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Part 3 B Cop15 Failure Analysis Transparency Evaluation in Climate Change


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Continuing our 10 Part COP15 Failure Analysis we find that Transparency of Emission measurement is a Key Issue, where all nations be it EU, Asia and US are found wanting. We evaluate here the strength and the effectiveness of the EU ETS and give the pros and cons of the developing world following this model for curbing emissions.

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Part 3 B Cop15 Failure Analysis Transparency Evaluation in Climate Change

  1. 1. Why COP15 Danish Accord Failed? The devil was in the details. PART 3 B TRANSPARENCY (Benefits & Pitfalls) Comparing the “DANISH TEXT” with the OBAMA BASIC Deal EVALUATING EU EMISSION TRANSPARENCY ECO THRUST
  3. 3. CONTENTS IN PART 3 B TRANSPARENCY : BENEFITS AND PITFALLS • Mitigation of Emission as per EU ETS Model • Method of Measurement Reporting and Verification MRV of the EU ETS • Performance of UK to measure up to Kyoto Targets under EU ETS • Cost of implementation of EU ETS mitigation policy • Financial irregularities in the implementation of the EU ETS • Pricing : In a free market economy nothing ever is free. • Issuance of free carbon allowances under EU ETS • Lobbying by big business to get free Carbon permits • Profiteering on free Carbon permits • Raising of Energy prices across Europe after EU ETS • VAT Evasion in Carbon trade leads to Tax losses of Billions of Euros • Macro economic distortions due to emission mitigations • Revenue movement without transfer of assets within EU • The Effect of money supply on non-commodity trading. • Are free carbon credits subsidies to the emitters? • Accepting the Carbon economy • The consequences of speculative losses for developing economies • The Alternate Equitable solution for non Annex 1 nations 3 ECOTHRUST
  4. 4. Mitigation of Emission as per EU ETS Model After the failed Copenhagen summit of last month, we began a 10 Part analysis of “Why COP 15 failed” in major documentation and presentation sites of the world. We come to the conclusion, that Transparency is one of the key issues in Emission talks that was holding the progress and causing much of the heartburn and distress amongst the negotiators. It is not for nothing that nations distrust one another. The problem is that transparency, its robust and effective model haunts climate change not only in Asia, but in the US and the EU too. Since all know how to cheat, nobody trusts the other. We are examining currently the model EU ETS (as US is not a signatory to Kyoto) and the model nation U.K. as a standard for emission transparency, and investigating the actual strides made by them to stop emission rise. In the Part 3A of our analytics we came up with startling facts as per DECC and British Government published documentation that our chosen model nation UK measures only 43% of the total emissions and mitigates just about 3% Surprisingly U.K. has perhaps the best credentials in the European Union in enforcement of emission norms. The fact that EU ETS at UK has achieved 3 % mitigation after 12 years of the 1997 Kyoto pact looks alarming and snail paced to stop climate change. Nonetheless, let us accept the argument that this time was required for the early stage development, and the results learnt from EU ETS can be put to use by later day followers. Hence let us explore few more critical issues before accepting or rejecting the EU ETS as a role model for developing nations as per the OBAMA BASIC accord at Copenhagen. 4 ECOTHRUST
  5. 5. As the discussion is being enlarged in view of reader feedback, the releases of the COP Failure Analytics shall be henceforth on a weekly basis and not bi- weekly. The issues which are to be considered for testing the robustness and the effective role of the model EU ETS in curbing emission rise, are: Method of Measurement Reporting and Verification MRV of the EU ETS Cost of implementation of the EU ETS mitigation policy Financial irregularities in the implementation of the EU ETS Macro economic distortions due to EU ETS emission trading Method of Measurement Reporting and Verification MRV of the EU ETS The regulators in U.K. for the EU ETS scheme are essentially local Government bodies. To date emission control measures in the EU ETS 2 are not controlled or monitored by any international agency which is surprising for the largest emitter group, the Annexure I countries. National level regulators are responsible for monitoring and reporting, registry administration, verification, enforcement and data management. The regulators include: the Environment Agency, Scottish Environment Protection Agency (SEPA) Northern Ireland Environment Agency (NIEA) and the Department of Energy & Climate Change (DECC) for offshore installations of the United Kingdom. The measurement, reporting and verification MRV procedures adopted by U.K. for emissions are not by any standard restrictive. They are to say the least quite user (emitter) friendly, and has severable debatable assumptions such as “all coal fired power stations would use the coal of the same calorific value or have the same emission values”. Since these observations would be numerous and technical in nature, they are not being discussed here. There are also few obvious and inherent problems even in the EU ETS 3 that has been supposedly revised learning lessons of phase 2 and is due to be applied from 2013. However instead of going into the basic core deficiencies and technicalities of the MRV we will present for our readers the results of the EU ETS as per published data by the British Govt, the Europol and the audit committees of UK to assess the performance of the model. 5 ECOTHRUST
  6. 6. Performance of UK to measure up to Kyoto Targets under EU ETS The first phase of EU ETS 1 2005-2008 saw teething troubles as expected. Due to the lax monitoring of EU ETS 1 several EU countries recorded double digit emission rise like Finland, Estonia and Denmark. However we shall restrict our discussion here to the model country U.K. chosen for evaluation. Emissions in U.K. rose by approx 5.8 % from 242,513,099 Metric Tonnes of CO2 in 2005 to 256,581,600 MT in year 2007 as per European Commission Press Release of 23rd March 2008. [Ref EU ETS 1] . The EU ETS -1 Cap of 245.3 MMT CO2 as per Kyoto was missed by U.K. like most European industrial giants. They got additional relief when the Cap for EU-ETS 2 for the year 2008-2012 was raised further to 246.2 MMT CO2, after additional allocation of a carbon offset limit of 14.5 MMT (6.9%) which it could purchase externally from the third world countries in Phase 2. In short this would actually result in U.K. emitting 260.7 MMT CO2 within the UK in the year 2012, as against 242.5 MMT of CO2 emitted in the year 2005. Hence the EU ETS interpretation of the Kyoto protocol would help UK raise emissions by 7.5% legally during the short period of 2005-2012 instead of reducing it by 8% during the extended period of 1997-2020. Whether the UK meets or overshoots this limit again depends on the British Government. Still as the Kyoto protocol is a moral impediment in the path of larger emissions, all out efforts are being made by EU to kill it or bury it, so that no restrictions or performance evaluation are there as per international treaties. Cost of implementation of EU ETS mitigation policy The cost of developing and implementing a model like the EU ETS would be phenomenal for any developing nation. The implementation of the EU ETS 2 is estimated to cost the U.K. anything from GBP 2.0 Billion to 2.5 Billion with an additional GBP 60 million estimated for administration costs. Though this cost will not be uniform across Europe, the preliminary estimates suggest that EU overall will spend around Euro 20 billion in the phase 2 of the EU ETS in addition to local administrative costs. For large countries like the China, India, Brazil, or South Africa with low energy density and a wide geographic spread of small energy units the cost of implementing the EUETS type emission MRV would be much greater, though the total energy produced could be lower. 6 ECOTHRUST
  7. 7. NOTE OF CAUTION: Developing nations must be extremely cautious and carry out their own feasibility analysis before committing to reduce emissions by the EU way. The January deadline in the OBAMA BASIC accord is for modes to be adopted for mitigation and not quantified figures to be committed by Non-Annex 1 nations. Ad hoc commitments without due diligence could be way off the mark and unnecessary. The big question however is whether despite the considerable investment, and the failure to meet the Kyoto targets by a mile, the emission control model of the EU ETS and model country U.K. provides a Transparent, Rigorous, Robust and Effective emission control mechanism , for the developing nations to adopt. Financial irregularities in the implementation of the EU ETS Carbon Credit Frauds have been the bane of the European Union Emission Trading Schemes EU ETS since its inception in the year 2005. Various forms frauds haunt the Carbon industry from lobbying for excess EU Allowances, to the falsification of plant carbon allowance requirements, to buying of false Kyoto credits from the third world nations to the swapping of virgin rainforests for fast growing commercial plantations, to the evasion of VAT. However for the sake of brevity we will highlight only two types of frauds here in the EU ETS that could create major problems for the developing economies, should the EU Model be duplicated in Asia , Africa or South America. They are directly related to Energy Pricing and Tax evasion and has nothing to do with the environment and hence will be of greater interest to the political masters of the developing world. Pricing : In a free market economy nothing ever is free. The nexus between big business and politicians have always been the talk of the town, though at times unsubstantiated. Free market economies of the West had shown a way in the seventies and the eighties how to nip the bud of this nexus, by taking away controls from the hands of politicians to simplified well laid out transparent policy directives executed by the bureaucracy and administration. This hard earned transparency was achieved because nothing was given away free in the free market economies and every object had a price and business competitors were made to bid for the objects on offer a price. Emerging nations like China and India gained enormously by discarding the socialist “Discretionary Permit ” policies, and ushering free market economics, as it did away with corruption and encouraged open competition. 7 ECOTHRUST
  8. 8. Issuance of free carbon allowances under EU ETS The issuance of free Carbon permits or the EU emission allowances destroyed this fair play and fair price equilibrium of the free markets. By issuing billions of Dollars of free EU ETS Carbon allowances to the emitters in the first phase of the EU ETS (2005-2008) several anomalies arose which have still not been brought under control in the revised EU ETS 2 despite five year of operations. The initial distortions were brought about by nations grabbing excess permits than required during the allocation of EU ETS 1 allowances for distribution through the National Allocation Plans NAP . In the first phase of the EU ETS France and Germany haggled and got a higher quota allocated than required, whereas the United Kingdom in its bid to reduce emission went in for a fairly conservative estimate of EU ETS allowances, which ultimately resulted in large payouts for emissions by the British industry. Lobbying by big business to get free Carbon permits At the industry level, the big business houses, usually the largest emitters quickly got into play, lobbying for greater EU allocations, sometimes even based on higher plant “rated” capacities, instead of the “operating” capacities, and got their share. The small units like single owner medium scale plants, hospitals and charitable trusts got left behind and many had to purchase the carbon credits from the open market to meet their emission needs . Fortunately they did not have to pay a fortune to buy as the Carbon prices plummeted since allowances exceeded the market demand by almost 6%. Profiteering on free Carbon permits The BBC research team in a report last year stated that power firms which had previously raised en energy prices on the pretext of emission control claimed multi million pound bonuses . by selling off its excess free permits that it had got through lobbying. The subsequent year saw power companies loose out as it was the cement and steel giants this year to reap the benefit of free Quotas. This year steel plants such as Drax in Yorkshire U.K. , Glocke Salzgittar of Germany and Accelor Mital Gent of Belgium had each over 5 million excess free permits, with Germany's Integriertes Huttenwerk Duisburg sitting on 10.million permits. They all made their opportunistic billions at the time prices had peaked. Worse as feared the steel companies and Cement majors who were masters of lobbying the EU to ensure they benefited at a time when permits can be traded at €15 (per tones) threatened to pull out of Europe if such free permits were not allotted in future under the EU ETS . The EU administration it is learnt is sympathetic to their cause. // 8 ECOTHRUST
  9. 9. Raising of Energy prices across Europe after EU ETS As financial traders from Goldman Sachs to Citibank to Barclay’s reaped multimillion dollar profits in Carbon Trade, the energy prices across Europe almost doubled from 2004 (Before implementation of EU ETS 1) to 2007. The big emitters’ in the energy sector (especially the Coal based power stations who are allocated more EU ETS emission rights) benefitted two fold both from the consumers as well as the regulatory authorities. They first raised the prices of energy to meet the emission mitigation costs and then sold of the excess carbon credits in the markets to profit from emission trading. Such profits were to the extent of GBP 2 billion which more than compensated for the minor modifications made by the industry to add additional emission equipment. Bloomberg energy analyst Mathew Carr further predicted that energy costs would bounce with the revival of carbon prices “Pollution permits, the biggest money- loser for commodity investors this year, are poised for a rebound that may spark a 10 percent jump in electricity costs for the 260 million consumers from London to Bucharest “ pid=20601109&refer=home&sid=aeFSX.0e2ga8 Macro economic distortions due to emission mitigations The Carbon trade has been long called the hot air trade by the street smart trading circles which is probably the most appropriate terminology both from the technical as well as the economic angle. Emissions are basically the hot exhaust gasses from the chimneys. So from a technologist’s point of view Carbon trade is essentially hot air. From the macro-economic point of view Carbon is neither a Good nor a Service, which is being priced. Rather it is a right to emit, a notional non-commodity that is being priced. Hence it is an asset bubble or a hot air commodity, as far as the commodity markets are concerned. Revenue movement without transfer of assets within EU Against the EU ETS phase 1 the UK had to pay out around Euro 2 to 3 billion for over 22 million Carbon Credits it bought whereas French and German companies profited around Euro 3 billion each from selling surplus carbon credits. This in no case meant that UK polluted more than Germany or even France, only that its negotiators were not smart enough to hanker and get more Carbon Credits allotted due to which it lost out substantial sums of money. In short the credits after being transferred to the industries actually ensured that the British Industries paid out a few Billions to the German Industry not to buy goods or services but to buy the right to pollute. 9 ECOTHRUST
  10. 10. In the EU ETS Phase 2 when the Germans where pressurised to reduce their demands for Emission allowances, they agreed to it on condition that they are allocated more Carbon offset rights, which are permissible for phase 2 of the EU ETS. So the Germans ensured that they got more than they needed this time too. The British however did not err this time around are sufficiently well placed with 3 to 6 percent excess Carbon credit allocations which they may sell at a later date as per knowledgeable sources. Even Russia with Euro 2 billion surplus carbon credits, since its own industry had collapsed after Kyoto allocations, is eyeing the EU market with its own version of “hot air” supplied with cheap Russian Gas. The Effect of money supply on non-commodity trading. The carbon exchanges at Amsterdam and London, Germany and Paris have all started functioning. The Prices of Carbon ( 98.5% free issues across the EU ) rose sharply at the Amsterdam and London exchanges initially to touch a peak of Euro 33 before the market collapsed in April 2006 when carbon prices crash landed to Euro 8.5 in a few trading sessions. Ever since then, the EU has tried to throttle supplies, but the prices kept dropping to go below 1 Euro before recovering, but never stabilising. With the market float being soaked up and with supplies being cut, Carbon trading volumes sunk to a third at the Energy exchanges and the total trading last year fell to around Euro 30 Billion. Major players like France and Germany are reported to be sitting on huge piles of unsold EU allowances from EU ETS due to this sudden and unexpected price crash. Are free carbon credits, subsidies to the emitters? Carbon Credit or hot air could be treated as state subsidies to energy units, as suggested by some economists, if it was uniform across nations, even within the EU, and not tradable. However this virtual money given largely as a free issue is also a tradable unit. Since it is not capitalized against goods or services and not real money, but is tradable it is a non- commodity in the commodity markets which makes it a doubtful asset or asset bubble. Hence prices can rise or drop very sharply and quickly depending on the availability of free marketable emission certificates at the exchanges, which will ultimately be in the hands of the big commodity traders and financers of the Wall Street. 10 ECOTHRUST
  11. 11. Accepting the Carbon economy If the developing nations accept this carbon economy, they have to contend with the fact that huge money transfers could be drawn out of economies of those who are slow to understand the carbon game and react retrospectively like the UK, did in phase I of the EU ETS. Their will be many swift and complex rule changes in the oncoming years, and nations must have the capacity to learn and grow. One mistake and either they have to cut down growth and their energy needs during a phase or else will have to buy the carbon credits off the market as the UK did. On the other hand they may also see their notional carbon wealth vanish overnight as France did, when the bottom fell out of the Carbon markets and they were left holding huge excess of Carbon credits. Not being related to productivity of goods and services, this innovative energy market financial instrument could be a unique tool in the hands of the richer nations to adjust trade imbalances. The consequences of speculative losses for developing economies This problems in selling Carbon is due to the fact that it is not backed up by any assets created, like in a commodity, and can increase money supply to an unlimited extent based on international speculation, as well as lead to a price collapse With energy deficient, high growth China and India drawn into such a market, carbon price fluctuations can result in large fluctuations in energy prices in the developing world and give a huge bonanza to the western economies, and speculators and trade cartels with deep pockets . However if weaker economies participate in the Carbon casino they may find themselves totally at a loss with foreign exchanges totally wiped out or holding huge amount of undervalued carbon credits from time to time due to market fluctuations, that could affect cash flow. While the G7 or the EU can afford to engage in such speculative virtual trading, it is doubtful that the developing countries are geared to engage in such activity. The difference in treatment between a bankrupt Argentina and highly borrowed Greece (EU) or Dubai (oil cartel) today may be taken into consideration while decision making. 11 ECOTHRUST
  12. 12. The Alternate Equitable solution for non Annex 1 nations The alternate equitable solution for the developing countries would be to develop a low carbon economy with a solution vastly different from the standard carbon and emission reduction metrics that the Kyoto has proposed and the EU has designed. This is because the western economies who account for 80% of emissions must make effort to reduce those by emission cutting or carbon reduction as per Kyoto. The developing nations who occupy only 20% of the carbon space today must take the alternate path, a renewable energy challenge, to ensure that they do not follow the footsteps of the western economies and destroy the planet earth. So whereas Kyoto calls for 5% emission cuts for developed nations, from 1997-2020 the developing nations must have their own pact of 5% renewable energy growth during the same period to ensure a carbon free world. The international commitments and suitable framing of possible counter proposals will be discussed next week in our Part 3c of the COP15 Failure Analysis. ---------------------------------- 12 ECOTHRUST
  13. 13. References of previous works on COP / Climate Change Why COP15 Danish Accord Failed. DISTRUST Part 1 (Slide Share ) Why COP15 Danish Accord Failed EQUITY Part 2 (Scribd) Why COP15 Danish Accord Failed TRANSPARENCY Part 3A (Slide Share) VAT Scam dogs Europe’s Hot Air Trade Technorati COP 15 : Deal Sabotage : Burying Kyoto at Copenhagen ( Slide Share) COP 15 : Gassing 15 years on Carbon Economy ( Slide Share ) COP 15 : Bullshitting 15 yrs on Climate change (Slide Share) The Imelda story of Cap & Feed. Why the planet earth suffers (You tube) Cap & Trade Energy Mathematics (You tube video) The Imelda Story ( Scribd) Cap & Trade energy maths at Scribd ( Scribd) For any Queries, Objections or Source confirmation of data please contact the author Sandip Sen at 13 ECOTHRUST