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Policy Brief – China’s Emissions Trading Scheme and Targets

By Sieren Ernst1 and Dr. Nicholas Linacre2

 1Principal and Founder, Ethics & Environment, email:

2Fellow, Faculty of Science, University of Melbourne, email:


On his trip to the United States in September, President Xi Jingping announced that China would implement a national emissions trading system by 2017. The announcement was a part of a joint statement with U.S. President Barak Obama that reaffirmed the two countries’ interest in curtailing global climate change in the lead- up to the Paris Climate Conference known as COP21.[1]

The joint Sino-American announcement specifically avoids using the term ‘cap-and-trade’ to describe China’s envisaged national system, though it has been reported as such in the English language press. Linguistic ambiguity is common for high-level Chinese government announcements in order to allow for leeway in implementing regulations. Despite foreign reporting of ‘cap-and-trade’ we believe, in this case, that the term ‘emissions trading’ more accurately describes what has been and will unfold in China.

As a part of the announcement, China reiterated its 2030 climate goals, released in preparation for COP21, of reducing the energy intensity of industrial and power emissions as a percentage of GDP by 60 to 65 percent by 2030, and increasing the non-fossil fuel power generation to 20 percent of the national total, a policy that extends and improves upon the existing targets of 40 to 45 percent energy intensity improvements by 2020 and 15 percent non-fossil fuel energy generation by 2020. China’s 2030 targets represent an improvement on the baseline trajectory. The key points are summarized in Box 1.

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The announcement of a national emissions trading system in China has prompted commentary that China is implementing a policy that could not pass through the U.S. Congress. Such claims exaggerate Chinese actions and are based, in part, on the idea that China is implementing a cap-and-trade scheme in the manner that often exists in other countries, with a steadily declining cap.

We believe that a California or EU style cap-and-trade emissions trading system, or even national targets that produce real reductions in total emissions are still a prospect for the future. China’s existing sub-national or regional schemes are often described as cap-and-trade schemes, but this is at best problematic and at worst potentially misleading. We therefore go into some detail on the operations of these schemes later in this document and explain how current Chinese sub-national schemes differ in important details from cap-and-trade schemes as popularized by California and the EU ETS.

China’s choice of a policy—emissions trading—requires a robust, transparent, consistent and accurate monitoring, reporting, and verification (MRV) system for greenhouse gas emissions and their associated regulatory oversight. This is something China lacks. This weakness, when coupled with the existing patchwork implementation of emissions reduction policies at the regional level, and the leeway that is built into the national targets, means that any international comparison or even internal analysis of China’s targets must be considered to have a wide margin of error. This has been the case for many years in China, and we do not see recent developments as changing the fundamental dynamic of uncertainty in China’s level of effort to reduce emissions.

In the following sections we discuss: (i) potential evolution of China’s national emissions trading scheme from the regional schemes, (ii) emissions trading design elements, (iii) the problem of transparency, (iv) model development and assessment of impacts of announced emissions policies, (v) new and prospective policy initiatives, and finally we provide conclusions in section (vi).

(i) Evolution of a National Scheme from the Regional Schemes

China already has several existing regional or sub-national pilot emissions trading schemes that began operation in 2013 and 2014 as a part of the of the 12th Five Year plan in the cities of Beijing, Shanghai, Tianjin, Shenzhen, Chongqing and the provinces of Hubei and Guangdong. Established at the impetus of the State Council, the regional schemes are designed and implemented at the provincial level, which results in differences in their targets, coverage, and monitoring and verification plans.

There is not yet a clear indication from the Chinese government if the national scheme will replace the sub-national schemes and, if so, how these sub-national schemes might be grandfathered into the national scheme. Despite this uncertainty, it is our view that it is likely that any national emissions trading system will continue the existing pattern of development—not with a national system of uniform rules being announced in 2017—but with national targets informing the development of sub-national trading schemes that will continue to evolve through the 2017 period and beyond with some form of linkage between the sub-national schemes.

Some evidence for this view comes from the recent announcement that Zhejiang approached the Hubei Development and Reform Commission to join its market, and Gansu and Anhui announced intentions to launch a joint pilot carbon exchange in 2015.[2] The national government will likely continue to introduce rules and guidance for specific sectors, or even cities, but with each system continuing to have different targets, rules, and monitoring protocols for each jurisdiction.[3] We believe that this unevenness between schemes will create challenges for linkages domestically, let alone internationally.

There is also some indication that the national system might be sectoral in nature, perhaps providing unified guidelines in key industry sectors such as iron and steel, power generation, chemicals, building materials, papermaking, and nonferrous metals. In this situation it is plausible that the sub-national schemes will continue to operate and expand in concert with additional, nationally controlled schemes governing specific sectors of the economy, and that a complex system of rules and monitoring and verification protocols will link these systems together.

The subnational schemes share unifying features that set them apart from cap-and-trade systems that exist in the United States and Europe. The most striking difference is the nature of caps in Chinese regional schemes. Cap-and-trade systems typically work by setting a cap that declines in each subsequent compliance period.[4] While China’s regional trading systems do have gross emissions limits, called caps, these emission limits are allowed to expand depending on the region’s economic growth. [5],[6] As such, the caps do not cause a decline in absolute total emissions as would normally be expected. Instead the caps work more like a managed quota system that keeps gross emissions within regional energy intensity targets. Cap allocation in China is determined at the provincial level, but is informed by the regional intensity target that is, in turn, devolved from the national target. We expect this hierarchy to continue to be manifest in any national scheme.

(iii) Emissions Trading Design Elements.

There are many aspects to the development of a national emissions trading scheme, but in this section we limit the discussion to seven key elements that are important for modeling scheme prices: scheme greenhouse gases, sector coverage, compensation for emissions intensive industries, offsets, linking, managing price volatility, and caps.

Greenhouse Gases

The proposed national scheme appears to only covers CO2. The following Kyoto Protocol gasses are not covered: Methane (CH4), Nitrous oxide (N2O), and Sulfur hexafluoride (SF6), but HFC, including HFC-23 appear to be controlled separately. PFC’s do not appear to be covered at all, and as yet, the Chinese government has no comprehensive methane policy, though there exist numerous international cooperation projects to improve methane management.

Sector coverage

Sector coverage appears limited to industrial and power enterprises covering industry sectors such as iron and steel, power generation, chemicals, building materials, papermaking, and nonferrous metals. Transport fuels will be covered using new fuel efficiency standards for heavy-duty vehicles and the introduction of a policy to promote improved low-carbon motorized travel reaching 30 percent of transport in big and medium-sized cities by 2030, but what is meant by ‘low carbon motorized’ travel is undefined at this stage. Further, it is not clear how transport fuels are counted in national intensity targets.

Emissions Intensive and Trade Exposed Industries

China has long protected key industries by subsidizing power prices for major emitters. Protection of key and state-owned industries will likely continue under the emissions trading scheme through the majority free allocations that have characterized the pilot schemes.

Offset usage

Domestic Chinese offsets (CCERS) are currently allowed in regional emissions trading schemes, with the proportion of total offsets allowable varying between 5 to 10 percent of total emissions differing depending on the scheme.[7] It is expected that CCERS will continue to be allowed in expanded local schemes as well as in any national expansion of the rules. It is by no means obvious that international offsets will be allowed in China’s trading schemes. China is a country with a long history of protectionist policies and local content rules, and there is a considerable likelihood that this will continue to extend to its allowable offsets.

Managing price volatility

To date, there are no transparent rules available governing mechanisms for smoothing out market prices. Generally, this may be limited to rules governing banking and borrowing of allowances, but might also include price caps and collars or other mechanisms to reduce price volatility.

Cap Setting

China’s regional trading systems do have gross emissions limits, called caps. These emission limits are allowed to expand depending on the region’s economic growth. [8],[9] As such, the caps do not cause a decline in absolute total emissions as would normally be expected. Instead, the caps work more like a managed quota system that keeps gross emissions within regional energy intensity targets.


There is currently no linking between China’s emissions trading systems. It is likely that China will start to develop internal linkages as a part of the development of a national system. However, in order for this to be an effective process, it will require considerable standardization in terms of the rules between existing systems. We believe that because of transparency issues, international linkage is a prospect of the distant future.

In summary, given the current lack of scheme details, it is difficult to assess the likely price trajectory of any carbon allowances issued under the proposed national scheme, as no specific caps or emissions reduction trajectories have yet been set. As more details become available, it may be feasible in conjunction with China’s marginal abatement cost curve to develop an idea of likely carbon prices.

(iii) Transparency

Transparency continues to be a major challenge for China in three areas: (i) China’s national emissions inventory, (ii) facility-level monitoring, reporting, and verification (MRV) system, and (iii) GDP based intensity targets. Further capacity development and transparency are needed in these areas before a national emissions trading scheme can be objectively assessed as reducing emissions. Until this is accomplished, any international comparison or even internal analysis of China’s actions must be couched within a wide margin of error.

National Emissions Inventory

China’s emissions inventory was last published in 2005, which is the base year used for both its 2020 and 2030 intensity targets. The 2005 emissions inventory is now a decade out of date. China committed, as part the 2009 Copenhagen accord, to creating a statistical monitoring system for greenhouse gasses and further agreed to providing a national GHG inventory every two years. This pledge has not been met.[10] More frequent publication of reliable data is an important element of building international confidence.

Uncertainty around China’s emissions inventory has led analysts to estimate carbon dioxide emissions for the power and industrial sectors from China’s published energy use data and estimates of its constituent fuel types and their carbon content. Comparing assessments from the International Energy Agency (IEA), U.S. Energy Information Administration (EIA) and World Bank provides widely differing estimates of Chinese carbon dioxide emissions, which can vary by over a gigaton for the same year (see Table 1). Such wide variations from credible sources is concerning, but is also a useful guide to the level of the potential uncertainty in China’s underlying emissions inventory.

Table 1: Estimates of Chinese CO2 Emissions (Gt) from U.S. EIA, IEA, and the World Bank

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Additionally, there are often discrepancies between regional and central government reporting of carbon dioxide. While China is taking steps to improve the institutional capacity of its Environmental Protection Agency, problems persist. A paper published in Nature earlier this year points to official estimates of national emissions that have differed from reporting at the provincial level by as much as 20 percent.[11]

Facility-level MRV

China needs a robust, transparent, consistent and accurate monitoring, reporting, and verification (MRV) system for facility-level greenhouse gas emissions and associated regulatory oversight. International confidence in China’s achievement of its stated goals will depend to a significant extent on China’s implementing such a system. There are few published independent assessments of China’s MRV capacity. This means that international observers must rely on Chinese statements[12], anecdotal evidence, and sparse academic literature.

Publicly available Chinese commentary on MRV, such as the World Bank’s Partnership for Market Readiness Program,[13] provides superficial coverage without any real analytical rigor on China’s MRV capacity. A more useful perspective is gained from recent academic work by Auffhammer and Gong.[14] This suggests that monitoring and verification protocols for different emissions trading pilots are at different stages of development, with only Shanghai at a relatively advanced stage of methodological development. MRV development has lagged behind the launch and operations of emissions trading system pilots in China. Auffhammer and Gong also highlight that most regions do not have a sufficient number of qualified verification entities or individuals.[15] This situation should be of concern to the international community as well as China, as it calls into question the data quality of reported emissions.

China’s lack of transparency over its MRV and the sparseness of high quality independent analytical work mean that international observers must rely on anecdotal evidence. While such evidence is inconclusive, it should inform the need for a systematic, rigorous, and independent analysis of China’s MRV system. It is the experience of the report’s authors that technical capacity in monitoring and verification in China is generally weak. This evidence comes both from personal experience and engagement with the Clean Development Mechanism (CDM) community working in China. Some specific concerns center around monitoring and verification.

Monitoring plans primarily rely on a combination of estimation and physical monitoring of emissions. Appropriate estimation of emissions depends on robust methodologies and high quality data, while physical monitoring depends on appropriate, properly installed and maintained equipment. It is the experience of one of the authors working directly on facility-level monitoring in China that physical monitoring of data for MRV purposes is of inconsistent quality across facilities. China has been working to improve capacity in this area, but numerous sources indicate that calibration and maintenance of monitors continues to be problematic.[16],[17]

Another area for concern is independent verification of emissions. This is a problem for all emissions trading schemes (e.g. EU ETS, CDM, and California), but we argue that this is particularly so in China. Objectively China has issues with corruption. China currently ranks 100 out of 175 countries on Transparency International’s Corruption Perception’s Index.[18] A potential conflict of interest exists for verifiers who are appointed by local governments officials who are, in turn, judged by the central government for their progress in meeting their provincial energy intensity targets. Based on personal experience, sparse academic work on the topic, and anecdotal evidence, we believe it is reasonable to question the legitimacy, robustness, and transparency of China’s existing MRV system. This problem is further compounded by a lack of transparency in reporting emissions data on registries.

For example, in the EU-ETS all data is publically available through the European Union Transaction Log (EUTL), through which the users can access information down to the facility level. Each emissions trading scheme in China has its own registry system, however the data on facility emissions, allocated or surrendered allowances, allowance transactions, and offset usage is not publically available, making it impossible to perform an independent assessment of the functionality of the emissions trading systems.

In summary, a trustworthy MRV system underpins any emissions trading scheme. Currently the measurement, reporting and verification of facility-level carbon dioxide emissions in China lack quality, transparency, and consistency resulting in uncertainty about data quality. This situation could be addressed by a systematic, rigorous, and independent analysis of China’s MRV system and other specific actions to address gaps. This is in the interest of both the international community and China.

GDP based Intensity Targets

China needs a more realistic measure of energy intensity. The framing of China’s intensity target in terms of GDP introduces a level of subjectivity that would not exist if the intensity target were defined, for example by a genuine efficiency measure such as tons of carbon dioxide per MWh—as is used by the United States for its intensity targets under the Clean Power Plan—or tons of carbon dioxide per ton of output from heavy industrial production.

China’s GDP numbers are controversial. China’s Premier Li Keqiang told the U.S. ambassador in 2007 that their GDP numbers were ‘for reference only’, and that in order to assess the growth of the economy of his own Liaoning province he used numbers such as electricity consumption, rail cargo, and loan disbursement.[19] The situation has not improved since Li assumed the Premiership, with independent analysts reporting that official GDP numbers may be off by as much one to four percent.[20],[21] Currency and exchange rates further complicate the GDP calculations and impact the assessed intensity reductions. Discrepancies in GDP and associated carbon dioxide numbers create a wide margin of error for the official targets.

In summary, China’s GDP and CO2 estimation methodologies are not transparent and the use of GDP means that China can rely on economic restructuring, rather than real improvements in energy production and efficiency to meet its goals. Instead of using GDP for the denominator of the national intensity target it would be more realistic to use a measure tied to energy generation, such as megawatt hours (MWh). Using GDP allows China to meet its target through measures that have nothing to do with energy efficiency or zero emissions energy production.

(iv) Model development and assessment of the impacts China’s Emissions Policies

To understand the potential impact of the China’s National 2030 intensity targets of 60 to 65 percent reductions on 2005 emissions, we modeled the impact of major announced policies on the business-as-usual (BAU) scenario that will reduce energy intensity, namely the increase of non-fossil fuel energy use to 20 percent of the total, and the increase of the services sector to 55 percent of GDP. We projected GDP using constant 2005 RMB and derived an energy to carbon dioxide conversion function correlating average data from the World Bank, EIA, and IEA. The model results are shown in table 2. We validated our model against China’s claimed reduction in energy intensity of 28.5 percent from the 2005 baseline in 2012 using published data.

Table 2: Real and Project Chinese GDP, Emissions, and Energy Intensity reduction from 2005 baseline

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The results in Table 2 show that using the publically available data we were unable to exactly reproduce China’s claimed reduction in energy intensity of 28.5. Our model instead suggests that China achieved an emissions intensity of 27.9 percent in 2012 from 2005 levels, but this is likely within the uncertainties inherent in the model and data. The projections in table 2 are based on extrapolating existing growth rates from the business-as-usual (BAU) scenario, and then estimating the impacts of announced emissions-reduction policies that China intends to use to reach its 2030 energy intensity targets.

Our results suggest that that existing policy measures—renewable targets and development of the service sector, are enough for China to comfortably meet its 2020 targets of 44 percent reductions below the 2005 baseline. Even in the business as usual scenario, China is still on track to meet 2020 targets. Absent the boost in zero-energy generation and extending baseline trends, China would still be at 39.5 percent below 2005 energy intensity levels by 2020.

The service component of the target—55 percent by 2020—represents only a slight departure from the business as usual growth rate of services in the economy and, contrary to current commentary, our modeling suggests that the services impact on the Chinese economy is over-hyped. Certainly, rebalancing is occurring, but current policy promoting services growth as a percentage of GDP appears to be consistent with services growth built into the data and continues the existing trend. Any additional policy effects of the 55 percent target appear minimal. The growth of China’s service sector, from 41 percent of GDP to 48 percent in 2014, has created a decarbonized GDP growth, which has done a great deal to bring down China’s energy intensity. By 2014, service sector growth accounted for about 50 percent of total GDP growth.[22]

While China can safely meet its 2020 targets, with or without additional policies, the picture for 2030 may be starkly different and depends on China’s ability to maintain high–7 percent plus–future GDP growth rates. If Chinese GDP growth declines in line with our model assumptions–GDP growth declining from 7 to closer to 3 percent in the later years of the 2020s[23],[24]–the Chinese government will need to take significant additional policy measures to meet its 2030 decarbonizing targets, which may in part be achieved by realizing the goal of 20 percent non-fossil fuel energy by 2030.

The ‘20 percent by 2030’ non-fossil fuel energy use policy scenario represents about a 70 percent increase above the current growth trajectory in non-fossil fuel energy generation over the period of 2020 to 2030. This non-fossil fuel policy also covers China’s planned rollout of nuclear power. Any support that countries are able to give in this area, in terms of the nuclear fuel cycle, is likely to have a disproportionate and positive impact on reducing global emissions.

In an early measure to boost renewable energy production in the mix, the Chinese government announced—in conjunction with the 20 percent non-fossil fuel target—measures to ensure the availability of renewable energy on the grid. This is expected to boost the contribution of renewable energy in the energy mix, which continues to struggle with a decade-long problem of idle capacity. To illustrate the problem, between 20 to 30 percent of wind power and approximately 9 percent of solar were intermittently unable to access the grid in 2014 and the first half of 2015.[25],[26]

China currently uses a quota system for each type of energy coming onto the grid, rather than using a least-price dispatch system. This has resulted in a significant under-utilization of wind power. The pricing impacts of reorganizing the dispatch system are unclear, but it is likely that China will continue to subsidize trade-exposed industries in rural areas to protect them from the price effects of any increases in power costs due to the non-fossil fuel power generation policy.

In a declining GDP scenario, even with achieving the goal of 20 percent non-fossil fuel energy by 2030, our model projects China’s energy intensity will still be only 46 percent below 2005 baseline by 2030, well short of the goal of 60 to 65 percent reductions. In such a situation, the Chinese government may be tempted to rely on additional structural shifts in its economy beyond increasing services, namely increasing personal consumption of durable and non-durable goods combined with decreasing use of energy intensive investment (i.e. construction) for stimulus.

Despite the fact that the Chinese government does not have official consumption targets, changing the investment/consumption ratio is an explicit goal of the 13th Five Year Plan.[27] An indication of unofficial goals comes from the Development Research Center of the State Council, which has put forth a vision statement that includes projections of a GDP comprised of 66 percent consumption in 2030. This goal, combined with any offshoring of heavy industry from China to lower production cost countries could result in decreasing energy intensity through carbon leakage–exporting of Chinese emissions–rather than by genuine global emission reductions.

Should China be successful in raising consumption to 66 percent of GDP, it would have the potential to eliminate the need for further policy in the areas of renewable energy, energy efficiency, or carbon pricing in order to meet its 2030 goals. However, such an increase would represent a significant departure from the historical situational in which personal and total final consumption have held steady at around 36 percent and 50 percent of GDP respectively for the last decade.[28]

(v) New and prospective policy initiative

There are a number of other potential policies that could have an effect on China’s emissions trajectory. China is evaluating the possibility of putting a hard cap on coal in the 13th Five Year Plan, starting in 2016.[29] To date, a coal cap has not been codified in law. Unofficial planning documents suggest a possible cap of 4.2 billion tons of coal in 2020,[30] but this values seems low as the Chinese National Bureau of Statistics (CNBS) recent upwardly revised China’s coal consumption data for 2013 to 4.2 billion metric tons.[31] Our modeling also suggests that implementing the 4.2 billion cap is unlikely as China exceeds this level in 2015 and future years.

Some reports suggest that Chinese coal consumption is leveling off or even contracting. If this is true, then it is likely partly a sign of an economic contraction. Under such circumstances the 4.2 billion metric tons cap for 2020 may be a realistic objective. It seems more likely that Chinese coal use will continue to grow out to 2020 and any future coal cap is likely to be higher than 4.2 billions tons, unless some additional action is taken on the part of central government to constrain coal use.

China announced at COP21 new coal use intensity targets for power plants of 310 grams of coal per kWh for existing plants and 300 grams for newly built plants.[32] For existing plants, this represents about a 2.5 percent efficiency improvement on the national average the coal fleet of 318 grams of coal per kWh.[33] In general, China’s coal-fired power stations are relatively inefficient by global standards,[34] making efficiency improvements and associated emissions reductions an obvious emission reduction measure.

The introduction of the intensity standard is a positive change. Until this announcement industrial and power sector efficiency measures in China were largely voluntary. Despite the positive impact of this policy, the Chinese government estimates the reduction in emissions as 180 million tons of carbon dioxide annually due to lower coal use.[35] Using our modeled emissions, this represents a reduction of 1.5 percent on 2020 level of emissions. In its current form this policy appears unlikely to be sufficient on its own to reduce coal usage to a level where minimal economic impacts will be felt from a 2020 introduction of a 4.2 billion ton coal cap.

(vi) Conclusions

Examining China’s national targets and the trajectory of the economy, it is unlikely that there will be a need for significant downward pressure on emissions from a national emissions trading system before 2020, as the Chinese government is on track to meet its targets without a significant shift in current policy. However, to meet targets beyond 2020, the government will need new policy measures. Likely, the most significant policy measure for reducing emissions intensity and real emissions growth is China’s non-fossil fuel policy of 20 percent by 2030. This policy covers China’s planned rollout of nuclear power. This policy alone appears insufficient for China to meet its 2030 intensity targets, but it is likely to have a significant and positive impact on reducing global emissions.

The gap between the current policy scenario and the targets indicates the scope that might exist for reductions through carbon pricing, efficiency, or additional policies to support zero emissions technologies. A further policy option could be measures that devolve national energy-intensity targets to regional energy intensity targets, which could signal tighter emissions trading targets past 2020 and generate more activity to reduce emissions in the lead up to 2020. If the government is to take the route of reducing emissions through its carbon trading schemes, we believe that Chinese emission trading market would have to evolve significantly beyond its current state of development.

The development of a functional carbon market in China requires transparency at the sub-national and national levels. A great deal of work is required to address the problem of opacity in MRV, intensity targets, and national emissions inventories. Specific suggestions include continuing support for improved transparency and capacity of China’s MRV systems, publishing emissions data held on current registries, publishing current emissions inventories and methodologies, and using measures of energy intensity that are directly tied to reducing emissions, instead of GDP. Opacity in China’s methods of calculation and measurement of emissions and emission reductions creates considerable uncertainty in the behavior of a major emitter. Whatever governments can do to continue to clarify these numbers will have a positive impact on the security of the world’s low carbon future.

If the world continues to accept China’s use of GDP based energy intensity targets, then China might be able to meet its emissions reduction commitments largely through structural adjustments such as increases in consumption or higher than expected GDP growth. None of these measures represent real emissions reductions that affect the amount of greenhouse gases going into the atmosphere. Failure to address this issue at COP21 will further delay the actions we need to take, resulting in deeper and more expensive actions later in the century.

The world would do well, in the midst of its enthusiasm for China’s new climate leadership, not to forget that real, verifiable emission reductions matter. We lull ourselves into thinking margins of error don’t matter much for the politics of climate change, but it is nature with which we will have to reckon in the long run.



[2] “China, Emissions Trading Case Study.” CDC Climate Research & IETA Climate Challenges Market Solutions. March, 2015.

[3] “A Survey of the MRV Systems for China’s ETS Pilot, Technical Note 8.” Partnership for Carbon Market Readiness, The World Bank Group. July 2014.

[4] The exception is where coverage of emissions expands. Subsequent to expanded coverage emission caps decline. This is a characteristic of the Californian scheme, EU ETS, Australian Scheme (nowdefunct), and the proposed 2010 Waxman-Markey Scheme.

[5]“广东省碳排放配额管理实施细则” Guangdong Province Carbon Emissions Quota Management and Implementation Details (Trial). Accessed Oct. 23, 2015.

[6]北京市碳排放权交易试点配额核定方法(试行)Beijing Province Carbon Emissions Quota Management and Implementation Details (Trial) Accessed Oct. 23, 2015.

[7] “Carbon Emissions Trading in China: The Evolution from Pilots to a Nation wide Scheme” Zhang, ZhongXiang, School of Economics, Fudan University. CCEP Working Paper 1503. April 2015.

[8]“广东省碳排放配额管理实施细则” Guangdong Province Carbon Emissions Quota Management and Implementation Details (Trial). Accessed Oct. 23, 2015.

[9]北京市碳排放权交易试点配额核定方法(试行)Beijing Province Carbon Emissions Quota Management and Implementation Details (Trial) Accessed Oct. 23, 2015.

[10] “Prospects for Monitoring Carbon Emissions in China,” Hsu, Angel. Working Paper, University of Texas at Austin. May 27-28, 2015.

[11] Liu, Guan, Moore, Lee, Su, & Zhang “Climate policy: Steps to China’s carbon peak,” Nature, June 2015.

[12] PowerPoint presentation on MRV to the World Bank’s Partnership for Market Readiness Program Accessed December 2015.

[13] Accessed December 2015.

[14] Maximilian Auffhammer and Yazhen Gong, “China’s Carbon Emissions from Fossil Fuels and Market Based Opportunities for Control” The Annual Review of Resource Economics (2015) 7:11-34

[15] Ibid.

[16] “Limitations and Challenges of Provincial Environmental Protection Bureaus in China’s Environmental Data Monitoring, Reporting, and Verification” Hsu, Angel. Environmental Practice 15 (3), September 2013.

[17] Zhou, Hongming “MRV & Enforcement in China ETS” Sinocarbon, Ltd. Jan, 29, 2015 [PowerPoint slides]. Retrieved from:

[18] Accessed December 2015.


[20] Orlich, Tom. “China’s GDP Deflate Gate, a Deep Dive on Data Reliability,” Bloomberg Brief. September 15th, 2013.

[21] “China reports GDP up 6.9%, but don’t believe this number for a moment” Worstal, Tim. Forbes, Economics & Finance. Oct. 19th, 2015. Accessed Nov. 27th 2015.

[22] “China Economic Update, June 2015.” The World Bank, Macroeconomics and Fiscal Management Global Practice. Updated, July 3rd 2015.

[23] “China’s Xi says annual growth of about 7 percent possible over next five years.” Lee, Jason. Reuters, Thompson Reuters. November 3rd, 2015. Accessed November 14th 2015.Still not happy with this by the a g GDP system are unclear, idely

[24] We believe that it is optimistic to assume that China can maintain growth rates and as China transitions to a service sector economy its GDP growth is likely to decline from 7 to closer to 3 percent in the later years of the 2020s as normal progression for a developing economy. This is inconsistent with official target growth rates of 7 percent through 2020.

[25] “China on world’s ‘biggest push’ for wind power.” Shukman, David. Science and Environment, BBC. Jan. 24, 2014. Accessed Oct. 23rd 2015.

[26] China Idles Solar Capacity for First Time Amid Grid Congestion.” Bloomberg Business, Bloomberg, LP. July 28th, 2015. Accessed Oct. 23rd 2015

[27] “扩大服务消费带动消费结构升级” Xinhua. November 3, 2015. Accessed November 11th, 2015.

[28] Household Final Consumption, etc. (% of GDP) Bank Data. Accessed Oct. 23rd, 2015. World Bank Data.

[29] Schmidt, Jake “Speech at Brookings Institution Workshop—Obama in China, Preserving the Balance” Brookings Institution, November 5th, 2015.

[30] Sepegle, Brian, “China Committed to Cutting Coal Consumption, but Needs New Technologies” The Wall Street Journal, Nov. 25th, 2014. China News.

[31] Buckley, Chris, “China Burns Much More Coal Than Reported, Complicating Climate Talks” The New York Times, Nov. 3, 2015. Asia Pacific.

[32] “Coal-fired power plant asked to be cleaner, more energy efficient in efforts.” Xinhua Finance, Dec. 3rd, 2015.

[33] Based on Dec. 2 2015 reporting from Reuters, “China Says to cut power sector emissions 60 percent by 2020” in average emissions from coal fired power plants for the first 10 months of 2018 are reported to be 318 grams per kWh.

[34] “International comparison of fossil power efficiency and CO2 intensity—Update 2014” Ecofys. Sep. 5 2014

[35] Haas, Benjamin, “China Pollution pledge hopes to soothe smog fears: analysts”, Dec. 3 2015.

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The Fog of Protest: The Promotion and Censorship of “Under the Dome”

This article was also published on The Energy Collective.

Less than a week after People’s Daily Online, the flagship newspaper of the Communist Party of China, released the air pollution documentary, Under the Dome, the government took steps to curtail the buzz. A leaked document from the Central Propaganda Department instructed media outlets to, “absolutely discontinue coverage of the documentary.” By Friday, the documentary was taken down from all Chinese websites. By that time, it had already been viewed by between 200 to 300 million people, more than half of China’s Internet users.

Created and financed by the former CCTV reporter, Chai Jing, Under the Dome has been compared to An Inconvenient Truth in its environmental content and format. The film features Chai Jing delivering a lecture from a stage with the aid of recorded interviews, graphs, educational cartoons, and short, investigative-style news stories in which she travels to sites in China and abroad, exploring the causes of China’s pollution and the solutions that other countries have found to their own pollution problems.

The documentary opens with Chai Jing telling her audience that concern about her unborn daughter’s illness motivated her interest China’s pollution. She poses three questions—what is pollution, where does it come from, and what can be done about it? The documentary takes shape around her investigation of these questions, and the answers that she finds. In telling her story about the origins of China’s pollution, Chai Jing would have had to tailor her message in order to gain some form of official sanction and ensure its release on People’s Daily Online. Remarkably, the film is able to maintain its integrity through the process. Chai Jing has managed to create a film that deftly pushes the boundaries of permitted protest and, despite its shortcomings, still emerges as a trenchant criticism of her society’s failures.

What is pollution?

For the purposes of her documentary, Chai Jing defines pollution as PM 2.5, or air pollution particles with a size of 2.5 microns or less that originate from a number of sources—fires, cars, coal dust, cooking oil. Exposure to PM 2.5 causes respiratory ailments, and increases the severity of asthma and bronchitis. It is linked to higher fatalities from lung cancer and heart disease. Due to the small size of the particles, some particulates are able to pass through the blood tissue and into the lungs, altering the balance of the human system in ways not understood or even studied medial science. Chai Jing has taken some criticism for implying that her daughter’s tumor was the result of pollution when a direct link cannot be proven. This criticism misses the mark. Beyond the chronic cough and irritated eyes that afflict so many Chinese urban residents, Chai Jing is absolutely right to raise the question of how else the pollution may be harming her family.

In 2008 the U.S. Embassy in Beijing placed a pollution monitor on its roof and released the results of the measurements through a mobile application. For the first time, reliable data on urban air quality was available to the public, and almost overnight, air pollution became a part of the consciousness of the urban middle class.

In asking, “What is pollution?” Chai Jing shares how her own investigation forced her to hold up a mirror to her own ignorance. Before she began to think deeply about the question, she thought of and reported on pollution as a problem that afflicted poorer satellite regions. She believed that urban air pollution was a more recent problem. “Isn’t it,” she asks her audience, “just in the last few years that we started hearing about air pollution?”

But as she looked, she realized that the data showed China’s pollution to be a long-standing problem. She gained access to internal statistics on links between air pollution and the high rates of lung cancer as far back as the mid-seventies contacted NASA and received satellite photographs of the north of China, showing heavy coal emissions as early as 2000, and extrapolated the PM 2.5 levels, not available until 2008, from earlier, less refined pollution measurements. Showing a picture of the Beijing airport in 2004, in which a worker sits in the foreground and behind him the ghostly outline of plane reveals itself through thick haze, Chai Jing tells of her shock in seeing this picture in 2014 and realizing, in hindsight, how obvious the pollution was, and yet she remained unaware.

Looking at the smog-shrouded picture that Chai Jing shows on the screen, one is hard pressed to credit her ignorance. I lived in Beijing in 2004 in a near-constant state of shock at what to me was not just the worst air pollution I had ever seen, but the worst I could imagine. The sense of unease caused by the pollution itself was heightened by what I interpreted as an equally pervasive phenomena of its denial, as through the particles in the air were not only choking out the oxygen, but reality itself. It did not occur to me then that what I was seeing was as much ignorance as denial. How, after all, could a whole society be ignorant of something as public, visible, and universal as smog?

The answer is as frightening as it is simple, or perhaps so frightening because it is so simple. “Look at the headlines at the time.” Chai says to her audience, before flashing on the screen a headline from 2004 that says, “Beijing airport closed due to fog.” But Chai has already shown that that government data itself clearly indicated that the north of China had had a deadly problem for decades. Chai does not accuse the government of lying to the public, nor does she have to. She simply presents, without much comment, that data that shows that it did. Her commentary focuses on her personal shortcomings; her surprise at her own naiveté, her shame at her professional failures as an investigative journalist for having missed the story. Her presentation is logical, innocent, and so sincere that one can almost see how People’s Daily, when it signed off on the documentary, might have missed just exactly what it was that it was about to unleash.

Where does it come from?

But after cracking open the ground, Chai steps back from the brink as she moves on to discuss the sources of pollution. Whereas the first section of her documentary had implications beyond her words, in the second section seems deliberately to cull the facts so as to limit the implications.

Take, for example, her decision to stick with PM 2.5 as a definition for pollution, a choice that precludes much discussion of climate change. Chai Jing’s focus is proximate causes of local health problems. Carbon dioxide’s impacts on local health are indirect, but climate change directly influences the negative effects of PM 2.5 emissions, as warmer weather increasing ozone formation from nitrogen dioxide emissions at the ground level. Even if Chai Jing had wanted to focus exclusively on health, climate change could have had a place. More significantly, the decision to largely elide the question of climate change allows her to focus on surface-level regulatory failures as a cause of pollution, rather than having to examine the deeper question of the structure of the energy economy and development strategy.

It may have been a tactical choice. According to the BBC, the documentary contained a section that highlighted the unsustainable trajectory of China’s development model, but that footage was cut from the final version. Some of the vestiges of this critique remain, if blunted. In discussing the number of cars on the road and their devastating consequences, Chai Jing highlights that China is just at the beginning stages of its car ownership. In discussing the consequences of China’s rapid development, she points out that there are many other countries still developing and at risk of using coal for their development trajectory. She calls out China’s energy use as wasteful in that is used to produce the raw materials that are then used to create urban developments in excess of existing demand. These points are raised, but often feel like dead ends. There is little follow through on their implications.

The thrust and sustained force of her criticism falls on the high amount of coal use, the lack desulfurization and vapor control technologies, and the comparatively unprocessed, and therefore dirty state of coal and oil when it is burned. Some of these shortcomings are a question of low regulatory standards, others a question of lack of enforcement of existing laws.

The simple reason for this is corruption, though Chai Jing by and large does not call it out as such. She focuses instead on historical factors that resulted in the oil companies having too many seats on the committee that sets the standards for fuel. She is shown interviewing officials who claim that the Ministry of Environmental Protection does not have expertise to set the fuel standards itself; therefore, it needs the help of industry. This dynamic is specific not just to China. The corruption of standards to protect public health in favor of industry would sound familiar to anyone familiar with the negotiated rulemaking process in United States. Still, the film holds up the public commenting process in the United States and Europe as examples for Chinese regulators to follow. And while there is no doubt that the United States and Europe have better outcomes than China for the greater transparency of their processes process, the process is often imperfect, and the public often remains unprotected. It is hard to discuss these drawbacks without opening a discussion about influence peddling and corruption. But that discussion, except in the case of a cursory mention of Chinese oil monopolies, a target at which the Chinese government has already publicly taken aim, is largely off limits in this documentary.

Some Chinese “netizens” have written off Under the Dome as a piece of propaganda. This charge could seem bewildering given the direct nature of some of the film’s criticism of the Chinese governance system, not to mention the fact that it has now been fully censored on the Chinese Internet. The apparent contradiction highlights the peculiar nature of Chinese protest and the balancing act that activists must carry out in order tailor their message to government priorities enough to have it heard, while still managing to say something that is strong enough to ignite public opinion and have some influence on what is permitted and what is proscribed. This is a different form of a tension that would be familiar to any activist, regardless of their country. How much can public opinion be pushed without causing a backlash? The different dimension to this in China is that the government is the direct arbiter of public opinion, and so the government’s opinion must be minded.

But for this reason, the government’s limited thinking on energy policy is on display in Under the Dome in a way that, at times, seems unsavory. This is never clearer that in the section on ‘clean energy’ recommendations, which plays almost like an infomercial for natural gas, or a hit piece on the Chinese oil monopolies. With triumphant, upbeat music playing in the background, Chai shows charts and interviews all making the point that China’s oil and natural gas industry lag behind the rest of the world, that innovation is needed, and that that innovation is being blocked by China’s oil monopolies.

The United States’ technology-driven adventure in hydraulically fractured gas and oil shale has, unfortunately, has inspired a lot of hand-wringing in countries all over the world who are wondering if they can or should be doing the same. China is no exception. It sees natural gas development as a primary conduit for reducing its massive coal consumption. While American companies are now helping China to develop their shale gas reserves, exploitation of natural gas in China has been thwarted by inability of Chinese energy majors to master the technology. There is no question that Under the Dome sells this narrative in a slick package. This is a pity because shale oil and gas development are a folly for China. This is the case first because China does not have the same unconventional shale resources of the United States to merit the investment, and second because unconventional resource development is water intensive and China does not have water, and third because transitioning to natural gas is a half-measure in achieving climate change goals. Using gas as a way to get off of coal locks in long-term investments in carbon dioxide emitting fossil fuel power generation well beyond the point when they should be dramatically reduced or entirely eliminated. The United States had made this mistake and now China, in using the United States as a development model, is attempting to repeat it.

This theme is also apparent when Chai Jing discusses fuel economy standards and emissions controls for vehicles. In discussing a better model for China, she heads to Los Angeles where, she points out, car ownership has increased three-fold in since the fifties, but pollution has fallen by sixty-five percent. But cleaner is not clean. According to the American Lung Association, Los Angeles has the worst smog in the United States, routinely achieving ozone levels that are harmful to human health. It has no place as a model in a documentary that focuses on clean air. That it is held up as a paragon certainly serves to underline how dire the air quality situation in China is, but it also underscores the lack of an ambitious or innovative plan for fixing it. But it should come come as no surprise that walking cities are not on the government’s agenda. As with the natural gas industry, the government sees the automotive industry as a key driver for growth in China, and it will need domestic markets in order to grow.

These choices likely indicate more about Chai Jing’s constraints than her own personal preferences. Those remain unknowable, obscured behind the official government line that in some parts of the documentary she is compelled to toe. But it does give an indication of China’s current development trajectory, and what comes through is incremental. These incremental changes will make China cleaner, but it will not make it clean. Moving away from coal can cut carbon dioxide emissions, but it will not be enough to slow dangerous climate change. Emissions standards on cars will make them cleaner, but it they will not stop traffic jams in cities, nor will they stop harming human health until they are fully electrified and backed by a clean grid.

Better environmental enforcement and strict use of end-of-pipe emissions controls are good things, but they should be used only in the absence of better options, not to make terrible technologies into mediocre ones. China’s goals of mitigating climate change and cleaning up its air would be better met through structural, rather than incremental change. Rather than follow the United States, China should acknowledge that its transportation and energy infrastructure follow an outmoded paradigm: a twentieth century development model that is ill-suited to the twenty-first century in which the China is emerging as an economic and political superpower.

What can be done?

Pollution is a difficult problem to solve, less from a technical standpoint then from a societal one. Alternatives to polluting always exist, but their implementations can alter the existing order of society and stir up its politics, power centers, and prejudices. Documentarians taking on pollution problems are faced with a quandary at the end of their films as to how to offer hope and actionable recommendations to the complex problems they have just spent an hour and a half illuminating. Within this constraint, the suggested remediation can seem unequal to the problem, as it did when Al Gore suggested to his audiences that they change their light bulbs and drive more efficient cars to solve climate change.

While on the surface Under the Dome’s solutions may seem also absurdly simple, in the context of Chinese society, they are anything but. Faced with a widespread lack of enforcement from government, Chai Jing asks her viewers to take matters into their own hands by either directly confronting non-complying business owners, or by dialing the Ministry of Environmental Protection’s hotline for violations if this fails.

The film shows Chai Jing modeling this behavior by walking into a building site were construction debris lies in an exposed heap—a major source of pollution in China—and asks the site manager to cover the debris as regulations require. Viewers are shown workers on the site covering the pile in short order. Chai Jing has won. She tells her audience, “It didn’t take more than five minutes to achieve this result.” In another intervention, she dials the Ministry of Environmental Protection’s hotline to report a restaurant that didn’t have a proper ventilation system installed the kitchen, and then again for gas station that does not have proper vapor controls on its gas pump.

It is hard to watch this video without wondering if the construction site manager or the Ministry of Environmental protection would have responded so quickly if Chai Jing were not a well-known television personality or had turned up without a camera crew. But Chai Jing too appears to be aware of her position. Recounting that the officials from the Ministry of Environmental protection told her that enforcement will respond one hundred percent of the time when the hotline is dialed, she wonders aloud to her audience, “Will they always come? I don’t know, but we can try.”

Chai Jing notes also that upon leaving the construction site where she successfully staged her intervention, a worker pulled her aside and said that the manager was afraid of her because she had a cell phone, and he was afraid that she might be filming. In telling this part of her story, she cannily conveys to her audience a tip that any good grassroots organizer would give to their trainees—record your actions; create a record both of the injustice and also of how you are treated while attempting to intervene.

This hotline, after all, is the number of the same Ministry of Environmental Protection that the documentary squarely blames for failing to enforce the law. But this, of course, is part of the intent of the action—first to remind the offenders that the citizenry knows that they are in violation of the law, and then to remind the enforcers of the same thing. In the one week that Under the Dome was available in China, the previously obscure hotline for the Ministry of Environmental Protection was advertised to almost 300 million viewers. Even if only ten percent of those viewers ever pick up the phone, the Ministry of Environment will have a very busy year. Why would the government publicize this message encouraging such direct action, even for one week? The Chinese government has long kept tight rein on environmental movements in China for their tendency to spill over into broader, democratic demands.

Elements of the central government are serious about environmental monitoring and reporting, but contrary to popular Western perception about the strength and centrality of the Chinese government, these changes are difficult to implement across the labyrinthine Chinese bureaucratic apparatus. In the past, the Chinese government has sanctioned citizen policing to enforce order in areas of the country or economy where it has weak control, sometimes to tragic effect. Popular outrage can be helpful in accomplishing autocratic ends, but it is also difficult to control. And so a week after Under the Dome enjoyed a government supported released, the experiment ended. The shutdown came several hundred million views too late. Chai Jing’s work has paid off—the box is now closed, but the genie has escaped already.

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Atlantic Oil is a Bad Investment

Last week, the Obama Administration released its 5-year offshore drilling plan, which included a proposal to open up drilling along the South and Mid-Atlantic Coast. The American Petroleum Institute says that drilling in the Atlantic Outer Continental Shelf (OCS) could bring $US 195 billion in investment between 2017 and 2035. Environmental groups have decried the announcement, saying it is out of sync with the President’s environmental goals in that offshore drilling opens the Atlantic coast to the unacceptable risk of uncontainable oil spills and is incompatible with his goals of halting dangerous climate change.

There is no question that prospecting and drilling disrupts wildlife. Further, most of the oil and gas in the Atlantic OCS is in deep and ultra deep water—higher risk prospects by every measure than their conventional, shallower counterparts. But reasonable people can disagree about the risks of a catastrophic spill and the difficulty of containing it.

The climate impacts, by contrast, are incontrovertible, as are the risks to investors who choose to pour still more money into expensive oil and gas extraction projects. The reasons are straightforward—oil companies already have more than enough oil and gas reserves on their books to destabilize the climate. Any further investment in fossil fuel development is just another log on a fire that is already threatening life as we know it. In order to keep the world from breaking the 2 degree Celsius limit, the non-profit organization the Carbon Tracker Initiative estimates that the world can burn enough oil to release 360 gigatons of carbon dioxide—about 760 billion barrels of oil—and then it needs to stop.

Seven hundred and sixty billion barrels of oil is less than the total amount of reserves that companies have on their books already. This means that even without more drilling, some companies are going to be left holding the bag, likely the ones with the highest cost of production. As it is, pursuit of expensive resources has already put the world into oversupply, dropping oil prices to $US 50 barrel. These low prices are expected to continue through 2015. It is impossible to know what will happen beyond that horizon, but given the dynamics of climate change, countries with a long-term view will be changing their infrastructure to limit fossil fuel demand, not increase it.

But the oil and gas industry persists in its inverted view of the future. When questioned about the wisdom of drilling at such a low price, Erik Milito, the American Petroleum Institute’s Director of Upstream Industry Operations, was quoted by Washington Examiner as saying “The oil and gas industry … is looking at investment windows of 10, 20, 30 years. And we’re looking at these windows based upon the understanding that global demand for oil and gas resources is going to continue to grow.”

It’s not clear that Saudi Arabia holds the same view. Some have questioned why it hasn’t cut production in the price slump, but instead continued to endure low prices. But the answer is simple: because it can. If Saudi Arabia cut production, it would simply be yielding market share to higher cost producers. And why should it? Memo from Saudi Arabia to the arriviste oil powerhouses of the world: “This is what being a major oil producer looks like.”

This is as it should be. It is both economically and environmentally efficient that the lowest price assets sell first and the more expensive fuels stay in the ground. If the world is paying an oil price that reflects the cost of technically complicated projects when it buys its fuel, then it is overpaying. All of the oil in the world that we can safely use is available at a lower price. The Carbon Tracker Initiative has matched the 760 billion barrels of oil budget to a point on the cost curve. The result is that if we were to use our energy resources efficiently—least-cost first—then no oil over a market price of $US 90 a barrel is worth digging for. Paying for oil higher up the cost curve creates an epic deadweight loss to society. The case for environmental efficiency is more straightforward. The infrastructure needed to extract oil is already in place; one doesn’t need to dig up a boreal forest, or put a rig off an untouched coast just to take more oil out of the ground than the world can afford to use anyway.

So how bad a bet is Atlantic OCS oil? Quite bad, it turns out. Using the 2014 update from the Bureau of Ocean and Energy Management for its estimates of economically exploitable oil for the Atlantic, and extracting the data for the South and Mid-Atlantic regions named in the Obama Administration’s plan, it is clear that that only 28% of the oil is exploitable at less than $US 90 dollars a barrel. Further, more than 50% of the production requires a market price of over $US 100 a barrel. A detailed breakout of the price can be seen in the table below.[1]

Table 1. Atlantic OCS Economically Exploitable Resources

Screen Shot 2015-02-03 at 3.03.54 PM

Let the buyer beware. Investors sometimes imagine returns as the function of a neutral market that operates according to economic laws, unbounded by politics and human nature. But of course this is not the case. The profitability of any investment is shaped by the policy environment, which in turn is shaped by the norms of a society. Oil and gas drilling in the Atlantic is unlikely to start until 2021. The current regime may be permissive, but the profitability of Atlantic oil relies on the continued negligence of the future governments of the world. The savvy investor should look at the high oil price needed for Atlantic drilling, consider the high demand that that price implies, and realize that they will only exist in a world where climate change is allowed to continue unabated.

And the Obama Administration should be ashamed of itself. Not only is it sending the wrong signals about fossil fuel development, but also in offering public waters up for oil and gas leases, it is putting public money behind a fossil fueled future. The expansion of American oil and gas development has been matched by the rise is subsides for exploration and drilling—$5.1 billion in 2013, up from $2.6 billion in 2009. The economy of a society is shaped by policy, and this policy is pushing us in the wrong direction.

The economic future of America cannot lie in competing with the Middle East for oil production; it has no comparative advantage there. But the United States has always had an advantage in technology and new systems development. It ought to be pouring resources into clean energy infrastructure. Instead it is creating a policy that will result in the squandering of public and private resources on an investment that carries a high risk of yielding meager to negative financial returns on an end product that endangers the future.

[1] Note that percentage of an exploitable resource is given in terms of oil and gas prices. This is because oil and gas are often found together. These two prices work together, i.e., if the given gas price for an oil price is lower than in the table, a higher oil price will be required for economic exploitation. If the gas price is higher, a lower oil price will be required and vice versa. Gas prices are not discussed in this article, as the Carbon Tracker Initiative has yet to do analysis on price points for stranded gas, though a report is forthcoming later this year. As per the EIA, the Henry Hub gas price for Jan. 30th 2015 was $US 2.88 per MMBTU. 1MMBTU=1 MCF.

This article was also published on The Energy Collective.

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Europe Shouldn’t Feign Weakness When it Comes to International Climate Finance

The COP 20 in Lima is over, having delivered to the world, like so many COPs before it, yet another awkward acronym. The latest for the pile is ‘INDCs’, that’s “Intended Nationally Determined Contributions.” Presumably different from Nationally Determined Contributions of the unintended variety.

By the COP 21 in Paris, countries of the world are to put forward their own plans (“INDCs”) for reducing or slowing the growth of greenhouse gas emissions in future years. While not all targets have been submitted or solidified, indications from major economies—the European Union, China, and the United States—are that commitments will not be enough to keep the world from breaking the two-degree barrier. Cambridge University professor and PAGE climate modeler Chris Hope, estimates that total commitments will give the world just a 1.1 percent chance of staying within two degrees Celsius of warming. The most likely trajectory for the world is still a warming 3.8 degrees Celsius by 2100.

First, a quick refresher about where that level of warming will likely leave us; between 3 and 4 degrees C of warming, the world faces high risk of coastal flooding causing hundreds of millions of climate refugees, Chinese food production will be at significant risk of collapse, Europe could regularly face summer temperatures of 45 degrees C, the Amazon will be in danger of collapse, and there is a reasonable likelihood of triggering the melting of the permafrost.

Chris Hope’s PAGE model estimates that damages will cost $US 19 trillion by 2100 at the current rates of emissions. Given the uncertainties and the scale of the events involved, putting a real number to damages is nearly impossible. But whatever the real number is, it is not small.

It is thus appropriate that at a debriefing on the COP 20 this week held at the Center for European Policy Studies in Brussels, Joss Delbeke, the European Commission’s director general for climate cited ‘climate financing’ as one of the major hurdles to the next year’s Paris negotiations—if ambitions are so low, the need for adaptation money will be high, the means of getting it fraught with difficulty.

The problem with climate financing is the same as it ever was: the bulk of climate financing won’t—can’t—come from public finance. In response to some questions on levels of climate financing from the NGO community, Delbeke acknowledged this reality, further stating that it was member states, not the European Union, that would ultimately be in control of commitments. The European Commission had very little role or jurisdiction in that area.

True, but as it happens, the more critical source of financing, private finance, does, indeed, fall under the Commission’s sphere of influence. The elephant in the room when it comes to private sector climate financing has long been how to generate returns from climate mitigation and adaption projects that have insufficient or no cash flow. Whether the project is a renewable energy project, land remediation, or conservation project, the answer often comes back to carbon markets—the cash flow must be created through a carbon price; a mechanism that monetizes the political will to stop climate change.

The European Emissions Trading Scheme is currently the world’s largest and oldest emissions trading institution, and it is failing. The price is not currently high enough to drive investment in climate change. Granted, all of the climate financing in the world cannot be driven by the European Emissions Trading Scheme, but Europe’s setting a high price would not just set an example for other trading schemes, but would also create an incentive for them to match Europe through harmonization requirements. These things are still a ways off—linking markets and using domestic carbon pricing to drive overseas investment are enormously difficult tasks, fraught with difficulties. But setting a high carbon price is the first step that the world’s flagship ETS is not taking, and it should.

Prices in the EU-ETS currently languish around 7 euro. The European Union has put forward numerous measures to improve the ETS, the first being a back loading scheme temporarily removing 900,000 million EUAs to be withheld from the market between 2019 and 2020. The next stage, a more permanent fix in making the ETS effective is the Market Stability Reserve (MSR). In its current proposed form, the MSR will withhold 12% of the surplus from the market each year as long as the surplus is in excess of 833 million allowances. When the surplus dips below 400 million allowances, then 100 million allowances will be released from the market.

Organizations like Sandbag have done an excellent job underlining the weaknesses of the Market Stability Reserve, not the least of which is that, as it is currently designed, the ETS will remain until well after 2027. There are several obvious ways to strengthen the ETS; the early start of the MSR, the cancelation or continued withholding of back-loaded allowances, and the cancellation of unallocated allowances. There are also less obvious fixes, such as adjustments to the formula used to calculate the size and the trigger points of the MSR which will ensure greater price stability and create better investment signal. There is a reasonable chance that the EU Parliament will pass a proposal for an early start to the MSR.

It will not be enough. London-based consultancy Energy Aspects estimates that even with an early start and continued withholding of back loaded allowances, allowance prices will only reach 10 euro per ton by 2020. This is hardly an amount that will drive emission reductions, let alone private investment.

If the Directorate General for Climate Action feels that its task at the international negotiations will be weighed down by disagreements over climate finance, it should leverage its mandate for the administration and policy development for the EU-ETS to affect the economics of private climate financial markets. In some ways the weakness of the ETS is ironic, given that when the DG Climate Action was established, some groups feared it would protect the the ETS at the expense of other climate policies. While the Directorate General cannot make changes to the ETS without the consent of the Commission and Parliament, it could advance and advocate for the passage of more effective reforms than those that it currently has on offer, which, even if executed in full, will not leave the ETS an effective instrument for driving either emission reductions or pro-climate investment. But a stronger EU-ETS could do both.

Through the EU-ETS the European Union has the currently has infrastructure in place to do more to more than any other region of the world to catalyze international climate finance. But this will mean nothing if it chooses not to use it.

This article was also posted on The Energy Collective.

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Does Europe Really Need an Emissions Performance Standard to Keep from Falling Behind America?

Last month at the European Parliament, the WWF held an event that was titled: “Fighting Coal CO2 Pollution: Is the EU Falling behind the US?” The event was held to discuss the United States’ use of an Emission Performance Standard (EPS) as a part of the climate change regulations that it will be effecting under the Clean Air Act. The event raised the question of whether such a policy could be a helpful compliment to Europe’s climate change policies, particularly its troubled Emissions Trading System (ETS) whose excess permit supply has allowed Europe to return to burning cheap coal.

Where ETS had failed to keep coal from the market, the event’s conveners hoped that an EPS might succeed. After all, in the United States there is no carbon price, but coal-burning fell off a cliff after 2008 in the face of stricter carbon dioxide standards for power plants under the Clean Air Act. Europe, meanwhile, remains irrevocably addicted to coal. Is the United States is doing something right while Europe’s policy has run amok?

Not really. Carbon intensity in the United States currently stands at just above 0.5 tons of carbon dioxide per MWh. Europe’s carbon intensity—in the midst of its coal bacchanalia—is 0.31 tons of carbon dioxide per MWh. That number has actually declined in the past few years even as coal use in Europe has increased, and done so despite the fact that Germany has taken on the order of fifty terawatt hours per year of zero emissions nuclear offline. If Europe instituted an EPS just like the United States has, it would have to increase its carbon intensity by 45% by 2030 in order to meet the target that the United States has set for itself for that year of 0.45 tons of carbon dioxide per MWh.

To which one might say, but of course that’s not what anyone is talking about. Even in the United States, 0.45 tons per MWh is the country average; some states have stronger targets, others weaker.  Europe’s EPS could be selectively applied to coal-offending countries in order to drive down coal consumption. Perhaps. But this is not the way that the EPS has been applied in the United States, where coal burning states, due to the pragmatic realities, have been given the highest per-megawatt hour emissions quotas, whereas states with a cleaner emissions profile have the tightest targets. This speaks to a reality of climate change policy—that countries and governments do what they can, given the barriers that are created by powerful incumbent industries and their influence in governments. But put that aside for a moment and consider that in Europe some of the countries with the highest renewable energy generation percentages also are major coal offenders—namely, Germany.

Would an EPS really fix the problem? In Germany, coal is being burned as a bridge fuel to the fill the power demand while it continues to bring more renewable energy online, and retire its nuclear power plants. That the United States is using gas, not coal, as a bridge fuel is an indication of the comparatively low gas price in the United States, not its comparative virtue with respect to Europe, or the comparative success of its carbon dioxide regulations. Indeed, despite impending regulations on coal in the United States, coal emissions continue to fluctuate with gas prices; in 2013, coal generation increased by 71.6 TWh, an amount greater than the 50 TWh per year increase that European environmental organizations are trying to prevent with the introduction of an EPS.

Rules for the US EPS under the Clean Air Act are not yet finalized. But one of the many options being discussed for their implementation is trading of carbon efficiency between over-performing and underperforming regions. Such a measure would mean that when gas prices increase in the United States, American generators will have plenty of room to continue using coal as a bridge fuel in the same way that Germany is using it now. Indeed, even without trading, with the target as high as 0.45 tons per MWh, There will be room in United States for using coal as a bridge as in the same manner that Europe is now as gas  prices increase.

More dangerous still for the United States, while coal is clearly a bridge in Europe, it may be a long-term strategy for the United States, which, in the absence of the renewable targets that exist in Europe, is already starting to replace its retiring coal-fired power plants with gas plants, rather than building renewable energy. This will lock the United States into a long-term relationship with natural gas that will prevent it from meeting the emission reductions targets required to mitigate climate change. It is true that Europe has a number of new coal-fired power plants coming online, but these are the result of legacy policies, and—with the possible exception of Poland—new plants are very unlikely to be permitted in EU countries in the future. The average age of a coal fired power plant in the United States is 40 years old, in Europe it is 34 years. In both regions, much of the coal fleet will be retired in the next 20-30 years. For both regions, the critical question is what will replace coal. Europe’s use of coal in the mid-term, unlike the United States use of gas, does not hold the danger of massive new investments in long-lived energy technology that is incompatible with a stable climate.

Of course Europe could design an EPS with a target that was so tight, say 0.2 or 0.1 tons of carbon dioxide per MWh, with tight geographical boundaries, no concessions for coal regions, and no trading that would make it harder to burn coal, and drive an accelerated retirement of coal-fired power plants. But if Brussels could pass this without giving concessions to the member states and industrial interests that will lobby against it, one might ask why it couldn’t simply tighten the ETS, or increase its renewable energy targets and get the same effect?

In some ways the focus on the EPS is strange preoccupation with form over function. The political economy and civil society of a region, more than the particular policy levers it chooses, shape the substance of climate policy and the ultimate strength of its outcomes. That there is such debate over coal burning in Europe despite the comparative strength of its climate policies is already an indication that it is a leader in emissions cutting. Coal burning or no, there is no other region of the world where there is such concern both within environmental organizations and the government not just with cutting emissions, but cutting them enough to matter.

This post was also published on The Energy Collective.

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Did The “People’s Climate” March Leave Conservatives on the Sidelines?

“I wish they wouldn’t call it The People’s Climate March.“ I said to a friend in the weeks before taking the bus up to New York City to attend the march. The messaging seemed out of line with the organizers’ stated intentions to include everyone. But my friend insisted that getting conservatives to attend the climate march was more than just a matter of words. The science was there; if people wanted to fuss about words and not believe the science, that wasn’t his problem. But it isn’t simply denial that keeps people from turning out for a demonstration.

Katherine Hayhoe, climate scientist turned political science professor and evangelical Christian, clarified the problem in a recent television interview, “It’s not a scientific issue…The answer has much more to do with who we are as humans, and how we function politically.”

“Would your father attend The People’s Climate March?” I asked him. Both of us have conservative fathers who believe that inaction on climate change is a serious failure of both the Republican and the Democratic leadership. He conceded that his father would not. And nor would mine. But the truth is, demonstrating is uncomfortable for many people, regardless of political affiliation, who perceive it as something that other people do—people more emotional, idealistic, and perhaps less rational than they are. My experience in trying to recruit people to attend the march was that, right out of the gate, the name on the fliers seemed to confirm their biases about who marched and how their values were different.

The march, of course, didn’t have any attendance problems—the crowd of an estimated 311,000 outstripped the organizers’ reach estimates by a factor of two, and it was about six-eight times larger than the previous best-effort in Washington, D.C. only a year and a half ago. A lot of work went into reaching out to labor groups, churches, and organizations that had never before identified climate change as a key issue, and that work was a striking success. But I’m not sure it was necessary to leave conservatives behind in the process.

I was made to revisit my concerns when at the march in New York I looked at the logistical material for the line up at the front of the march, in which participants were encouraged to group by six different affiliations—solutions, front line communities, building the future, a section entitled “we know who is responsible” under which  “anti-corporate campaigns” were encouraged to line up.

Anti-corporate? “Corporations” are not one thing. Renewable energy companies and electric car companies are corporations. Whether the future is full of centralized or distributed, community, or utility owned power, the technology will be developed and delivered by corporations. I do not doubt that powerful incumbents in the fossil fuel industry use their political and economic power to block legislation on climate change. Their behavior is unconscionable, and it is not limited to oil companies. But the government has also participated in the corruption of American democracy, and it is there that conservatives tend to direct their outrage. There were no anti-government campaigns under the “We know who is to blame” section. For a movement that wants to be broad-based, would it not be better to welcome both sides and let them bring their own messages instead of sending unsubtle queues about who the march is really for?

Several days after the march this message came across my twitter feed, “I can think of few ways to marginalize a movement seeking to rally mass support faster than giving Naomi Klein the microphone. #sigh.”

Author and activist Naomi Klein is a board member of, the most prominent and successful grassroots climate change organization. is a small group of people that has done tremendous work bringing an awareness of climate change and helping to organize and publicize participatory actions for people all over the world. A brief twitter exchange with the tweet’s author led me the radio interview that had elicited his lament—an hour long segment on Boston’s WBRU that Klein was giving in connection with the march and her new book, “This Changes Everything: Capitalism vs. The Climate.”

When I moved back to the United States seven years ago after having spent many years working on investment in clean energy projects in Asia, one of the stranger things for me to discover as I familiarized myself with the cultural debate around climate change was the accusation made by certain elements of the right wing that climate change was a plot dreamed up by liberals to destroy capitalism. Having worked in a commercial enterprise with the goal of stopping climate change, the two things were unrelated in my mind. The roots of this fear are now more obvious to me even if it remains, in my mind, as unwarranted as ever.

But for Naomi Klein the fear is not unwarranted. On the contrary, she seeks to validate it. The title of her book is a provocation, meant to meet the opposition head on, reclaiming its territory as her own. Yes, she says, capitalism is to blame for climate change, and yes, conservatives were justified in their fears. But these two things, capitalism and climate change, are unequally matched. The climate can be specifically defined, capitalism cannot be; it is an economic system that takes many shapes in different societies, and can be modified or restrained to fit the needs of the future. As with the term ‘corporation’, a blanket condemnation of capitalism is hard to make sense of.

Many of the things that Klein calls for—small, locally owned energy enterprises, government control of dangerous activities, strengthened homeowners rights, and the end of predatory banking, breaking the link between economic growth and resource depletion—are not inimical or intrinsic to capitalism. The same is true for radical deregulation which, in her interview on WBRU, Klein conflates with capitalism. Radical deregulation is a trend that in past thirty years has seized both Democrats and Republicans alike. Not even Adam Smith advocated for it, and it has been criticized by Anat AdamtiDavid Moss, and Simon Johnson respectively of Stanford, Harvard, and MIT Business Schools, to name a few.

Even Klein’s statement that some profits are illegitimate is far from anti-capitalism. The mere existence of markets in a society does not imply that the amoral transactions that constitute them need to rule, unchecked, in its every aspect. On the contrary, it is important for a healthy society to evaluate where markets belong and where they don’t. Different societies will have different lines, but the need to establish a line is in itself uncontroversial. Even Milton Freidman would have balked at selling babies.

Klein demurs when it comes to solutions, saying that she is a journalist diagnosing a problem, and she will leave solutions to others. She is clear that she does not think that communism is the solution, acknowledging that the record of communist societies in dealing with the environment is terrible. In many ways, this acknowledgment negates her thesis. It’s not capitalism vs. the climate; it is destructive human activities vs. the climate. And these destructive activities can be mediated through any number of government systems. However we choose to organize society in order to deal with climate change, it will be some combination of market and non-market activity. Unless, of course, one is advocating full-throated communism, which Klein certainly isn’t.

And so it is not clear to what this language serves, coming from someone on the board of such a prominent climate change activism organization, except to alienate a vital section of the grassroots. This is a pity because there is much in Klein’s message—particularly in her eloquent detailing of the harm that major industrials run amok cause to human and infant health—that is important and underreported. It is a message that would resonate with almost anyone, regardless of political affiliation.

It would be one thing if none of this mattered, but it does matter.

In a column last week, entitled, “Why the [Awesome] Climate March Won’t Change America,” Grist writer David Roberts rightly pointed out that the climate march is hobbled in its ability to effect change because, diverse though it was on the liberal side of the spectrum, the right, by and large, did not turn out.

“[march organizers] would have been over the moon to have more Republicans. They deliberately kept the march’s message broad, avoiding specific policy demands, to allow a wide range of people to participate. I’m not one of the many back-seat drivers who blames the climate haws for the right’s intransigence of the issue. The right is to blame for the right. And right now, the right is unreachable on climate change. But the fact remains that the diversity on display was, broadly speaking, diversity within the left.”

Of course people are to blame for their own actions, but reasonable people can disagree on whether not turning out for the march is blameworthy if one is conservative.  The march’s message might have sounded broad to Robert’s liberal ears, but it wasn’t terribly. Further, not joining the People’s Climate March is not synonymous with climate denial. Roberts says that, “The right is unreachable on climate change,” a characterization that is both inaccurate and dehumanizing.

Roberts confuses the denial and inaction of conservative members of Congress with the broad base of conservative voters, whom he dismisses as a bunch angry and entitled southern white men.

Let’s look at the numbers. The Yale Climate Change Opinion Survey details that of 726 self-identified conservative voters, 52% of them believe that climate change is happening, 26% percent do not, and 22% don’t know. Seventy percent of conservatives believed that the United States should increase the use of renewable energy “immediately”. Forty-two percent of those people believed that that the benefits outweighed the costs of greater government regulations. Two-thirds of respondents believed that America should take action to reduce its fossil fuel use. Only one third of respondents felt that the Republican Party’s position on climate change reflected their own, and a majority believed that their congressional representatives were unresponsive to their views on climate change.

So that doesn’t sound like unreachable on climate at all. It sounds like the Republican Party has a position on climate change that is increasingly untenable, and that there is a disconnect between the desires of the electorate and the actions of the Congress. It is not just a problem with climate change and the Republican Party. A recent Rasmussen poll showed that 53% of Americans believe that neither political party represents them, and the most recent numbers for Gallup’s confidence in  Congress poll show that number to be at a new historic low for the poll’s forty-two year history; seven percent of the public reports having a high degree of confidence in Congress, while two-thirds of the voting public has ‘very little’ or ‘no’ confidence in the Congress. All of this seems to indicate that Americans vote, but are not entirely happy with either options or the results, and that it wrong to categorize the public as a whole in terms of broad swaths of red and blue.

William J. Becker, Executive Director of the President’s Climate Action Project, has already taken Roberts to task for ignoring the data on conservatives. In a column yesterday, Robert’s breezily dismissed Becker’s data, saying he doesn’t trust polling and message testing because data doesn’t represent the way that people will act in the real world. He then goes on to describe how he believes the real word does act by citing the Ph.D. research of Irina Feygina, who…seems to have done a lot of work with polls and message testing. The first line of her Ph.D abstract reads, “Despite extensive evidence of climate change and environmental destruction, polls continue to reveal widespread denial…” It appears some polls and message tests are more equal than others.

That said, of course polling and message testing are limited and are not predictors of political behavior. They are a grain of insight, nothing more. And that is an important insight, if you need polls to get it. I do not have the same, incredulous reaction to these polls as Roberts because, for me, they reflect realities that I see in my personal and work life. But from Robert’s descriptions of how ‘the conservative’ behaves, one gets the impression that his only exposure to conservatives is what he reads in the liberal media; that he is both the purveyor and the product of the very polarization he calls himself “obsessed with.”

I give you this:

Put a conservative in a room with a poll and ask him whether he supports cleaner air. Why of course he does! More efficient energy use? Sure! More solar energy? Yes, please! People like cleaner, more, and better, generally speaking.

Now imagine that conservative in his living room, watching Fox or listening to talk radio. Is he hearing about cleaner air? No, he’s hearing about job-killing regulations, which he hates. Is he hearing about efficiency savings? No, he’s hearing about Big Government coming to take his lightbulbs, and he hates that. Is he hearing about the recent flourishing of solar power? No, he’s hearing about Solyndra, about government boondoggles and giveaways. He hates those.

Would Robert’s dare refer so categorically to any other group but conservatives? And also, did it occur to him that his own reaction towards optimistic polls about conservatives and climate change is not far off from the behavior of ‘the conservative’ that he so grotesquely caricatures?

In the service of his Manichean depiction of America, Roberts shows a map of the United States, color coded red and blue by the straight majority of the districts that voted Democrat or Republican in the 2012 Presidential election.  He contends that liberals exist in what he calls ‘urban archipelagos’ with the rest of the country awash in rural angry-white redness. This picture is radically oversimplified. Even a slightly color coded map shows a more nuanced and accurate picture. This map from the Chicago Sun Times is a good graphical representation of the margins of victory between Republicans and Democratic in congressional districts, making it clear that margins of victory are slim in most states. The geographical divide is also far more nuanced than Roberts would have us believe

There are people who vote for both parties all across the country, and they encounter each other every day in school, as neighbors, and at family gatherings. Contrary to what some pundits in rarefied circles would have us believe, we are not, as Americans, binary-red-and-blue-bots who avert our eyes from The Other on the rare instances that we happen to pass on the sidewalk. Among our ranks are Republican voters who believe in broad access to inexpensive healthcare and strong action on climate change and Democratic voters who believe in fiscal conservatism and second amendment rights. But for both parties, their decisions at the voting booth are restricted in primaries and congressional campaigns run by well-funded and organized groups with a few, narrow priorities. Few individuals are so involved in the political process that they can, or even would consider, participating in picking their political candidate, or even forming a relationship with their already elected official by way of writing, visiting, or demonstrating in order to influence that official to act on certain issues. Just because Republicans—and for that matter Democrats—care about climate change does not mean that it is an issue that they are organized to vote on.

The implication is that there is plenty of room to activate people who care about climate change. This is what has been and doing well, but it appears to be triaging a critical constituency as a hopeless case.  David Robert’s bombast is extreme, but the risk is that the prejudice behind it, “Forget them, they’re hopeless. They might as well be from Alpha Centauri. Their values are not ours. Their very brains are wired not to care,” is, in fact, endemic to a large section of the environmental movement. Robert’s solution for funders—which appears to mirror the strategy of the grassroots movement—is to fund liberal causes, and build a passionate and active liberal movement. That’s what appeared to be happening at The People’s Climate March. But Robert’s strategy is internally inconsistent, doomed to failure by his own analysis. He himself points out that odds are that conservatives will continue to control the House of Representatives for any timeline that matters to climate change. So what, exactly, are we trying to accomplish?

It’s good news that some climate change advocacy groups still put science before politics. Groups like the Citizens Climate Lobby, which organized lobbying visits to more than five hundred Senate and House offices on this last summer to lobby for a revenue neutral carbon tax, has a non-partisan membership and has an fanatical ethos of respect for all people involved in the organizations, regardless of their political affiliation.

Others would do well to follow suit. No one movement will be enough, and the organizations putting people in the streets are powerful. They could be more so. The environmental movement has repeatedly claimed that “climate change is not a left or right issue.” If that’s true, they need to walk the walk. More alarming still, that truth—that climate change affects us all— seems to be threated in the minds of some by the creeping notion with that it really is a liberal issue after all. That is a pity not just because it is wrong and is in itself a fundamentally illiberal idea, but also because it is a dead end.

This post was also published on The Energy Collective

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Energy Prices on Both Sides of the Atlantic Still Not Responsible

Earlier today at the Center for Global Development, IMF Director Christine Legarde gave a talk promoting ‘responsible’ energy pricing, defined as pricing reflects the environmental costs of fossil fuels, by way of launching the IMF’s new publication, Getting Energy Prices Right, From Principle to PracticesMeanwhile, developed countries on both sides of the Atlantic were busy demonstrating how put into practice climate policies that that get energy prices dead wrong.

Last week, the EU decided on targets of increasing energy efficiency by 30% by 2030, a percentage that is well below the 40% targets that many environmental groups were hoping for. The debate around energy efficiency targets in Europe has been fraught with accusations that the Commission is using opaque modeling to justify efficiency targets kept deliberately low in order to prop up the carbon price in the ETS. Brook Riley of Friends of the Earth has called the debate ‘bizarre’.

It would indeed be bizarre if the E.U. were keeping efficiency targets low to protect the carbon price. Efficiency and carbon pricing should be complementary, not competing policies. Energy efficiency targets are designed to mandate action on the negative end of the cost curve that is entirely insensitive to carbon pricing. If an economy is so energy inefficient that mandatory targets significantly reduce the demand for fossil fuels, then the logical implication is that there is plenty of room to increase reduction targets without causing the carbon price to spike. In essence, the best way to protect the carbon price is to reduce the cap. And energy efficiency policy should have no ambitions beyond efficiency. It is a pity that the EU-ETS cannot manage to solve its oversupply problem through a steeper or permanent set-aside, but treating efficiency as a back door to the carbon price is the wrong way to rectify the problem.

As the EPA closes out the Washington, D.C. public comments period for its Clean Power Plan, it is worth asking what the total global impact of the Obama Administration’s climate policies will be. The administration is mandating national emissions targets of just over 1100 lbs per MWh of generation by 2029. The size of this target is synonymous with locking in natural gas as the fuel of choice for the U.S. power sector.  The Obama Administration has made no secret its intention to use natural gas as a bridge fuel for emission reductions. The appeal of this strategy is easy enough to see—having let cheap natural gas set up the ‘bridge’, the administration need not bother itself about how to get to the other side—a question the Clean Power Plan certainly doesn’t address.

A recent report by Rhodium Group and CSIS shows that the Clean Power Plan will cause a 15% increase in natural gas generation over the reference scenario by 2030 versus a 1% increase in renewable generation. Environmental groups lauding the Climate Action Plan tend to focus on its impact on coal, which will indeed decrease. To what end? More exports for China, evidently. The developed world has a long history of exporting its pollution to poorer countries, but the act takes on unusual perversity when the pollutant is carbon dioxide, which doesn’t stay out of the proverbial back yard if one chooses to burn it there.

But can the government be blamed that the coal is going to China? It can be. As the above article from Vox highlights, 40% of U.S. coal comes from public lands, and the Obama administration has presided over the leasing of 2.2 billion tons of coal to private companies in non-competitive auctions. That is to say, it is practically giving away the coal to allow private companies to profit by selling environmental destruction to China. A real climate policy would put a price on the carbon dioxide in coal at the mine mouth to close the export loophole. Some may protest that such a policy is out of reach of the Obama Administration, but setting a higher reserve price for the auction, which would have the same effect, is far from politically impossible. And yet the U.S. government continues to ask for plaudits for reducing coal, and all the while it is giving it away.

Whether in coal or carbon pricing, if the U.S. and Europe want credit for strong climate policy, they should put their money where their mouths are.

This article was also posted on The Energy Collective.

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Model Governance and Emissions Models, Transparency and Climate Policy in China and the EU

Last week Reuters published a brief article updating the public on the status of Beijing’s emissions trading system, with its thinly traded volumes and largely opaque transactions. The crux of the article comes in the last paragraph, Without transparent data, it is hard for investors to position themselves,” said another trader, who asked not to be identified because he is not authorized to speak to the media. It doesn’t bode well for the strength of China’s emissions trading system that the person willing to speak out about its core problem, lacking the State’s imprimatur to open his or her mouth, prefers to remain anonymous. This is not the kind of environment in which strong climate policy can prosper.

But opaque climate policy is not just the purview of post-communist oligarchies.  Earlier this month at a meeting on modeling for climate policy at Breugel, a Brussels-based economic policy think tank, attendees were privy to the spectacle of Peter Zapfel, Assistant to the European Commission’s Director General for Climate Action, telling the crowd that they should ask themselves how much transparency the public really needed. The issue in question was the closed-source PRIMES model, the partial equilibrium model used by the European Commission to determine the impacts of different climate policies and to justify the policies selected by the Commission for the achievement of their own 2030 targets for climate clean energy. Attendees representing environmental NGOs in the room, including Friends of the Earth, WWF, and Greenpeace were demanding that that the basic assumptions of the model be made public.

Zapfel’s response, in essence, was that the top line outputs of the model were all that mattered; civil society didn’t need to worry its little head about the inputs. To illustrate his point, Zapfel added that he used to want to know all of the technical specifications of his camera or computer, but then he realized that that was too much information, and all he really needed to know was whether the camera or computer was good or not.

It was a strange analogy from a technocrat, given that revelations about unbounded reach of the United States NSA have recently left the whole world to learn the hard way the dual perils both of not fully understanding the capabilities of their own high technology and of taking a government that says, “just trust us, it’s for your own good” at its word.

Complex systems create the possibility for magnification of small error; therefore, as societies increasingly rest on complex systems, they have a greater, not lesser need for transparency and for civil society organizations to observe and translate the importance of the small details to the public. Whether those details are the discount rates or technology assumptions used in a model, or the quality of continuous emissions monitors used to measure the integrity of an emissions trading system, they have the potential to create consequences of national and even global significance when climate change is what is at stake.

The European Commission has listed “new governance systems” as one of the key elements of the policy framework for its 2030 climate and energy goals. As the Commission sorts out exactly what this means, it would do well to remember just how foundational transparency is to good governance. Both China and the European Union are making real attempts to find the best solutions—both in policy formation and implementation—for the reforming their energy systems, but gagging or blinding their best watchdogs is the wrong way to be spending their efforts.

This article was also posted on The Energy Collective.

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Short Commentaries 5/31/14

China, EU launched three-year cooperation on “Carbon Emissions Trading Scheme” from English People’s Daily. Cooperation will include exchange of experts and sharing of experiences and best practices. One wonders what the EU, plagued with endemic oversupply, can offer the Chinese system. Chinese regional schemes are still young, but a major problem seems to have been lack of price clarity and transparency. On the surface, price problems in China come from a different are different to those in the EU, but the problems have a common root—lack of will to create real reductions. In the idealized world of global emissions trading, cooperation and harmonization should begin early, but as yet there is no indication that ambition or leadership on either side is enough for this cooperation to amount to anything more than trading around the margins.

U.S. eases risks for $134 million forest protection fund from Reuters. USAID moves way from direct payments to projects to a model that, on its face, is more private sector oriented—using its money to leverage investments rather than to directly fund them. The press release gives very little indication of the kind of activities that will be funded or how loan recipients will repay the loans—either traditionally through business activities, or through the sale of voluntary forest credits. It also does not indicate the terms on which Althelia is offering the credit, or the price at which it is buying this insurance from USAID. All of these things would be useful in knowing if Althelia is engaging in actual commercial-style transaction or, or merely giving out donor money with commercial attributes. There is nothing wrong with the latter per se, but there is a question of what it will be proving to the private sector if it is successful. If the transaction is successful under terms that the private sector could not accept or replicate, then leverage effect of the USAID guarantee will have no effect beyond it’s immediate disbursement. This would be a missed opportunity because forest protection needs more money than the public sector can currently offer. While USAID has called Althelia the first private sector fund of its kind, its backers are all development banks. This is, in fact, USAID insuring the European Investment Bank. But if the projects are successful on terms attractive to the pure private sector, perhaps it will follow.

Wonks Collide as Obama Climate Plan Prompts New Ideas from Bloomberg. Great River Power proposes a carbon price that is set according to a level of desired abatement and collected by regional ISOs, who then refund to the fee to the load serving entity on a pro-rata basis per hours of generation. Set up in this way, the price acts directly on the dispatch order of electricity, pushing coal, which would have the highest carbon price, further down the queue. Authors of the study claim that cost relief for consumers will be provided through refunding the revenues to the load serving entity. But in deregulated markets,  load serving entities, will be likely both keep the refund and pass through the price increase anyway. That said, this is not a bad way to arrange a carbon price for power. It would be a step forward for the EPA if, under the carbon regulations for existing power plants to be that will be announced this Monday, it allows for states to creatively implement their carbon limits through use of this pricing plan, or another one link it.

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Between Drilling and the Deep Blue Sea

““Unlike most of the planet, the Arctic still contains uncharted mysteries,” Bloomberg yesterday quoted Scott Minerd of Guggenheim Partners LLC as saying.

The statement is no doubt true. The Arctic is among the last pristine wildernesses on the planet. There are elements of the global influence of its climate and the local details of its ecosystems and geology that science has not yet attempted to record, let alone understand. But Minerd was being loose with the language—by ‘uncharted’ he meant ‘unexploited’, and by ‘mysteries’ he meant ‘resources’. His investment management fund is looking at investing in heavy industry in the Arctic region.

Guggenheim Capital Partners is not the only investor interested in exploiting the Arctic. A 2012 report from Lloyd’s of London identifies around $US 400 billion of committed and projected funds for the development of potential Arctic oil and gas projects. Four hundred billion dollars is not a spectacular sum when it comes to the oil and gas investment—Ernst & Young reports that 75 non-national oil companies representing only 9% of oil and gas reserves worldwide invested $US 540 billion in 2012 alone.  Investment numbers for national oil companies, which hold 90% of reserves, were omitted. Lloyd’s numbers are quotes of preliminary estimates and crude approximations as such. The U.S. Geological Survey estimates that around 22 percent of the world’s untapped oil and gas reserves are in the Arctic. If a sizable fraction of reserve prospects for Arctic development proved exploitable, total investment would well exceed $US 400 billion.

What else could be done with this money? A timely transition to renewable energy will require at least US$ 1 trillion in investment a year. But total renewable energy investment was down by 11 percent last year to $254 billion dollars—some considerable change shy of the trillion-dollar mark. Even if $1 trillion isn’t an exact figure, it’s beyond dispute that more money is needed.

Investment in Arctic Ocean oil is an interesting analog to renewable energy investment. In the logic of the last decade, risk-adverse financial investors would flock to fossil fuels over renewable energy because with fossil fuels, they were confident of a steady return due to its low risk profile and steady returns.

But Arctic Ocean oil turns that argument on its head. Early this year, after spending $US 6 billion dollars and not drilling a single well, Shell announced that it was suspending its operations for drilling in the Arctic for fear that the investments were damaging its bottom line.

Shell’s $US 6 billion dollar loss was buried in a portfolio of higher return projects so their shareholders, while affected by the loss, did not feel the bite in the way they might have were they taking a stake in an Arctic-only private equity fund as Guggenheim Partners is considering doing. Renewable projects, due to uncertain regulation and comparatively newer technology, are considered a risk. But average returns on renewables, in the low single digits, are better than Shell’s Arctic Ocean prospect that on account of regulatory issues, legal hang-ups and technology immaturity has until now offered only negative yields. When risk capital is the rasion d’etre for investment, it is worth asking why, when given a choice, one would invested in destroying the environment rather than preserving it?

But returns are not the end of the story, even though it is easy to get lulled into thinking of them that way. Yesterday evening, Harvard students blockaded the office of the University President Drew Faust in protest of the University’s decision not to withdraw the endowment’s investments in fossil fuels. This morning, a number of them were arrested. In a statement to the Harvard Community written last October, Faust stated that, ‘The endowment is a resource, not a tool to impel social or political change.” In so writing, Faust perhaps unwittingly, invoked the backward view of finance that recently resulted in the Great Recession by way of robbing a line from Machiavelli’s playbook— In actions of all men, especially princes, where there is no recourse to justice, the end is all that counts.

The purpose of debt and equity finance is to facilitate capital accumulation, which in turn defines the structure of the society in which it exists. Returns are fees, the project is the purpose. In a healthy financial system, financers are mere middlemen. The great disasters of modern finance, including the 2008 financial crisis, were a symptom of a financial sector that came to conceive of returns as the purpose and, in the most recent crises, deliberately created ways of divorcing those returns from the projects that they intermediated with catastrophic consequences. While it is true that investors evaluate projects on the basis of returns, it simply incorrect to imply that the decision to stop or go ahead with projects will not have social or political consequences. The ends are a resource, but the means of getting them shapes the world.

This article was also posted on The Energy Collective.

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