Climategate: How To Follow the Money

There's big money in climate.

That became strikingly obvious in Copenhagen. The conference itself cost in the neighborhood of $30 million, but that was only the visible tip of the melting iceberg. Add to that the celebrities, the demonstrators, the congressional delegations, and the corporate displays, and you can bet something closer to $60 million was really spent on the conference -- along with, of course, a carbon footprint the size of Morocco's. The one significant outcome of the Copenhagen conference was an agreement to continue the international market in carbon offset trading that would otherwise have expired in 2012 and to prevent a crash in the carbon credits market.

It appears that most of the participants saw the money spent as an investment.

To see why, we need to look at the way Kyoto has turned into cash for many of the biggest names in the climate change world, and to do that we need to understand how the whole carbon trading scheme works.

Simple Carbon Trading

Start with the simple proposition that you want, for whatever reason, to reduce the amount of greenhouse gases (GHGs) being emitted by human activities worldwide. The reasons, of course, are all based on the idea that humans emitting GHGs are causing unexpected and unacceptable changes in the climate. Whether that's true or not is a topic for other articles; for now, just take it as given.

There are actually a number of GHGs that could be an issue, but the largest share of human-produced GHGs is in carbon dioxide (CO2). So for simplicity, the Kyoto Protocol normalizes everything in terms of CO2 alone, using a number called the global warming potential (GWP). By definition, the global warming potential of CO2 is 1; the highest GWP is for sulfur hexaflouride, a gas used mainly in electrical equipment. Sulfur hexaflouride has a GWP of 23,900, so for Kyoto Protocol purposes, releasing 1 ton of sulfur hexaflouride is considered to be 23,900 tons of CO2.

Now, if there were a king of the world, that dread sovereign might just say: "Hey! Stop emitting GHGs!" And that would be that. In the real world, if you want to reduce GHGs, you have to come up with some kind of scheme to get people to do it (more or less) voluntarily. Governments do this, normally, with taxes. The simplest scheme is just to tax anyone who emits GHGs, charging them enough to pay for the bad effects. Reduce the amount you emit and your taxes go down.

Of course with a government program, and particularly with the UN, nothing is that simple.

Developing countries, particularly India and China, have rapidly growing economies and populations that really enjoy that their standards of living are rising toward first-world levels. These countries, as they improve their standards of living, are necessarily going to release more CO2. In the simple model, they would be expected to pay for those emissions.

Carbon Trading after Kyoto

India and China, with rapidly growing economies and populations that are really enjoying progress towards a first-world standard of living, didn't like this scheme at all. To them, the simple carbon tax is just a massive tax, reducing their GDP and impeding their progress. Add to this the historical resentment of colonialism, and the simple carbon tax was a non-starter.

The Kyoto plan was intended to solve this -- at the cost of more complexity -- by using a carbon trading scheme. For example, imagine China is going to build a new power plant that would have emitted 1,000 tons of CO2 a year. If China instead builds that plant with new technology that reduces the emissions to 500 tons a year, they get 500 tons of carbon credits in the form of a certificate of emission reduction (CER). The theory is that they can then sell those CERs to other places as "credit" in place of CO2 emission reductions, something we'll discuss below.

The devil is in the details, of course. If you can get a 500 ton CER for building the power plant better, shouldn't you get 1,000 tons of credit for not building the power plant at all?

That could be a pretty sweet deal -- you can not-build a lot of power plants in a year. If there's a market for these CERs, that's a license to print money. So there's immediately a problem -- you must somehow establish that you only provide CERs for projects that would otherwise have been built anyway.

The Kyoto Protocol establishes a mechanism to certify these emission reductions called the Clean Development Mechanism (CDM), which establishes a bureaucratic process under the supervision of the UN to do this certification. The purpose of the CDM is to keep the process honest. Only certify emission reductions for projects that would have been built anyway and that would have had a greater carbon footprint if they had been built the way they would have been built.

Got that? You have a CER, with real cash value, as long as a UN organization will certify what you might have done, and the way you might have done it, if you had done it, and done it that way.

Now, let's leave the third world and go to the developed world, the first world, or what the Kyoto Protocol calls the Annex I countries. In fact, let's go to the the U.S., where there is a power plant that already emits 1,000 tons of CO2 a year. They can offset that emission by buying the CER from China -- but why would they bother?