“The Clean Development Mechanism [the offset part of the Kyoto Protocol], which provides about 95 percent of the offsets used in the European market, is clearly broken and should be quickly phased out.”
-- Fred Krupp, Environmental Defense Fund President, Wall Street Journal Environmental Capital, March 20, 2009
My first reaction to reading that parting statement in what was otherwise a very rational and cogent interview was unprintable in a family blog like this.
First of all, let’s get a few things straight.
When it comes to protecting the environment and harnessing market forces to that end, Fred Krupp is a god. Maybe I should even capitalize that description. There is nobody who has done remotely as much for that particular cause -- including our Nobel Prize winning inventor of the Internet -- as Fred Krupp.
I have been a regular and long-standing contributor to the Environmental Defense Fund (EDF), even during the unfortunate period when their abbreviated acronym likely confused a fair number of Viagra seekers on Google. The staff there is analytical, innovative and ferociously dedicated to their cause. They’ve gotten their viewpoint into the inner workings of many of the U.S.’s mega corporations, generally at the CEO or board level. They basically investment-banked the biggest private equity deal of all time -- the KKR takeover of TXU -- mainly to stop a massive planned expansion of coal-fired power. Calling EDF and Fred the father of environmental markets is not remotely an exaggeration.
While to my regret I don’t know Fred personally, we did actually once spend the better part of an afternoon together, though I doubt he would remember it. It was in the lovely city of Kyoto, Japan, on a Sunday in the middle of the 1997 namesake climate conference, and our Japanese hosts had arranged a series of different tours around that historic city.
Coincidentally, I ended up on the same tour as Fred, and for at least one portion of the tour, we ended up chatting as we walked down a small winding street together with a multi-star admiral from the Defense Department who was part of the U.S. delegation. At the time, EcoSecurities was less than a year old, still had a grand total of two employees and to say we (and therefore me) were nobodies would be a gross exaggeration; we had several steps to climb before we would even register at the “nobodies” level. Fred, on the other hand, was already a superstar.
At Kyoto, the CDM was hardly borne of unanimous acclaim, and EDF had no
small role in getting the negotiating buy-in on market based approaches
that helped convince a number of skeptical countries. In 2001 when the
U.S. largely disappeared from the international climate world, it’s not
an exaggeration to say that EDF also took a hiatus from the dialogue
about the operational aspects of the CDM.
Fair enough -- EDF’s main
constituency is the United States and U.S. policy (though they also run
an extensive China program). But to be frank, it was very unfortunate
to lose their rationality and capability in the process, and I would
argue that some of the maddening aspects of the current CDM -- from a
business perspective -- are a direct consequence of losing the U.S. (and
by association, EDF) influence on its development in those crucial
startup years.
So, when phrases like “should be quickly phased out” get bandied about,
my first question (after my blood pressure settles) is: Exactly how has
the CDM failed so much that the father of environmental markets
believes it to be beyond saving? Let’s take a look at the results.
The first CDM project was registered at the end of 2004, just a little
more than four years ago. Today there are 1,500 projects registered
(representing some 1.5 billion tons of emission reductions through
2012) and at least another 2,500 in the pipeline. Billions of dollars
have been raised in the capital markets and there are methodologies
covering at least 100 different project types. A sector dedicated to
financing global environmental improvements has emerged. Projects are
distributed across some 68 countries around the world.
When you’ve
tramped across a landfill in Brazil, a piggery in Mexico, a steelworks
in China and a refinery in Ghana, all of which are linked by the single
commonality that their management wants to become more climate friendly
(and get paid for it), you know that a sea change in global business
attitudes has occurred. Maybe Fred and the guys from EDF need to get a
bit more mud on their boots and see what’s actually happening out in
the field at the micro-level.
There are many indisputable shortcomings of the CDM. First, far too
many first-generation CERs came from HFC-23 reductions, rather than
from changeovers to renewable energy and energy efficiency. Second,
the process of assessing the “additionality” of certain clean energy
assets that were at various stages of development has been deemed
questionable by some outside observers. Third, an overwhelming
preponderance of CDM capital flows have gone to China. And fourth, the
regulatory process that oversees the CDM often seems to have been
designed by Kafka, with a helping hand from Dante.
There are answers to all of these critiques, not the least of which is
that we’ve barely passed the fourth year of what should be a
decades-long process of “learning by doing.” The main issue is that
you cannot set up a legitimate market system that only lasts a few
short years, sunsetting almost as soon as it starts.
Of course in
these conditions projects that paid the highest immediate returns were
identified and executed first. Of course in these conditions clean
energy projects that were at some stage along the development pipeline
were the most likely to try to engage the CDM financing instrument.
And of course China grabbed the lion’s share of projects -- half the
developing world’s emissions are there, they can be found in large
concentrations, and the Chinese government has made a regulatory system
that was rational and workable through which to tackle them.
We Americans who basically went offshore about eight years ago to
actually build the CDM “business” that was envisioned by the U.S. and EDF
are now coming home. We think our experience to date has some
relevance and should be heard in the U.S. policy debates. Though it’s
been a never-ending challenge, I can’t think we didn’t succeed at some
important levels. Just for one, that two-person company I was half of
at Kyoto now has some 300 employees, offices throughout the world and
has registered more than 150 projects within the CDM system
representing 100 million-odd tons of potential reductions by 2012.
Anybody who thinks this is so easy is welcome to join our staff on one
of several exciting field trips -- climbing a 200-foot smokestack to
check the calibration on flow meters, negotiating coalmine gas royalty
agreements with provincial officials over endless baijiu, or trying to
dry clean the stench of pig feces from biogas plants out of your
clothes are all popular options. It’s not easy, it’s not always fun,
but if you want a market instrument that’s going to work in the
developing world, this is where you have to go. Blithe statements about
failure are frankly a bit insulting to those of us who actually
followed up on the promise and trajectory that was laid out a dozen
years ago.
The latest concept that EDF is promoting around global carbon market
solutions has been dubbed “ClearPath.” Though sparse in detail, the
basic idea involves developing countries taking on voluntary caps that
are somewhat greater than their current emissions, so they can sell
excess emission rights today and use the proceeds to finance
transitional energy technologies to move their emissions downward. EDF
estimates that this will raise some $250 billion to $1.5 trillion over the first
decade of operation -- a fairly substantial range, to say the least.
In principal, it’s an admirable concept, and it is undeniable that
covering the broadest possible sweep of countries with hard caps is
something to which we should aspire.
However, the idea that it’s going to be easy to come up with the
“right” amount of extra emissions allocation for any sizable number of
countries is ludicrous. A simple observation of developing country
emissions profiles should immediately raise the question of how to
construct something even remotely equitable. On a GHG per capita basis,
South Africa is at 50 percent compared to the U.S., China is at 25
percent, Mexico is at 20 percent and India is at about 10 percent. It
is already hard enough to get industrial countries to seriously talk
about hard caps -- now we need to layer this variable into the equation
and create a reasonable supply and demand balance that will be both
politically palatable and still incentivize serious reductions? And
this is assuming we can get the necessary monitoring, reporting and
verification of GHG emissions data for developing countries in place to
ensure that ClearPath could distribute credits accurately and
appropriately.
I’m not against the ClearPath -- far from it -- and if EDF and its
negotiator allies can convince a sweep of key developing countries to
take this up (while not just flooding the market with a next generation
of “Hot Air”), my hat is doffed with genuine admiration. But in my
heart, I don’t think that’s realistic. And to be honest, I’d like to
know what Plan B is, in case ClearPath is greeted with the skepticism I
expect.
As far as I’m concerned, Plan B must involve fixing the CDM so that it
can continue mobilizing capital, incentivize emissions entrepreneurs
and technologies, and slowly push the global supertanker of emissions
slightly away from its current trajectory. There are many ways to fix
the CDM to keep it moving, and to make it more environmentally
credible, transparent and predictable for capital allocation and
project development. Perhaps we can indeed get a small handful of
countries to experiment with ClearPath. But as a colleague is fond of
saying, climate change will have no silver bullet; rather, (it) will
require multiple rounds of silver buckshot.
I guess my problem with a throwaway quote like Fred’s regarding the CDM
is that it feeds a (very ironic) attitude encapsulated in the U.S.
policy debate about international offsets -- the “not made in America”
issue. It’s ironic because the CDM, emissions trading -- and the whole
idea of environmental markets in general -- sprouted from American
soil. In coming back to the global negotiating table, the U.S. can
make a real difference by addressing the various shortcomings of the
CDM, and by coming up with constructive solutions that actually learn
from past experiences. The essentials would be to make the regulatory
process simpler and more conservative (by endorsing real technology
benchmarks across sectors, avoiding the project by project system of
the CDM) and creating a longer time horizon for achieving emissions
value, (so that the benefits of emissions savings can correlate with
project finance timelines).
To be frank, what we have accomplished --
given those shortcomings of the Kyoto/Marrakech architecture -- is to
my mind remarkable.
In 2008, Fred wrote a book called “Earth: The Sequel.”
Disappointingly, it was not a sci-fi thriller about moving to another,
hipper, planet, but rather about how we fix our relationship with this
one through emerging markets for new energy technology. I’d like to
think the CDM deserves the same kind of consideration for a sequel, and
I don’t think it’s unfair to ask exactly which particular shortcomings
of the CDM have convinced Fred that we exclusively need to tread a
radically different path.
CDM is far from perfect -- few have ever
claimed otherwise -- but it has indeed lit a wildfire of enthusiasm for
emissions reductions that we will not rekindle easily if it is
summarily doused with a bucket of “been there, done that” cold water.
ClearPath is an admirable idea, but fraught with complexities that make
the CDM look like a crayon maze on a kid’s meal menu at Denny’s. If we
can get five or 10 countries with different profiles to sign up and
work out the kinks for the next decade, that’s a triumph right there.
In the meantime for the other 150-plus countries in the world, let’s
discuss the strengths and weakness of CDM and international credit
systems rationally, with some nuance and with aims of improvement --
and not just pander to popular misconceptions.
Marc Stuart is the co-Founder and director of new business development for EcoSecurities, a global carbon trading firm. The views expressed are his own and do not necessarily represent the view of EcoSecurities. To follow the dialogue, see the Cleantech Blog, where this originally appeared.