Today the NYT reported a story which I wondered why I had not heard before: Manufacturers of a particular type of refrigeration compressor gas (the stuff in the heat-transfer pipes in refrigerators and air conditioners), mostly in China and India, figured out that they could make a fortune collecting "carbon credits" for reducing greenhouse gas emissions. They destroy a byproduct of their manufacturing process -- which is quite cheap and easy to do -- rather than venting it into the air (which would be illegal in most places, but not in China and India), and collect 11,700 carbon credits for each ton of the gas they destroy (because it is calculated to cause 11,700 times as much global climate impact as one ton of carbon dioxide).
They can then sell those credits to builders of new carbon-emitting facilities in countries where attempts to adhere to the Kyoto treaty, or other motives, results in national governments requiring emitter be carbon neutral or at least partially offset any production. This goes particularly to offset new power plants in Europe and other attempts to comply with Kyoto, though it is also what you are subsidizing if you check the box when buying an airline ticket that reads, "Would you like to pay an extra $20 because you are the type of person who likes to pat himself on the back for throwing money at meaningless gestures, and you want to pretend that you are not, by flying on this trip, creating more greenhouse gas emission than you could ever offset by driving a hybrid car or putting solar panels on your house?" (At least that is what the text by the checkbox ought to say.)
This is all thanks to the United Nations system of tradable credits for emissions, created with the goal of using market forces to bring about a more efficient reduction in greenhouse gas reductions. Tradable offsets are, indeed, a good idea in principle. If it is cheaper to reduce total emissions by, say, paying Indians to take some cheap and very efficient action rather than covering half the countryside with expensive barely functional alternative generators, then we should do that, obviously. But the trouble with creating an artificial market for a fake good that people do not actually value, but are forced to buy, is that you have to be very careful about your rules because there is a lot of incentive to take advantage of the system.
For example, the "market" for tax stamps on cigarettes -- a "product" that no consumer wants and is just forced to pay for -- results in an enormous enforcement mechanism and still there is a black market. Because consumers do not care if the tax stamp they are buying is fake, market discipline does not really exist. Or consider the market for liability insurance for drivers: There are many poor and/or socially irresponsible people who would not buy such insurance if they did not have to, so their end of the market prefers products that are as cheap as possible, even if they are worthless. Thus, the insurance regulators have to work hard to make sure that all products meet certain minimum standards, resulting in complicated multidimensional rules, and other rules are needed to make sure drivers buy anything at all.
The people who created the carbon trading scheme did not show this level of care in creating their rules.
Rather, they created a rule that actively rewards manufacturers for producing a lot of a product that creates the waste gas, which they then sell for a pittance just so they can collect the carbon credits. The particular refrigerant gas they produce happens to contribute to climate change and stratospheric ozone depletion itself (and it is inevitably vented into the atmosphere via leaks or when the refrigerator ends up in a Chinese landfill), and there is an attempt to phase it out in favor less damaging alternatives. But these manufacturers are having none of that. After all,
Each plant has probably earned, on average, $20 million to $40 million a year from simply destroying waste gasand
The production of coolants was so driven by the lure of carbon credits for waste gas that in the first few years more than half of the plants operated only until they had produced the maximum amount of gas eligible for the carbon credit subsidy, then shut down until the next year, United Nations reports said. The plants also used inefficient manufacturing processes to generate as much waste gas as possibleIn addition, the manufacturers are threatening to start venting the gasses if their absurd subsidies are withdrawn. You might recognize that business model because it is the same one employed by Somali pirates: Do something that is socially very harmful, and make money by getting Westerners to pay to you reduce the harm you are causing, somewhat.
Of course, unlike piracy which is an inherent risk of shipping, this problem was created by the people who were trying to solve the problem.
“I was a climate negotiator, and no one had this in mind,” said David Doniger of the Natural Resources Defense Council. “It turns out you get nearly 100 times more from credits than it costs to do it. It turned the economics of the business on its head.”Really? It never occurred to anyone that it was a bad idea to create a "market" where someone was not penalized for creating a pollutant (because the requirement to buy carbon credits to offset pollution is imposed only in a few countries) but was rewarded for destroying it. Even if the authors of the plan -- inexcusably -- were unaware of this technology that produces that 100-fold profit margin, surly they must have realized this was a perverse incentive. I realize that someone who works for NRDC is perhaps not a very good scientist, but the planners could have asked, say, a random economics student for some help.
Apparently just under half of all of the tradable carbon credits that have been awarded under the UN scheme have gone to 19 manufacturers of these refrigerant gasses. It would have been much better if the U.N. had just given a random 19 Chinese and Indian companies $20 million/year worth of the credits to sell; it would have still created a market for buying credits, which produces a bit of efficiency, but would not have caused the production of more greenhouse gasses on the other side of the planet as the current system does. Of course, paying that $20 million/year as ransom, to end this inefficient process without the companies making good on their threats to vent, may be exactly what ends up happening.
It is interesting to wonder if all of the greenhouse gas reduction from building industrial wind turbines (if the net does indeed turn out to be a reduction -- there is debate about even that) adds up to as much as the greenhouse gas creation that was caused by implementing this half-assed carbon offset market.