the NYMEX, you will see 0 volume all of this week and most weeks.

Contrary to my statements above, the price imputed to US SO2 allowance futures is lower than the price imputed to current transactions. This has been true since 2005, when the US EPA introduced a rule that effectively cut the value of all allowances in half starting in 2010 and wipes this derivative out as a compliance unit by 2020. The EPA took this action to try to un-wrestle market control from incumbents, but so far the EPA’s intervention has failed. It was struck down by the US Supreme Court in 2008.

In the late 1970s, all members of the OECD pledged to cut national SO2 emissions 50% from 1980 levels by 2000. When all is said and done, how did the US rank in terms of performance relative to this SO2 reduction pledge?

Second worst among developed OECD nations. Canada ranked worst.

How did the world come to believe that such a failure of an emission management regime is the most effective emission management tool the world has ever seen?

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