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Why Richard Tol is Wrong about the Upside of Climate Change

“It’s pretty damn obvious there are positive impacts of climate change,” Reuters reports Professor Richard Tol saying on his way to disassociating himself from the Fifth Assessment Report for the Intergovernmental Panel on Climate Change that he helped to author. The report is the international, comprehensive assessment of the state of human caused climate change and its impacts, which was released last week. The report, in summary, says that the rate at which the climate is changing will be very, very bad for life on Earth.

Tol doesn’t think so, but Tol is an economist, not a scientist. His expression of risk is reflective of the flaws in economic thinking. He appears to conceive of climate risks as linear and additive, basing his climatic unconcern on the outcome of a cost-benefit style of economic analysis where you count up the pros and cons and then consider if you have broken even, are ahead, or are in the red.

He points out that in the much-discounted positive side of the climate change equation, some regions will be able to grow new crops. Potatoes in the tundra! Booyah! So why all the frowny faces about impending disaster? “They will adapt.” Tol is quoted as saying, “Farmers aren’t stupid.”

No, they are not. But unfortunately for Tol’s argument, neither is climate risk linear and additive. It tends towards discontinuous and geometric. If you happen to be a farmer in India who can no longer produce food for lack of water, no amount of non-stupidity will help you think up a way to make rain. If you happen to be a farmer in Africa, you might find weather conditions forcing you to switch from farming agriculture and raising livestock to raising livestock alone. Which would be fine until you discovered you had nowhere to feed your livestock but a wider and wider range of degraded land, creating further erosion and irrigation problems for your already-stressed environment.

Of course the picture is complicated. Some crops will thrive where they didn’t before. But the known unknowns should keep us from running out and celebrating just yet. Pests will also thrive where they didn’t before. The mere existence of a substitute for a failed crop doesn’t imply that even the clever farmer will have access to the seed, or the experience to grow it, or insight into how to keep it growing in the rapidly changing and more erratic weather patterns that we are to expect with sudden climate change. These transitions take time and money and room for trial and error. The regions where much of the harm will occur do not have the money or the margin to endure these changes.

Tol’s argument in some ways echoes that of the nouveaux climate change denialists who say, “But it was warm when the dinosaurs walked the earth, and there was still life, plenty of life!” Not human life though. All the changes in past temperature took place over the course of geological time—slow enough for adaptation to occur in the biological sense of the word. Except in the case of the dinosaurs, that is, when the climate did indeed change quite quickly. Man-made climate change is happening in time frames sensible to, well, man.

This means that we are placing ourselves in conditions to which life—in both the biological and cultural sense—has never before had to adapt. We know plenty well enough to know that, given the fragility and interdependence of our existence in nature, such changes run high risks of causing catastrophe.

Tol is an economist not a scientist, but even economists ought to know better by now than to make these mistakes. After all, the catastrophic failure of economists to predict the 2008 financial crisis was in no small part a result of overreliance on models that underestimated the impact of interconnectedness and coordinated failures.

Of course farmers aren’t stupid, but Professor Tol is dead wrong to be so glib.

This article was also posted on The Energy Collective.

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Short Commentaries 02/28/14

Global Carbon Markets to Reach Record Volumes By 2016 from Business Spectator. Carbon markets need a different measure than volume for success. Article cites a point carbon analyst expecting EU-ETS market value to increase by two thirds to 7.5 Euro per ton. Increasing value drives increasing volume, but what does it mean? Permits are rising again off the back of the enactment of back loading measures and the release of a clear schedule for withholding permits from auctions. The price increase is indicative of nothing more than irrational exuberance betting on irrational exuberance. With the EU-ETS still more than 1 billion permits long, the fundamentals for a real appreciation aren’t there. The real value of these permits remains near zero. Optimists might argue that this represents a first step by the EU and that the next step is that backloaded permits will be cancelled, or further permits will be withheld from the system. Given the two-year fight over pulling out less than half of the long permits out of the system, holding permits in hope of another policy breakthrough is bound to be a bad bet. Also, more is now riding on the permits than the EU-ETS. Europe has staked out 40% reductions for its 2030 targets. As Greenpeace has pointed out, 2.3 billion banked permits in the system means that only 33% reductions are required to meet that target. Would the Commission have settled on 40% rather than the less ambitions 30% or 35% targets in play if the escape valve of banked permits weren’t present? Perhaps they would have, but as this blog has pointed out before, bells-and-whistles climate policy has a way of making it easy for countries to take strong positions in name only.

U.S. Coal Exports Jump Three-fold Since 2005 from Oil Price. This is the entirely predictable result of falling coal consumption due to the shale gas boom.  This announced just a day after a kerfuffle about Norway’s Store Norske opening a coal mine in its artic regions even as its sovereign wealth fund bans investment in coal companies. Robbing Peter to pay Paul is a nice way to appear current in sovereign carbon cutting; unfortunately given the global nature of carbon emissions, the collector will soon come around for us all.

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The U.S. Government Should Pay Attention to Uncertainties in the GHG Budget

Cornell professors Robert Howarth, Renee Santoro, and Anthony Ingraffea ignited a controversy in 2011 when they published a study claiming that, due to escaped methane, emissions from hydraulically fractured natural gas were worse than coal. Their study showed that the escaped gas amounted to four to eight percent of total gas production, more than twice the EPA’s estimate for the same figure.

Two different studies, one from Cornell and another from MIT, produced their own analyses criticizing Howarth et. al.’s claims on the grounds that their data set was too small, their assumptions incorrect. Both studies concluded that hydro fracturing leaked little gas. But both studies criticized Howarth et. al.’s assumptions by way of offering new assumptions, but no new data or measurements. Nothing was settled.

Carbon dioxide emissions—with the exception of emissions from transportation—come from large, industrial sources. By contrast, methane emissions leak out of hundreds of thousands of sources that include valves, pipes, landfills, and waste pools.  In oil and gas production, these emissions, known as ‘fugitive’, are just that; they steal out of the equipment and infrastructure and go uncounted into the atmosphere. The Environmental Protection Agency requires gas production, processing and transmission facilities to report fugitive emissions using emissions using estimates based on a predetermined calculation for leakage rates for each piece of equipment. But actual leakage rates can vary depending on the type of equipment, how it is maintained, the type and pressure of the gas that it conveys, and the geology of the formation from which it is withdrawn. The estimations are necessarily inexact. There are no direct measurements, and so much room for controversy.

Recently, the Environmental Defense Fund attempted to fill the data gap by coordinating a study that took direct measurements of gas flow back from wells. Results showed that wells constructed using advanced technology leaked only 0.42 percent of production—much less than Howarth et. al.’s or EPA’s estimates. But the study settled nothing due to skepticism due to over sample bias—companies that voluntarily cooperate with fugitive emissions studies are likely to be the best actors.

Then last month yet another study of fugitive methane emissions lead by Harvard claimed that emissions for the 2007-2008 period were 50 percent above the estimates used by the EPA for that year. The Harvard study is different to preceding studies in that it doesn’t rely on estimates or incomplete measurements, but rather uses to cell phone tower and airplane mounted instruments to detect the mass balance of methane in the air. The data is harder to quibble with.

The findings prompted Henry Waxman to call for hearings on methane emissions and global warming consequences of natural gas extraction. Given the current leadership of the House Energy and Commerce Committee, hearings are unlikely to happen. But methane emissions need more oversight. Uncertainties over methane leakage are just part its underreporting. New science on the global warming impacts of methane also point to it being a much larger portion of U.S. emissions than is currently reflected in U.S emissions inventories.

Methane emissions in the EPA inventory are not given in terms of tons of methane, but tons of carbon dioxide equivalent, or the potency of any gas a greenhouse forcer compared to carbon dioxide. Carbon dioxide equivalent is calculated through a conversion factor called Global Warming Potential (GWP). Estimation of the Global Warming Potential of a gas is complicated. The single number of Global Warming Potential is meant to capture the gas’s comparative power to absorb infrared radiation, its lifetime in the atmosphere and its indirect effects, including induced changes in tropospheric ozone, water vapor levels, and CO2 production. Most recently, the Intergovernmental Panel on Climate Change (IPCC), which sets the international standards recommended GWPs for gasses, has added climate feedback effects to the calculations.

The value of methane’s GWP has constantly changed as the science behind its derivation has evolved. In 1996 twenty-one was the IPCC’s recommended GWP for methane. Next year, the IPCC will revise its recommendations for methane’s GWP for the third time since 1996 from its current twenty-five to thirty-four. Methane numbers in the United States Inventories for Greenhouse Gasses and sinks, meanwhile, are still reported using the 1996 value of twenty-one. The EPA is in the process of updating the GWP for methane to twenty-five, the value recommended by the IPCC in 2007. The change will bring the United States emissions inventories up to the best available science of seven years ago, but leave methane emissions underreported by thirty-seven percent compared to the best available science of today.

The EPA decided to update to 2007 values in part to standardize with the recommendations of the United Nations Framework Convention on Climate Change (UNFCCC), which sets guidelines for international reporting. While it is valuable to be able to accurately compare the United States’ emissions to the rest of the world, it is arguably more important to have a realistic assessment of the comparative size and impact of different sources on a national level. Abatement decisions are not made on an international level, but driven by domestic energy interests and domestic regulatory assessments of significance, harm, and abatement costs within national borders. When numbers are skewed, there is a danger that decision-making will be skewed as well.

According to the EPA, total net emissions in the United States in 2011 were 5.75 billion tons of carbon dioxide equivalent. Of those emissions, methane constitutes 580 million tons, accounting for ten percent of total U.S emissions. If methane emissions in the United States are indeed underestimated by 50 percent, that would make them just over fourteen percent of total emissions. Incorporating the most accurate GWP—thirty-four—into the upward revised number for leakage, total methane emissions become 1.4 billion tons of carbon dioxide equivalent, or 2.4 times higher than emissions listed in the current national inventories, and twenty-one percent of total emissions. Even in the most conservative case where EPAs leakage rates are entirely accurate, if thirty-four were used as a conversion factor, methane would be reported as fourteen percent of total emissions.

Control of fugitive methane emissions is simpler than the control of carbon dioxide emissions. Halting carbon dioxide emissions in the United States will require that trillions of dollars infrastructure currently locked into fossil fuels be retired and further trillions of dollars be invested in development and construction of non-emitting energy technologies. By contrast, controlling fugitive methane emissions requires that simple and already existing technologies be installed at a profit to the companies that install them.

The failure to control fugitive methane despite the obvious benefits is a typical failure of energy efficiency to be effected. There are many reasons why large industries waste energy—and therefore money—including poor incentive structures, higher rates of return on an investment in the company’s main line of business than on investment in efficiency improvement, or poor understanding of where and how the gains are to be made.

But in addition to wasting private money, energy inefficiency imposes a cost on the public through higher emissions and climate change. In the case of methane emissions through natural gas losses, the cost is thirty-four times higher than that of carbon dioxide for every ton of emissions wasted.

Given the high cost to the public of methane emissions, the low cost of regulation to the emitters, and the continued failure of the market to stimulate action, there is a clear case for controlling emissions through regulation. President Obama has highlighted methane as a problem, saying a June 2013 speech, “We’ll keep working with the industry to make drilling safer and cleaner, to make sure that we’re not seeing methane emissions…” But the President’s Climate Action Plan has no specific plans for controlling methane. It calls in general terms for interagency partnerships to reduce methane emissions in agriculture, oil and gas. Concrete plans for controls are yet unarticulated.

In referencing cleaner drilling, President Obama was referring to the EPA’s promulgation of New Source Performance Standards for the oil and gas production. The new regulation puts controls on certain wells, compressors, valves, and storage tanks upstream of processing. Gas wells with ‘green completions’ are the type of infrastructure that the Environmental Defense Fund monitored in its study showing a loss rate of 0.42 percent. The study is also the reason why many companies are claiming that Harvard study showing high leakage from the 2007-2008 period is outdated. The EPA’s New Source Performance Standards are not designed to control methane. They are designed for the control of hazardous and toxic pollutants such as benzene and xylene that are components of natural gas when it is extracted, but are removed during processing. Some methane is controlled as an ancillary benefit, but it is not the principal intent of the regulation. Thus, upstream of processing only very specific installations with high air toxics emissions are targeted. Installations downstream of processing are not affected by the regulation at all.  But about half of methane leaks from oil and gas production occur downstream of production. But EPA’s own estimate, this regulation will prevent between 1 and 1.7 million tons of methane emissions in the future, or between 3 and 5 percent of present day volume as reported by the EPA.

The EPA reports that emissions have dropped 12 percent since 2005. But even through conflicting reports, it is clear that the real magnitude of reductions remains unknown. Information increasingly points to methane emissions being a more serious component of the U.S. emissions than previously believed. The government needs to start taking the problem seriously, first through accurately reporting the emissions, and then through promulgating methane-targeted policy that controls emissions, rather than relying on regulations that were written without methane in mind.

This article was first posted on The Energy Collective.

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Short Commentaries 12/23/13

On climate change, Florida’s been warned from Tampa Bay Times. Local Tampa journalist is told by climate scientist during an MIT fellowship, “Oh, but you’ll be underwater.” The article discusses the now unavoidable flooding of Florida’s coasts due to sea-level rise, but does not discuss the fact that the porous limestone geology of much of south Florida means that not just the coasts, but up to half of the entire state, have a reasonable risk of inundation by the end of the century. More reporting like this is needed in Florida to start moving the dial on the opinion of local leaders like Marco Rubio, who has taken the no-carbon-tax pledge and is against federal action on climate change on the grounds that “Government Policies Can’t Change the Weather.” Rubio is right, of course, but not for the reasons he thinks. Government policies that cut carbon emissions could mitigate climate, which is a different thing from the weather. Rubio is on the record against federal policies for prevention, but he is also on the record as being just fine with having the federal government pick up the bill for climate crises once they have occurred, as he has advocated for the federal government establishing a reinsurance fund for natural catastrophes.

Energy Tax Breaks to Shrink in Baucus Focus on Emissions from Bloomberg. Baucus says he wants to simplify the tax code while creating a policy where the government isn’t picking winners. But discussions on tax reform have eschewed the most elegant solution—the creation of an economy-wide carbon tax. The proposed tax credit will go to installations with emissions that achieve a benchmark of 25% below the national average. Policies aimed at reducing emissions—and particularly policies targeting investment in new infrastructure that will be operating for the next 20 to 60 years—should not have a floor on the amount of emission reductions they are intending to bring about. Here again, a carbon tax is a more effective instrument in that it creates constant, downward pressure. Further, with a U.S. national average of about 1200 lbs. of CO2 per MWh, this policy will be a handout to combined cycle gas plants, most of which can already make the 900 lbs. per MWh threshold.

Not Just the Koch Brothers: New Drexel Study Reveals Funders Behind the Climate Change Denial Effort From DrexelNOW. The implication appears to be that campaigns aimed at shaming foundations out of funding climate denial managed to shame them into doing the same thing sub-rosa instead. Money might be better spent in public education than in trying to coax the wicked out of their ways.

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Short Commentaries 11/27/13

Beijing Looks to Market to Fix Pollution from The Wall Street Journal. The interpretation as an anti-pollution policy is curious. The announcement, released from the Third Plenum of the Chinese Communist Party’s (CCP) 18th Congress, was a typically vague CCP utterance, announcing that markets will have a stronger role in allocating water, electricity, oil, and natural gas. Chinese natural gas, oil, and electricity sell at prices well below international averages. Higher natural gas prices would actually have a negative impact on pollution in China, as gas burners clearn than coal, and has become a choice fuel for cities like Beijing that are facing gross limits on coal consumption imposed as a means of pollution control. The policy will also have no impact on pollution pricing through carbon tax and cap and trade schemes. Those are separate policies, and where they do exist in China, their prices are still too low. China’s carbon taxes of US$1.6 per ton of coal will not create a differential price with gas. While some trades in Shenzhen’s market have closed at over $US 11 per ton, these have been largely speculative trades in a low-liquidity environment that shouldn’t be taken as indicative of a national price. Direct carbon pricing, of course, is not the only way to curb polluting. Ending subsidized electricity prices to energy users in theory could cut waste. However, the Party was clear in its announcement on the continuing centrality of state owned enterprises, and they are unlikely to lose their influence with the government any time soon. Moreover, energy efficiency is already on the negative end of the mitigation cost curve where incremental price increases are unlikely to have significant, if any, effect. Water pricing is a different thing than pollution discharge pricing and will not have any salutary impact on the 70% of China’s water supply that is contaminated. China’s pollution controls will continue to advance primarily by command and control, where they advance at all.

‘Signature’ achievement on forests at UN climate talks from BBC. REDD+ had two small wins at COP 19—the commitment of an extra US$ 280 million of funding for the World Bank’s BioCarbon Fund and the formal adoption of REDD+ through the COP. Formal adoption will pave the way for standardized criteria for baseline measurement and pay for performance financing. Innovations such as publically available data for deforestation detection from the LandSAT and MODUS satellites has greatly improved the odds that pay for performance for forestry can be verifiable and accurate. However, the adoption REDD+ by the COP 19 does not and cannot provide what the forests most critically need—a sustainable source of conservation finance. This, of course, cannot be provided without binding targets, and the COP cannot achieve binding targets.

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Politics and the Language of REDD+

“For the moment you start to discuss some eternal principle or another, you are not arguing, you are fighting. That eternal principle censors out all the objections, isolates the issue from its background and its context, and sets going in you some strong emotion, appropriate enough to the principle, highly inappropriate to the docks, warehouses, and real estate. And having started in that mode you cannot stop. A real danger exists. To meet it you have to invoke more absolute principles in order to defend what is open to attack. Then you have to defend the defenses, erect buffers, and buffers for buffers, until the whole affairs so scrambled that it seems less dangerous to fight than to keep on talking.”

-Walter Lipmann, Public Opinion

Jerry Brown didn’t show up to last week at the ceremony where he was to receive the Blue-Green Alliance’s “Right Stuff” award. But who did? A crowd of protestors condemning the Governor for his support of REDD+ through the Governor’s Climate and Forest Task Force and the possible inclusion of REDD+ projects into California’s emissions trading scheme. Speaking outside the Blue-Green Alliance award ceremony, Executive Director of the Indigenous Environmental Network Tom Goldtooth called REDD+ bad for the climate, environment, human rights, Californians, and the economy. The controversy has had some impact on the state of California, which has decided to avoid the sticky wicket of climate finance by setting no clear timelines in which REDD+ will be accepted into the California’s Emission Trading System.

All of this happened as the Climate Policy Initiative released its report stating that climate finance dipped to $US 359 billion dollars a year in 2012 from $US 364 billion in 2011. If ever implemented on a large scale, REDD+ could be a major vehicle for climate finance, but with the lack of political will to mobilize the money in the developed world and anger about REDD+ in the developing world, it is unclear whether the past six years of efforts to develop a REDD+ regime will ever amount to anything. If REDD+ does go down with a whimper, will it be a major loss for climate finance, or a near miss for the developing world?

What is REDD+?

At this point, the uninitiated in the acronym-overloaded nexus of climate and development finance might be forgiven for asking, ‘what on Earth is REDD+ anyway?’ It is a question both sides of the REDD+ debate would do well to revisit.

Last week, Steve Zwick of Ecosystems Marketplace published an article asking why the mainstream media always gets REDD+ wrong. Just days later, the Center for International Forestry Research (CIFOR) released the results of a media study concluding that the ‘causes of deforestation are getting lost in REDD+ rhetoric.’ Has a jungle of jargon overgrown all lucid discussion of conservation finance?

The ‘REDD’ in REDD+ stands for Reducing Emissions from Deforestation and Forest Degradation with the ‘F’ for forest elided to allow for the abbreviation ‘REDD’ that has a pithy, homonymic quality but also the disadvantage of being too reductive to encompass the diversity of solutions for forest loss. The  problem was dealt with by adding a ‘+’ to represent, ‘the role of conservation, sustainable management of forests and enhancement of forest carbon stocks in developing countries.’ The resulting REDD+ looks mathematical, but lacks precision.

The emissions reducing activities that might fall under the REDD+ rubric would include, but not be limited to, governance programs encouraging the devolution of land rights to indigenous groups, establishment of conservation areas, sustainable forest management, establishment of agroforestry projects, payments for ecosystems services through international development funds, payments through ecosystems services through market mechanisms, voluntary conservation payments, commercial agricultural intensification, disbursement of efficient cook stoves to limit wood harvesting, establishment of alternative industries for forest dwellers to prevent clear cutting, training of local police forces to prevent deforestation, establishment and training in remote monitoring, and mobile technology to improve policing and detection. These activities are being carried out in about thirty countries.

The existence of a single word for all of this creates in environment in which not just newcomers, but sometimes practitioners are able to effortlessly reduce, forget, or simply never learn the nuances of a deeply complex topic that cross-cuts technology, ecology, finance, sociology, finance and politics.

Good or Bad?

In his article in The Huffington Post, Steve Zwick reacted to implications, often employed by REDD+ opponents, that profits and markets are necessarily bad. One of the organizations Zwick targets, redd-monitor.org, on the sidebar of its website lists quotes that it calls ‘reddism’, or quotes by people whose support REDD+. One such quote reads, “I’m doing it to make money. The numbers are colossal.” The speaker is identified as London-based billionaire Vincent Tchenguiz. Parenthesis beside Tchenguiz’s byline note that he was arrested in 2011 as part of a probe into an Icelandic banking collapses. The point is to create a kind of condemnation-by-syllogism through which we are to understand that Vincent Tchenguiz likes money, Vincent Tchenguiz likes REDD+, Vincent Tchenguiz was arrested, therefore money and REDD+ are criminal. There is no mention of Tchenguiz’s $457 million dollar lawsuit against the U.K.’s Serious Frauds Offices which has already been ordered by the high court to pay Tchenguiz’s bills for using false information in the warrant. This omission makes redd-monitor.org’s methods more egregious, but even without the factual error, its methods are flawed. And Zwick is right to take offense at these tactics, but wrong to employ them himself in branding his opponents ‘ideologues’ and selecting one straw man example of the opposition’s grievances–already given too much attention by the mainstream press–to represent all of the opposition to REDD+.

Zwick’s takedown of REDD+’s opponents ignores that there are real instances where, in the name of conservation, indigenous groups are excluded from their land and livelihood, and harmful activities are incented. The point should not be that either side is pristine, but rather that the diversity of activities under REDD+ is so great and crosses so many disciplines that it can only be evaluated, praised and criticized on a project-by-project or jurisdiction-by-jurisdiction basis and ought never be referred to as a monolith.

In 2007, the Fourth Assessment Report (AR4) of the Intergovernmental Panel on Climate Change identified forest loss as 18% percent of global emissions resulted in increased international interest in finding ways to dramatically increase financing for preventing deforestation. From this point onward, REDD+ came into the foreground of international climate negotiations and global efforts on improving land use management and forest conservation. The problems of weak land rights for indigenous groups, perverse incentives created by markets, insufficient financing for conservation, and widespread deforestation, are not new and predate the REDD+ framework. But the increased attention that has come to forests along with a realization of the large role that they play in climate change has heightened government, multilateral and civil society focus and conflict over their ownership and administration.

But these issues—self-governance, environmental preservation, and climate stabilization—are significant to everyone on Earth. Problems and conflict are inevitable. It is logical that increasing the financial stakes for forestry will increase the risk of corruption and mishandling of assets. But the amount of money required to halt deforestation is enormous. In some sense, Tchenguiz is right to say, “the numbers are colossal”, much greater than the roughly $US 100 billion a year that is currently being spent on development aid. The advances that could be enabled by increased cash flows into REDD+, including remote detection and monitoring, development of alternative fuel sources, and agricultural intensification will need more money than multilateral donors can afford to give. The private sector must be involved, even if risks that come with involvement. Quality debate and informed public participation are critical to success. To this end, all sides should lay down their shibboleths and start addressing specific problems in plain English.

The article was also published on The Energy Collective.

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Short Commentaries 9/13/13

California Carbon Price Forecast Plunges from Environmental Leader. California’s carbon market becomes the latest to succumb to overly aggressive estimates of supply. Changes from early projections reflects overly aggressive estimates economic growth and transport miles. Analysts have also cited the RPS and vehicle emissions standards as playing a role in downward projects, these factors have been explicit for years and should already have been priced in to the market. It is worth noting that as recently as a year ago, organizations with an interest in increasing California’s offset supply were beating the undersupply drum, demanding an increase in California’s allowed offset categories, some of questionable integrity. Organizations tempted to push for increased offset supply in order to boost their value books should always bear in mind that low prices are also damage returns. Some will say that the low price, as it indicates low emissions, is merely a sign of a functioning market. Congratulations would be indeed be in order if California’s emissions reduction targets were in line with averting serious climate change, but they are not. California’s emission targets for 2020 of 426 million tCO2e represent a mere 5% reduction on 2011 emissions of 448 million tCO2e. While CARB’s stated targets of 80% below 1990 for 2050 are ambitious, it is unclear that these targets are anything but aspirational in the absence of strong price signals to guide infrastructure investments.

Brown Says He’ll Sign California Bill Regulating Fracking from Bloomberg. Fracked gas will help California reduce its emissions by 5%, but not by 80%.

EU concession in aviation emissions row eases trade concerns From Reuters (via trust.org) Connie Hedegaard puts a brave face on the deal by describing it as, “not perfect, but progress.” The agreement is contingent on ICAO coming up with a voluntary emission reductions roadmap by October 4th and European Parliament approval. In including aviation emissions in the EU-ETS The Climate Change Commissioner faced internal opposition as well as formidable trade and legal challenges from the United States and China. A concession that counts only emissions over European airspace would represent a significant walk back from December 2011 findings of the European Court of Justice, and set a bad precedent for cross-border emissions regulation. Resistance to regulation of aviation emissions has always been a staging ground for a broader fight against of  border adjustment taxes. If the of the United States and China are successful in pushing back on cross-border emissions regulations will be more likely that in the future national boundaries will be perceived as the limit of a government’s jurisdiction over emissions. The decision is unfortunate first because national airspace is a nonsensical heuristic for aviation emissions accounting. The ownership or lack of ownership of emissions should be settled between countries A and B of departure and destination. The decision to regulation only over European airspace would leave a netherworld of unaccountable airspace. Secondly, the compromise would have negative implications for sovereigns trying to control their own emissions leakage. The global success of emissions regulation is hampered by lack of comprehensive policy and leakages that are often large enough to obviate the intent of relevant laws. The European Union has bravely gone out on a limb in taking a broad definition of aviation emissions in the EU-ETS. The successful inclusion of aviation emissions under the initial terms of Directive 2008/101/EC would be a shot across the bow of countries choosing not to act on emissions, sending the message–clean up your act, or be closed out by countries who will.

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Of Green Bondage

Earlier this month, the World Bank announced the launch of US$ 550 million dollars of Green Bonds—its largest U.S. issuance to date. Are Green Bonds a way forward for climate finance, or will the World Bank’s Green Bond issuances remain a niche opportunity in the realm of adaptation finance?

The Green Climate Fund, as per the agreements of the COP 16 is to receive $100 billion dollars per year in climate financing. Since its inception, the question of where that financing will come from has hovered over the climate finance community. Even in an era less financially troubled than the present one, donors have been hard pressed to produce so much money so constantly and quickly. Since Cancun, the words ‘private sector’ have been murmured around the back halls of conferences in order to hand wave away the obvious question. But the band-aid only gives rise to another, obvious question—how can the private sector be made to invest in the high-risk low-return investments that characterizes much of the adaptation and mitigation needs of developing countries?

Though often uttered in the same breath, adaptation and mitigation have radically different profiles as investments categories. Mitigation projects include energy efficiency, renewable energy projects, and land use change projects. Adaptation projects include infrastructure projects such as the building of sea walls, water collection facilities, irrigation, strategies for deal with coastal erosion, and even the outlandish development of floating districts for inexorably inundated regions.

The point is that there is a clear path to profits from the power projects that characterize mitigation. In the case of land use there is, at least, environmental pricing work underway to create upside for investors. Whether or not this work will ever be realized is another question.  But the benefits from the infrastructure projects for adaptation are not so easily monetized and therefore do not lend themselves to private sector taking risk on the transition. Which is not to say that there is not room for private sector investment. Adaptation comes at a cost, and the cost must be borne by the government. Governments lack the cash to pay for adaptation up front; therefore, there is room for a fixed income revenue stream for the private sector through debt instruments. But it is still the government that will pay. Green Bonds as a vehicle for climate finance will not satisfy those who want to see transfer payments from wealthier countries as a form of climate reparations. But they are an enabling form of financing for projects that might not otherwise be built. And without the innovation of the World Bank’s Green Bonds, even a transfer in the form of debt would be difficult.

Investors in the latest issuance of the World Bank’s Aaa/AAA rated Green Bonds include pension funds, foundations, private asset managers, and the State Treasury of California. Through the World Bank’s vehicle, these investors’ money has gone, among other things, to a community based natural resource management and development project in Tunisia. Without the World Bank’s repackaging, restrictive covenants would have prevented money from these predominately European and American investors from entering into Baa1/BB- rated Tunisia. The same is true of debt for renewable energy projects, which because of the immaturity of developers and uncertain policy, seldom are able to achieve an AAA credit rating on their own.

The World Bank is able to provide a de-risked portfolio through two means. First, its longstanding relationships with sovereigns allow preferential access both to projects and to repayment, which substantially lowers default risk. Second, the Bank covers its investments in riskier, lower-yield projects by bundling them with more secure projects such as small hydro or gas switching projects.  The inclusion of these projects is necessary ballast for the final product, but it has caused some environmental groups to question their overall green credentials.

The recent $US 550 million Green Bond issuance has a yield of 0.375%. The low yield is partly a reflection of the fact that these are short term bonds, coming due within two years of the issuance, but also reflects the historic lows of U.S. Treasury yields, over which Green Bonds were pegged to have a spread of +8.3 basis points. Both of these facts, combined with question of the Bank’s method of packaging bonds, begs the question of how well this approach can scale. The historic lows of U.S. Treasuries and $US Libor make this investment attractive to US dollar investors, but when these benchmark rates inevitably rise, will the Green Bonds be able to keep up? Assuming that the World Bank can, then the question becomes—at a greater volume of projects, will the World Bank still be able to source and manage attractive offerings while staying true to the environmental principals? The jury is out.

This post was also published on The Energy Collective.

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Short Commentaries 7/11/13

U.S. China agree to cut emissions from vehicles, coal From Reuters. Note that implementing details of the plan are as yet unclear, but that the critical coal component seems to be a continuation of the U.S.-Chinese cooperation on carbon capture and storage. Given the poor thermodynamic profiles and high costs of CCS, R&D dollars are better spent on energy storage. One of the biggest driving factors of climate change is extant and expanding coal use in Asia. Coal’s low cost and great abundance makes it the choice fuel for many developing countries in Asia. CCS is a poor solution because it constrains the possible locations of coal-fired power plants and makes burning coal more expensive than renewable alternatives.

Carbon Market Glut-Fix Plan Wins Backing in EU Parliament from Bloomberg. Backloading inches forward. Fortunately, an amendment that would have further obviated backloading by quickly returning the permits to the market has been removed. Unfortunately, a new amendment stipulates that no more than 900 million permits may be removed, and that the ‘interference’ with the market can only be a one-off. This is bad on two counts. First, it is no secret that 900 million permits are about half of the number needed to return the market to a carbon price that can drive emission reductions. Second, if the experience of the market collapse has shown anything, it is that policy makers cannot predict future price movements in the market. Before backloading became the preferred fix, the price collapse generated talk that an institution that operated like the U.S. Federal Reserve would be required to perform open market operations to keep the carbon price on target. The existence of such a body would imply constant monitoring and interference in the market. Of course the long and painful experience of passing (or not passing) the backloading measure has shown that the legislature cannot be an efficient arbiter of ETS supply. However, in the inevitable event that backloading is insufficient, European government’s hands are tied and, as yet, there is nothing to take its place.

Major Norwegian Pension Fund Drops Tar Sands Investments from The Energy Collective. Proving the worth of The Carbon Tracker initiative’s “stranded carbon” reports. Pension funds are a powerful aggregator through which individuals have a vote on the direction of global financial flows. The Carbon Tracker’s main page has link to help email your pension fund.

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Malthus Rolls Over

Last week, Oxford Computer Science Professor Steven Emmott published an excerpt of his book, Ten Billion, in The Guardian. The tone of his excerpt breaks all of the rules about communication on environmental issues. It uniformly grim and offers no solutions—verboten on two counts if you actually want people to listen, hear the message, and take actions. However, the article, and presumably the book, deals head on with the foundation of environmental destruction—population growth—from which so many environmental groups and writers shy away. The article correctly points out that the constraints are not just climate, but water, waste, and concentrated populations combined with contaminated environments that lead to elevated risks of disease.

The Green Revolution caused the Malthusian crisis to go out of fashion. But Malthus was not wrong, but rather too narrow in his analysis; he identified food as a single, inflexible constraint. He didn’t allow for the expanding effects of technology and didn’t consider the ecosystem’s other limits. He should have identified multiple constraint that represent the ecosystem as a whole.

E.O. Wilson coined the term ‘technological prosthesis’ for pesticides, fertilizers, de-salinization, fossil fuels—anything that allows the population to continue to expand beyond what it would without technology. But these prostheses come at the cost of the complexity and resilience of the natural environment. Each prosthetic fix that allows us to go beyond natural carrying capacity also creates a point of weakness at which our built environment can fail.

The Earth has a carrying capacity. Technology and its continual advancement make that capacity hard to pinpoint, but it does not vitiate it all together. If the capacity is met, human population will inevitably be curtailed. The question now is merely whether the curtailment comes about humanely through policy and planning, or painfully, through ecosystem collapse.

Emmott’s article rightly states, “The fact is that they – we – are not being well informed. And that’s part of the problem. We’re not getting the information we need. The scale and the nature of the problem is simply not being communicated to us. And when we are advised to do something, it barely makes a dent in the problem.” But beyond this, Emmott’s prescription become confused. He says that it makes no sense to tell people not to have children, but insists that population control is necessary. He rightly dismisses ‘green lifestyle’ choices as ineffective, but goes on to insist that curtailing consumption is necessary. Ultimately he calls for behavioral change writ large. The prescription is neither new nor actionable. And the final line in the article—that children should be taught to use guns—is bracing, theatrical, but unhelpful.

But Emmott is right about information. Most people, even those concerned about the environment, do not think about the gravity of environmental projects or the consequences of those problems’ trajectories. Mobile technology and the Internet now present unprecedented opportunities for people to have real-time information on the state of not just their own environment, but the health of far flung ecosystems that are being deforested, degraded or acidified. Technology can also allow for people to understand, with a swipe of a barcode, the embedded carbon or water in the products that they are using. But just providing information on the frightening state and trajectories of our environment is well known to merely create panic and causes people to turn away or simply disbelieve.

So what if this mobile information were coupled with information on how our legislators were voting, on critical issues, and how their votes had the power to impact, either positively or negatively, the environmental data that was scrolling across our screens? What if the data tracked our lifestyle choice—including having children—and told us both the immediate and likely future impact of those choices on the environment, ten, fifteen, and twenty years in the future? Now that might just have the chance of bringing about powerful behavioral change.

This post was also published on The Energy Collective.

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