The New Carbon Cycle

McKinsey Article Concludes Good News for Emissions: US and EU Emissions Down, Economies UP

McKinsey and Company director Scott Nyquist authored on article entitled Great News on Emissions. Really.  He concludes that the US and EU have cut emissions while growing their economies. 

His article provides an upbeat view.

So it’s very important that in both 2014 and 2015 the global economy grew—and energy-related emissions didn’t.  In the 40 years that the International Energy Agency has been tracking emissions, this is the first two times that year-on-year energy-related emissions have been flat or less, without an economic downturn.  And in 2013, emissions grew less than the global economy.  For perspective, energy accounts for more than two-thirds (68 percent) of global GHG emissions, and energy use increased more than 150 percent from 1971 to 2013.

So all that sounds pretty wonky.  Why does it matter?  Because it means that it is not only possible, but a reality that the link between emissions and growth can, in fact, be cut.  Indeed, in a number of developed countries, that is already happening.  In 2014, for example, the EU grew modestly—and cut emissions by more than 5 percent.  The United States saw power-related carbon emissions decline 10 percent from 2005 to 2014, due to greater efficiency—in effect, like Europe, it is creating more wealth using less energy—and  the displacement of coal with cleaner natural gas.

China and India have room to approve as most of us know.

But here, too, there are encouraging trends.  The rate of growth of emissions in China is slowing, as its economy becomes less energy intensive—services now account for more than half of GDP, the highest ever.  China has also begun to get serious about growing less filthily. In part because of pressure from a public literally sick of living in smog-choked cities, the country is investing in more efficient and cleaner energy use.  In 2014, Chinese emissions increased less than 1 percent compared to the previous year, even as it grew 7.3 percent.  In the previous decade, China’s emissions had grown an average of 6.7 percent a year.  So that’s a big change.  The big reason: China is depending less on coal, which accounts for more than 80 percent of its energy-related emissions.

 

The author concludes, and I agree, that technological innovation is the key to solving greenhouse gas emissions issues. While the emissions issues are far from solved, great steps have been made.  The investment in new technology, renewables, innovations in business models and financing approaches present one of the great business opportunities the world has ever seen.  Trillions of dollars will be invested over the next 10 years and beyond to address these issues as more energy is demanded, but more efficient use and alternative ways of generation energy and controlling emissions from traditional sources opens up an economic boom.

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New Voluntary Carbon Credit Standard Demonstrates Continued Emergence of New Carbon Cycle

A new standard for verifying carbon credits issued outside the Kyoto Protocol's Clean Development Mechanism and Joint Implementation and other government-based cap-and-trade systems has been established at the London Stock Exchange.  The issue of creditability of voluntary carbon credits has been rising over the last couple of years as parties engaged in purchasing voluntary credits have found in some cases that credits had questionable veracity or sources.  The new standard simply called the Voluntary Carbon Standard (VCS) is another attempt to establish a rigorous vetting process to ensure the reliability of voluntary credits sometimes referred to as Voluntary Emission Reductions (VERs).

The new VCS marks the end of a two-year consultation with industry, Non-Governmental Organizations (NGOs) and market specialists, led by The Climate Group, the International Emissions Trading Association (IETA) and the World Business Council for Sustainable Development (WBCSD).  The establishment at the London Stock Exchange demonstrates the growing importantance the financial markets place on investment in carbon credits. Carbon credits are seen as a type of "non correlated" investment--investments that are not influenced by certain other market factors such as stock markets, inflation, and interests rates.  Carbon credit prices are affected by the cost of coal and natural gas.

Some market analysts estimate that annual transactions in the voluntary carbon market could reach four billion dollars in the next five years.  The VCS may be instrumental in this future growth if it provides the reliability to ensure reliable VERs.

Although direct cuts in emissions are the first step for any individual or business looking at minimizing contribution to climate change, the voluntary carbon market has an important role to play. Government regulation and appeals for people to change their behavior will not be sufficient alone to achieve the carbon reductions needed at the rate necessary to reduce climate change.

Carbon offsetting or emissions markets are a critical part of merging ecology and climate with economic systems.  In essence, embedding in our economic system processes and programs that lead to the emergence of a market and investment in projects that reduce pollution and protect the environment.  In the case of climate change, it puts humanity in a more positive role in the Earth's climate—forging a New Carbon Cycle, in which human economic activity is in part playing a role to maintain the natural carbon cycle.

The cap-and-trade concept permits individual agents or firms to develop strategies and investments to profit by developing projects that reduce emissions and then selling the offsets or carbon credits on the open market.  The mandatory program for compliance functions like the sulfur dioxide system in the US, where emissions trading was invented.  The SO2 program has been extremely successful and decreasing the costs for reducing emissions beyond what industry and even the US Environmental Protection Agency anticipated. 

Beyond these "mandatory" or "compliance" programs for reducing emissions, in the greenhouse gas reduction arena, the voluntary standard demonstrates that even outside or without a governmental mandate, as generally does not exist yet in the United States, but is arising now through US states passing legislation to create cap-and-trade systems, a market for emissions offsets can arise and prosper, leading to emission reductions beyond what any government is requiring. 

The veracity of these voluntary credits becomes critical, like any other economic product.  Somewhat like a stock, security, or currency, the seller needs to be sure that the generation of the credit can be sold and the buyer that the credit has real value and is not a worthless piece of paper or electronic trade. Rules for certification under the VCS are said to be as robust as those of the Kyoto Protocol’s Clean Development Mechanism (CDM), but is designed to be more efficient to attempt to reduce the costs for participants and time delays sometimes incurred with the UN Executive Board that manages the CDM process.

Andrei Marcu, President of The International Emissions Trading Association (IETA) and co-chair of the VCS Steering Committee, says: “While the main action must be in regulatory approaches, voluntary actions and offsets have an important role to play, and the VCS will provide them with necessary credibility.”

Adam Kirkman, Program Manager, World Business Council for Sustainable Development, said, “Many WBCSD member companies already participate in emerging carbon markets or implement emission reduction projects on a voluntary basis. The Voluntary Carbon Standard provides additional incentive to business to invest internationally in low carbon technologies, allowing companies to monetize the gains from their early voluntary actions via a robust standard supported by third-party verification that delivers environmental integrity, consumer confidence, and market credibility.”

The ongoing development through private parties of voluntary carbon credit standards and markets demonstrates the power of using markets and economic systems to set the stage for the emergence of a bridge between human systems and natural systems.  The emergence of this New Carbon Cycle demonstrates that human beings are still evolving in the face of significant threats to their lives and livelihoods.  The evolution is intellectual, rather than physical.  Emissions markets provide a critical part of addressing climate change, despite criticism from ideological representatives from both the right and the left, this process had been established, and it appears unlikely that carbon credit trading will cease to be a part of provincial, national, and international legal and economic systems.  All signs are that emissions markets will play a critical role in any greenhouse gas or climate change legislation and treaties, and even without such regulation, voluntary markets will play an imporant role in protecting our environment.

Chicago Climate Exchange's Voluntary Carbon Credit Market for First Half of 2007 Exceeds Total Volume for 2006

The Chicago Climate Exchange, the US voluntary carbon credit exchange, announced on July 2, 2007, that the total trading volume of voluntary carbon credits for the first half of 2007 surpassed the volume recorded in all of 2006. The CCX recorded a volume of 11,850,300 tons of carbon dioxide in the first half of 2007 versus 10,272,400 tons of carbon dioxide in all of 2006. Trading volume in the month of June was 2,142,300 metric tons of carbon dioxide, making it the third highest trading month in the history of the CCX. Trading occurred for all offset years from 2003 through 2010.