Zen in the Art of Reduced Emissions from Fossil Fuels
Steve Zwick on August 7, 2009 5 Comments
When I first heard of the Yasuni ITT proposal more than two years ago, I was still in that phase where every new PES (payments for ecosystem services) idea is a mind-popper.
This one, however, seemed more improbable than most - yet oddly intriguing.
The glaring flaw seemed obvious: leave this oil in the ground, and one day it will be the last oil on earth - and, presumably, priceless. But then you spring to the antithesis: what happens if our technology evolves to the point that crude oil becomes as irrelevant to the functioning of our future economy as whale oil is to our modern one (although I recently learned they used whale oil to grease up the Hubble Space Telescope; apparently our modern technology can't come up with anything else that stays slippery in the coldness of space)? Would that fact that we kept this stuff in the ground mean there is that much less carbon in the atmosphere?
The proposal seems to raise one question after another about the very nature of payments for ecosystem services, and after a brief chat with Phil Covell, who is Business Analyst for the Katoomba Incubator, and Dr. Robert Breunig, an economics professor at the Australian National University, I've got more questions than ever (mostly of their providing).
To begin with, the scheme hopes to earn what one might call "avoided drilling" credits, which at first glance seem like avoided deforestation credits that reduce emissions from oil instead of from the destruction of trees. But, as Phil points out, avoided drilling is nothing like avoiding deforestation - because deforesting generates emissions at the source through decay or burning of vegetation, while extracting oil leads to emissions someplace else when the oil is burned for fuel.
Yasuni is intriguing because it's a hybrid of two types of carbon trading: one that reduces emissions by improving land-use, and the other that reduces industrial emissions by improving efficiency.
The Yasuni scheme simply reduces the available supply of oil that can be burned, which raises scores of questions - beginning with how this compares with efficiency and renewable energy programs like wind parks.
Basically, renewables and energy-efficiency projects have less of a climate change impact than people generally expect. Because they reduce demand for fossil fuel, they also tend to reduce fossil fuel prices, which leads to increases in fuel consumption elsewhere that partially offsets the clean energy project savings...
Of course, that's where payments for ecosystem services come in: by embedding the cost of environmental degradation into the cost of generating energy, we should be able to make sure the purchase of energy causes less environmental damage. Ideally, we'll get really good at both - and have cheap energy and cheap ways of preserving the environment.
The Yasuni proposal is much simpler: locking the oil away in the ground forever simply reduces supply - which reduces emissions without leading to a drop in prices flowing from increased fuel efficiency.
Dr. Breunig raises several intriguing questions: first, he believes the demand for oil will never go away, even if we wean ourselves off of it for energy production.
"Solar panels themselves have parts in them that are petroleum-based," he says. "There will always be some small ongoing demand for oil."
And that oil isn't going into the air -- which raises the question of whether or not permanently sequestering oil in the ground is such a good thing.
"It might be beneficial for us now to not touch that oil," he says. "/but maybe it will make sense to destroy that rainforest in 200 years."
What if, for example, we solve all of our environmental problems, and the world is covered in lush forest 200 or 1000 years from now? What value would that one patch of rainforest have?
On a more practical note, Phil points out that it might be considered double-counting if energy consumers receive carbon offsets for not consuming and producers also receive them for not producing. This, however, immediately spawns its own antithesis:
"On the other hand, there is intrinsic climate-related value in leaving oil underground," he says. "OPEC has readily proven that restricting oil supply is an effective means of achieving measurable reductions in global carbon emissions. And absent commitments to leave oil under sensitive areas such as the Yasuni National Park, or major technological advances that make oil obsolete, it is only a matter of time before all the carbon currently sequestered in viable oil fields is released into the atmosphere."
All this back-and-forth is hurting my brain - and if any readers want to share the pain, feel free to chime in on this issue.
- Is the Yasuni proposal viable, or is it just an intriguing idea?
- And even if it's just an intriguing idea, what's so intriguing about it?
- How would this fit in with other payments for ecosystem services -- such as biodiversity offsets or water quality trading?
Anyway, let us know your thoughts -- you can also post anonymously. Any questions, feel free to contact me directly: szwick(at)ecosystemmarketplace.com.
Steve
What you are actually working around is an existential issue - so the Pirsig reference in the title is apt.
In Energy Risk five years ago,
http://www.opencapital.net/papers/Opinionemissions.pdf
my instinctive view was that emissions trading - and I now add carbon credits - are a doomed attempt to monetise something intrinsically worthless.
No surprise to find then that the cheerleaders are the people who brought us the credit crunch - also based upon monetising by poltical fiat intrinsically worthless IOUs.
The same solution can address both the problem of a new global reserve currency, and a workable carbon currency based upon its ENERGY value, not some arbitrary political number.
This may be achieved simply by producers issuing Units - within the right global legal and financial framework (which is my area of competence, I believe) - redeemable in energy.
This completely changes the game.
Iran is seriously interested in this approach
http://www.slideshare.net/ChrisJCook/introducing-the-petrotrust-presentation
http://www.slideshare.net/ChrisJCook/petro-clearing-january-2009-farsi-4-presentation
Also in the UK and Norway it is getting serious interest
http://www.slideshare.net/ChrisJCook/energy-pool-20-05-2009
I think this is an interesting take on avoided carbon emissions, I do like the use of a certificate as a fungible and tradable asset, however it will also face the same challenges of permanence. This would be the type of instrument that we could pilot on our platform, however as the article states, this will take major government involvement similar to debt for nature swaps, because of the large amount of capital needed.
Mike
The biggest problem is pointed out late in the article:
"...without a principled stand against drilling like Costa Rica's..."
In some sense, this is a moral issue as much as an economic one. Sure, it's pretty hypocritical for energy-guzzling nations whose development was based upon exploiting every natural resource to tell countries like Ecuador that they shouldn't. However, they should make the decision whether or not to exploit those resources (and whether or not they use low-impact methods if they do) based upon their own interests. It seems to me that they are faced with a dilemma that can't be solved by ROI analysis alone, and the suggestion that they should be paid for not doing something that has as much downside as upside for their own country is distasteful to say the least. It also seems to me like a bit of a bluff since the internal disruptions to their own people will not be possible to reverse if they drill; it's almost like someone with a gun to their own head saying 'stop me before I kill'. The economic rewards of exploitation would be very short-lived, but the social and environmental consequences would not, and the Ecuadorian government must know this.
Direct payments to keep oil sequestered in the ground by foregoing its extraction seems a little dicey to me. Given the global and fungible nature of the world's oil markets,addressing leakage it seems, would be quite difficult.
Why not do a super charismatic REDD deal? Depending on how extensive the forests are the numbers might be close enough...
Ecuador’s initiative to save the ITT concession in the Yasuni National Park is praiseworthy, and these activities must be encouraged – but paying for oil to stay in the ground is not the way forward.
After all, if payments for keeping oil underground are made to Ecuador, why not to other oil producing states? Indeed, Saudi Arabia proposed just such a system early on in the Kyoto negotiations.
The manifold perverse effects of this, both environmental and geo-political, should be obvious. The real value to be paid for is the forest as a carbon sink and as a reservoir of bio-diversity. Carbon market value for tropical forests is a good proxy for both biodiversity and the other values.
Equally important, the use of the funds raised must not be limited to renewable energy but must fund the institutional reforms and comprehensive land-use planning that is essential to poverty alleviation and long-term forest preservation.
Until markets for biodiversity develop further, areas such as the ITT should be preserved by crediting the carbon, and not the oil.
Plaudits are due to Germany for proposing to allow forest carbon crediting in its domestic carbon trading system despite the continuing refusal by the European Commission (against the wishes of all parties in the EU Parliament) to allow forest or land-based credits even if compliant with the Kyoto Protocol.
Reform in Europe is long overdue, and I hope Germany’s initiative is a harbinger of change.
Ecuador’s new constitution mandates protection of the indigenous peoples and is a matter of moral as well as legal imperative for the government. This is a significant step forward but should not be a matter of compensation payments.
In other respects, Ecuador has, in my view, a lot of housekeeping to do before it can be trusted by anyone other than governments. It has all the problems of oil-dependent states and – despite its oil wealth – has defaulted on international debt obligations three times in as many decades. So the risk that it will default on forest bonds is not insignificant.
Governments and multilaterals can take this risk, and either they or the insurance industry will have to insure that risk before the private sector can invest in forest conservation directly.
Private sector investment, however, is essential given the magnitude and cost of keeping the tropical forests intact. The best estimates are that it will take some $100billion a year for decades to come and this will not be forthcoming from the public sector.
In addition, to quote the Economist, “Reforms are needed (in Ecuador) to address the deficiencies of the business environment, including inefficient and costly utilities, legal insecurity, a rigid labour market, low skills levels and a dearth of affordable financing. In other words, Ecuador’s wealth has not been used to adjust for the ill effects of an oil-based economy.”
The country’s GDP per capita is 25% higher than China’s, but Ecuador shows no signs of lifting some 25-30% of its population out of poverty as China has. These are failures of policy, and they need to be addressed if forest preservation is to endure the tedious process of moving to a non-fossil fuel economy. For that to happen, conservation must be based on integrated land management, not just on energy substitution. Improved agriculture and poverty alleviation must be paid for – as must sustainable forest use and forest-law enforcement.
Much of Ecuador’s high deforestation rate is driven by poverty and lack of capacity in forest protection and law enforcement. The trust fund proceeds must extend to these matters as well, not just to funding renewable energy if it is to succeed in its purpose.
Similarly, too little consideration is given to the effects of driving away foreign oil companies which, despite their failings have a tendency to be more responsible in dealing with environmental issues than home grown ones in the developing world.
Ecuador’s domestic oil company, for example, is the country’s worst polluter. Similar concerns have been raised in Borneo with the withdrawal of BHP Billiton from coal mining in Borneo as it is all too likely that smaller, less-responsible domestic interests will move in and behave far more destructively than BHP.
For the foreseeable future, Ecuador will be dependent on oil no matter how much is raised by the trust fund. It should therefore be incentivized to encourage high standards of behavior in its oil industry as well as beginning to lay the foundations of renewable energy.
All of the issues which Ecuador faces – as do other similarly-placed countries in West Africa – can be successfully addressed, but unless the funds raised by crediting its forest conservation efforts are used more broadly than to fund renewable energy I fear that the efforts will fail.
Forest conservation requires a comprehensive approach which takes into account not only the rights of indigenous people, important as they are, but the needs of the migrant populations for a better standard of living and more settled way of life.
The economics of the entire area have to change not just the energy mix of the economy as a whole. It remains to be seen if Brazil’s Amazon Fund can achieve this. It is essential, in my view, that those countries, like Germany, which participate in such funds ensure that a comprehensive land-use plan is financed to ensure forest conservation in the long-term. There will be no “permanence” without it.