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New PESD Working Paper details challenges of designing carbon offsets for the transportation sector

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Programs to enlist developing countries in climate change mitigation by granting credits for carbon emissions reductions across entire sectors like transportation are quite appealing in principle. However, as researcher Adam Millard-Ball shows in PESD Working Paper #97, "Adverse Selection in an Opt-In Emissions Trading Program: The Case of Sectoral Crediting for Transportation, " any practical implementation of such schemes would entail thorny trade offs between economic efficiency, environmental effectiveness, and political acceptability.

Sectoral crediting mechanisms such as sectoral no-lose targets have been proposed as a way to provide incentives for emission reductions in developing countries as part of an international climate agreement, and scale up carbon trading from the project-level Clean Development Mechanism to the sectoral level.

Countries would generate tradable emission credits (offsets) for reducing emissions in a sector below an agreed crediting baseline. However, large uncertainties in the regulator's predictions of the counterfactual business-as-usual baseline are likely to render sectoral no-lose targets an extremely unattractive mechanism in practice, at least for the transportation case study presented here. Given these uncertainties, the regulator faces a tradeoff between efficiency (setting generous crediting baselines to encourage more countries to opt in) and limiting transfer payments for non-additional offsets (which are generated if the crediting baseline is set above business-as-usual).

The first-best outcome is attainable through setting a generous crediting baseline. However, this comes at the cost of either increased environmental damage (if developed country targets are not adjusted to account for non-additional offsets), or transfers from developed to developing countries that are likely to be too high to be politically feasible (if developed country targets are made more stringent in recognition that many offsets are nonadditional). A more stringent crediting baseline still generates a large proportion of non-additional offsets, but renders sectoral no-lose targets virtually irrelevant as few countries opt in.

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Adverse Selection in an Opt-in Emissions Trading Program: The Case of Sectoral Crediting for Transportation

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Sectoral crediting mechanisms such as sectoral no-lose targets have been proposed as a way to provide incentives for emission reductions in developing countries as part of an international climate agreement, and scale up carbon trading from the project-level Clean Development Mechanism to the sectoral level.

Countries would generate tradable emission credits (offsets) for reducing emissions in a sector below an agreed crediting baseline. However, large uncertainties in the regulator's predictions of the counterfactual business-as-usual baseline are likely to render sectoral no-lose targets an extremely unattractive mechanism in practice, at least for the transportation case study presented here. Given these uncertainties, the regulator faces a tradeoff between efficiency (setting generous crediting baselines to encourage more countries to opt in) and limiting transfer payments for non-additional offsets (which are generated if the crediting baseline is set above business-as-usual).

The first-best outcome is attainable through setting a generous crediting baseline. However, this comes at the cost of either increased environmental damage (if developed country targets are not adjusted to account for non-additional offsets), or transfers from developed to developing countries that are likely to be too high to be politically feasible (if developed country targets are made more stringent in recognition that many offsets are nonadditional). A more stringent crediting baseline still generates a large proportion of non-additional offsets, but renders sectoral no-lose targets virtually irrelevant as few countries opt in.

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Working Papers
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Program on Energy and Sustainable Development
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Adam Millard-Ball

Energy Working Group Talk: Suzi Kerr on Designing More Effective International Policy to Reduce Emissions from Deforestation and Degradation

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Effectively addressing emissions from deforestation will require both an international policy - to address the global nature of the climate problem, and domestic policies - to effectively respond to the international policies and take unilateral action; Suzi will be focusing on the former. 

The key challenges in reducing emissions from deforestation and degradation (REDD) policy are monitoring, permanence, and additionality - leakage and adverse selection as well as the risks involved if REDD is linked explicitly to international carbon markets.  They propose an international system based on national baselines, temporary rewards for protection and externally replicable monitoring and illustrate the potential outcomes in terms of  additional carbon storage, the cost of emissions reductions, and transfers of resources between countries.  Suzi will also briefly discuss how national governments might respond to an international policy of this type. 

 

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Suzi Kerr graduated from Harvard University in 1995 with a PhD in Economics. Following that she was an Assistant Professor at the University of Maryland - College Park from 1995 through 1998. From 1999 to 2009 Kerr co-founded and was Director of Motu. She has been a visiting scholar at Resources for the Future (USA), Victoria University, and, from Jan - August 2001, in the Joint Center for the Science and Policy of Global Change at MIT.

Suzi Kerr is a Visiting Professor in the Economics Department at Stanford University and a Senior Research Associate in Stanford's Program in Energy and Sustainable Development.  She is also a Senior Fellow at Motu Economic and Public Policy Research in New Zealand. 

Stanford University

Suzi Kerr Visiting Professor Speaker
Seminars

PESD invited to World Bank meeting on CDM reform

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Researcher Richard K. Morse attended a World Bank consultation focusing on finding solutions to problems in the global carbon market (CDM). The meeting took place in Frankfurt on May 4th where Richard presented recent PESD research findings from working paper #90 "Making Carbon Offsets Work in the Developing World: Lessons from the Chinese Wind Controversy," and proposed possible policy options for carbon market reform.
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Guest Lecture: China’s Coal and Power Conflict and Its Broad Impacts

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PESD researcher Gang He will be guest lecturing in Stanford University's China Energy System course on China's coal and power conflict and its broad impacts on Chinese energy and climate policy.  He will discuss the most important feature in China's energy market - coal and power conflict, explain why there is a conflict and how it come into being, and analyze the broad impacts of the conflict on deploying CCS at scale and applying CDM in the Chinese power market.  Gang will also highlight some possible solutions to the coal and power conflict in China's energy market.

China Energy System(CEE 276F) is a directed readings course that studies the energy resources and policies in use and under development in the world's most populous nation.  As a country undergoing rapid and sustained economic growth, China's decisions as to how to meet its energy requirements will affect global energy markets and impact the global environment.  This course focuses on the areas of major impact that are forecast and will present a comparative analysis of China's energy management strategies.

Y2E2 111

Gang He

616 Serra St.
E420 Encina Hall
Stanford, CA 94305

(650) 725-4249 (650) 724-1717
0
Research Associate
Gang.jpg

Gang He's work focuses on China's energy and climate change policy, carbon capture and sequestration, domestic coal and power sectors and their key role in both the global coal market and in international climate policy framework.  He also studies other issues related to energy economics and modeling, global climate change and the development of lower-carbon energy sources. 

Prior to joining PESD, he was with the World Resources Institute as a Cynthia Helms Fellow.  He has also worked for the Global Roundtable on Climate Change of the Earth Institute at Columbia University. With his experiences both in US and China, he has been actively involved in the US-China collaboration on energy and climate change. 

Mr. He received an M.A. from Columbia University on Climate and Society, B.S. from Peking University on Geography, and he is currently doing a PhD in the Energy and Resources Group at UC Berkeley.

Gang He Speaker
Lectures

PESD releases new Working Paper on the controversy over carbon offsets from Chinese wind power

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Gang He
Gang He
Richard K. Morse
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In a new Working Paper, PESD researchers Gang He and Richard K. Morse offer a unique, comprehensive analysis of the biggest controversy in the global carbon market - the additionality of Chinese wind power in the Clean Development Mechanism.
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2010 MIIS International Trade and Investment Conference: Opportunities and Strategies in Emerging Economies

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The "Carbon Markets: Developing Countries & the Next Clean Development Mechanism" panel will be held from 3:25PM to 4:45PM

PESD researcher Richard K. Morse to speak at the 2010 MIIS International Trade and Investment Conference: Opportunities and Strategies in Emerging Economies on the "Carbon Markets: Developing Countries & the Next Clean Development Mechanism" panel.

The Monterey Institute of International Studies (an affiliate of Middlebury College) will be hosting this all day conference.  This event is being held with the purpose of bringing together stakeholders in the fields of trade policy, business, and human development to enhance knowledge of and create constructive dialogue around the global trends shaping international trade policy, business innovation, and social ventures in emerging economies.

Monterey Institute of International Studies
Irvine Auditorium
499 Pierce Street
Monterey, CA 93940

Richard K. Morse Panelist
Neal Dikeman Co-Founder and Chairman of the Board for Carbonflow Panelist
Barbara Haya PhD Candidate at the UC Berkeley Renewable & Appropriate Energy Laboratory Panelist
Conferences

Making Carbon Offsets Work in the Developing World: Lessons from the Chinese Wind Controversy

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The Clean Development Mechanism (CDM) is the leading international carbon market and a driving force for sustainable development globally. But the eruption of controversy over offsets from Chinese wind power has exposed cracks at the core of how carbon credits are verified in developing economies. It has become almost impossible to determine whether offsets from Chinese wind are "additional" and that they in fact represent "real" reductions beyond business as usual. Unless this problem can be resolved, it threatens to spread beyond wind in China and could threaten the ability of carbon markets to deliver the mitigation demanded by international climate policy.

In 2009 the CDM Executive Board (EB) shocked the carbon market by forcing an unprecedented review of whether multiple Chinese wind projects satisfied UNFCCC additionality requirements. CDM investors reeled as the safest CDM bet became the riskiest; the Chinese government publicly criticized the UN's oversight of carbon markets; and the CDM EB prepared itself for an unprecedented fight over how carbon offsets could be verified in the world's largest CDM market.

At the center of the controversy is the Chinese power tariff for wind.

When the EB observed decreases over time in power tariffs granted by China's National Development and Reform Commission (NDRC) to wind projects, it became concerned that China might be manipulating power tariffs in order to guarantee additionality and subsidize its domestic wind development with international finance. If the Chinese government were controlling additionality, then the CDM's ability to validate carbon offsets would be dealt a near‐lethal blow because the problems posed by Chinese wind extend to nearly all power sector projects in almost every developing country. If offsets cannot be credibly verified, then the integrity of emissions caps set by the Kyoto Protocol is directly threatened.

The Chinese wind controversy therefore has direct implications for the design and negotiation of any successor to the Kyoto Protocol. Despite largely failed negotiations in Copenhagen, the design of reliable, efficient carbon markets remains the world's most serious prospect for international cooperation. The developed world has committed USD 30 billion in climate aid by 2012, but the majority of these funds will likely have to be private capital delivered through markets. In order for carbon markets to avoid controversy and function effectively, the lessons from the Chinese wind controversy must be used to implement key reforms.

This report examines the application of additionality in the Chinese wind power market and draws implications for the design of effective global carbon offset policy. It demonstrates the causes of the wind power controversy, highlights underlying structural flaws in how additionality is applied in China, and charts a reform path that can strengthen the credibility of global carbon markets.

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Publication Type
Working Papers
Publication Date
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Program on Energy and Sustainable Development Working Paper #90
Authors
Gang He
Gang He
Richard K. Morse

Energy Working Group talk: The Controversy over Chinese Wind in the Clean Development Mechanism: Implications for Strengthening Global Carbon Offset Policy

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Gang He and Richard Morse examine one of the biggest controversies in the global carbon market - the additionality of Chinese wind power in the Clean Development Mechanism (CDM).   Addressing and moving beyond the binary question of whether such projects do or do not represent "real" CO2 reductions, they use insights drawn from detailed analysis of the entire Chinese wind CDM portfolio to argue that the current legal and economic structure of additionality is unworkable in the Chinese power sector when one takes into account how regulation and policy in those markets actually function. 

Therefore under the current CDM additionality regime, additionality cannot be credibly verified for Chinese wind - a problem that extends to multiple types of energy projects in numerous developing countries.  In short, the controversy over Chinese wind illustrates the need for large-scale reforms of how the world validates carbon credits in developing world power sectors.  In a post-Kyoto world that envisions a greatly expanded role for international carbon offsets, ensuring the integrity of carbon markets through smarter policy engagement with countries like China is more important than ever.

Richard and Rhoda Goldman Conference Room

Gang He

616 Serra St.
E420 Encina Hall
Stanford, CA 94305

(650) 725-4249 (650) 724-1717
0
Research Associate
Gang.jpg

Gang He's work focuses on China's energy and climate change policy, carbon capture and sequestration, domestic coal and power sectors and their key role in both the global coal market and in international climate policy framework.  He also studies other issues related to energy economics and modeling, global climate change and the development of lower-carbon energy sources. 

Prior to joining PESD, he was with the World Resources Institute as a Cynthia Helms Fellow.  He has also worked for the Global Roundtable on Climate Change of the Earth Institute at Columbia University. With his experiences both in US and China, he has been actively involved in the US-China collaboration on energy and climate change. 

Mr. He received an M.A. from Columbia University on Climate and Society, B.S. from Peking University on Geography, and he is currently doing a PhD in the Energy and Resources Group at UC Berkeley.

Gang He Speaker
Richard K. Morse Speaker
Seminars

PESD Researchers in Copenhagen for the United Nation's Climate Change Conference

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PESD researchers Richard K. Morse and Gang He are in Copenhagen attending international climate negotiations at the UN's COP 15.  Key issues in PESD's research platform are prominently featured in the event: carbon capture and storage, reform of the clean development mechanism (CDM), Chinese energy markets, carbon markets,  the future of coal and gas and global emissions, the smart grid, and a host of other topics central to the future of the global energy system.  Richard and Gang are testing their latest research with some of the world's key decision markers on energy and climate and sharing Stanford and PESD insights in this global forum.

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