Others’ reduce their emissions on your behalf: Carbon Allowances and Credits

Trading a colorless, odorless gas with someone here or in China is a hard concept to grasp.  Here’s an overview on how “carbon credits” or “carbon allowances” work.

Carbon Allowances

When governments decide to reduce emissions they can choose two main options: industry wide reductions or a market-based scheme.

Industry-wide reductions require all companies to reduce their emissions flat out by a certain percentage no matter how much it costs.

For example, if the US requires a 20% reduction in CO2 emissions by every company in the country it will be easier and cheaper for some than others.  A total reduction by 20% will be achieved (or face huge fines) but it might not be very efficient.

A market-based method is more efficient and more acceptable to companies.  A 20% reduction of CO2 emissions overall will occur but not by the same percentage by all companies.  Here’s an example of how it works:

Old Power Inc. is an established power company and produces 100 tons of CO2 per day. 

New Power Inc. is a new power company that is just installing new generators and expects to produce the same amount (100 tons of CO2 per day) as well.

The US Government decides it wants to reduce overall carbon emission by 20% and try a “cap and trade” market system.  Today, overall emissions are 1 million tons.  By the end of the year, the US wants a reduction to 800,000 tons (a 20% reduction).

Based on current emissions, the US Government issues “Carbon Allowances”, literally, permission to pollute.  But they issue them 80% lower than actual emissions.  So each company mentioned above will get 80 tons of allowed carbon emissions each.

For Old Power Inc. it will cost a lot to replace their old equipment and reduce their emissions 20 tons/year.  However, in comparison, New Power Inc. can reduce their emissions simply by choosing newer technology during construction.

Old Power Inc. then goes to New Power Inc. and buys 20 “carbon allowances” at the market rate.  They are allowed to continue to produce 100 tons of CO2 per year.

New Power Inc. takes the income from the sale of their 20 carbon allowances, buys newer, more efficient equipment.  Produces the same amount of electricity as Old Power Inc. but only emits 60 tons of CO2 per year.

Overall, the new output is 20% lower, but was done efficiently in the eyes of both companies.

Retiring allowances: make a larger difference

Anyone can enter the market and buy allowances.  If you are a conservationist, you can buy allowances, retire them permanently, and reduce pollution even more!  This act, drives up the prices of existing allowances by reducing the supply.  It drives up demand for cleaner technology as the cost of the old technology is increased.

Controversy of Carbon Allowances

Because these are effectively “permission to pollute” some conservationists do not like purchasing these credits.  This is because allowances do not mean carbon emissions will actually be reduced.  The actual reduction requires implementation and enforcement by the government that enacts the laws.
For example, according to the Economist (6/2/2007) the first round of European Emissions-Trading Scheme (ETS) Allowances have lost all of their value because the EU issued too many, and the demand was not high enough.
However, in round 2, they issued far fewer, and now the carbon market keeps the allowances’ value high enough to encourage firms to reduce their pollution.
Investigating the source of your allowances is ESSENTIAL to ensuring you are actually reducing the impact of carbon on global warming.

Reduce your own carbon footprint.  It is verifiable, cheap and easy.  Reduce your footprint by next weekend!

Carbon Credits

Credits are actually investments in new projects that remove greenhouse gases from the environment or displace energy produced with fossil fuels.
For example, imagine construction of a new solar power plant in Arizona.  They are going to produce 10 Megawatts of electricity, and displace that much power from the grid coming from a coal plant.  They are therefore, keeping the coal plant’s carbon from entering the atmostphere.  The solar plant gets a “credit” for doing so that has a separate value from the energy they produce.
By selling the credit, the solar company reduces the cost to produce solar power thus subsidizing the expensive technology.

Another example comes from pig farms in third world countries (Economist 6/2/2007).  By installing technology that captures and sequesters methane (a BAD greenhouse gas) from manure, they are reducing global warming and value is assigned to that reduction.  You or a power company can buy that credit. By doing so, youencourage menthane capture (which reduces global warming) and thus offset your own carbon production.
When
Effect of methane captured  =  Effect of CO2 released by you
You are considered “carbon neutral” because you have neutralized the effect of your impact.

Controversy of Carbon Credits

The controversy of carbon credits is that they do not produce as much carbon emission as they claim, and that it eliviates consumers from taking simple steps to reduce their actual impact.
Imagine, that the Solar Company above does shoddy research, and finds out they can only produce 8 Megawatts on average.  So they have sold 10 MW of carbon credits and thus 20% of the credits’ value is worthless.
Also, there is no standardized way to measure the credibility of the carbon credits.  Maybe it’s Joe Schmoe and his buddies planting trees he’s just going to cut down in 10 years and burn for fuel?  Then there is no net carbon reduction.
Or the solar company has a terrible management team, only builds 40% of the project and goes bankrupt.  All of those credits are worthless, and the value is unrecoverable.

Reduce your own carbon footprint.  Contact us for a FREE list of SIMPLE things you can do to reduce energy use .

Sources
•    Gore, Albert. Inconvenient Truth. 2007 Film.
•    Hinkle Charitable Foundation. 2006 Global Warming Series: Report 5.
•    Stopglobalwarming
•    US Dept of Energy. Elements of An Energy Efficient Home. 2000.