Tuesday, July 06, 2010

Subsidising destruction

Tue, 06 Jul 2010
By Hilary Chiew
Source: freemalaysiatoday.com

COMMENT Last week I raised the issue about perverse incentives in the form of government subsidies to the power sector. This absurd policy direction is not unique to Malaysia though.

It is being played out amply in the battle against climate change, arguably humanity’s biggest threat.

In the global fight against rising earth temperature, the cap and trade system was introduced into the legally-binding emission reduction agreement called Kyoto Protocol in an effort to reduce the release of global warming greenhouse gases (GHG) from economic activities.

(Under the first phase of the protocol, which takes effect from 2008 to 2012, industrialised economies [collectively referred to as Annex I members] are obliged to cut their emission by 5% from the 1990 baseline year. Currently, the United Nations climate talks is supposed to agree on the emission targets by Annex I parties for the second phase in continuing the protocol as mandated by the main treaty, the United Nations Framework Convention on Climate Change [UNFCCC].)

It is essentially a compromise between developed and developing countries which is typical of international treaty negotiation. The former which is historically responsible for the climate crisis needed in a way, some tangible incentives to convince its key emitters such as power generators to agree to emission reduction strategies. The latter conceded that without some sweetener, there will be no deal.

What we get was the built-in flexible mechanism called Clean Development Mechanism (CDM) that lessens the pain of developed countries’ polluting industries to cap their emission in contributing to the overall reduction commitment of industrialised nations.

The paramount objective of CDM allows industrialised countries to invest in emission reduction wherever it is cheapest globally. At the heart of CDM is “offsets” where emitters in rich countries achieved compliance by outsourcing part of their reduction targets outside their sector (for example, power generation) and usually in a developing country.

Along the way, developing countries are supposed to obtain technologies that help them to avoid emitting carbon while they continue developing their economies, eradicate poverty and lead their countries towards the desired developed status, albeit, through a low-carbon development model

These technologies and projects are paid with money that comes from the trading of carbon credits generated from the avoided emissions. These credits called Certified Emission Reductions (CER) are verified by a third party and approved by the CDM executive board. Each unit of CER is equivalent to one metric tonne of carbon dioxide equivalent. Hence, the creation of a new commodity -- carbon.

Friends of the Earth International, a grassroots-based environmental advocacy group, defines the commodity as the right to emit carbon and then governments, which are responsible to resolve the climate crisis, limit the availability of this right in order to create scarcity and therefore a market for it.

Free to emit

How does this internationally-agreed involuntary exchange of “goods” work at the national level?

As a group, the European Union (EU) was the first off the block in introducing carbon trading into its collective emission reduction programme. It did so by setting mandatory cap on different sectors of its EU-wide economy and active participation in the UNFCCC’s CDM mandatory offset scheme. It launched the EU-Emission Trading Scheme (ETS) in 2005 when the Kyoto Protocol was enforced.

The EU-ETS has emerged as the world’s largest carbon trading scheme. The global carbon market has roughly doubled in size every year since 2005 with an estimated worth of US$63 billion in 2008.

(Carbon emission trading is less developed in the United States largely because the country has not signed up to the Kyoto Protocol and has no obligation to reduce its emission despite being responsible for persuading the UNFCCC to adopt the cap and trade model as a policy tool when the pact was agreed in 1997.)

The EU-ETS covers approximately 11,500 power stations, factories and refineries in 30 countries which include the 27 EU members states, plus Norway, Iceland and Lichtenstein. Together, these sectors account for almost half of the EU’s GHG emissions but excluding direct emission from road transport, aviation, shipping, agriculture and forestry.

In Europe, polluting industries such as power generation from coal, are given permit for an allocated allowance of emissions which they are not allowed to exceed. The permits are distributed to the emitters covered by the scheme either at a cost – through auctioning – or for free.

Yes, for free and at the expense of taxpayers' money, power consumers and the health of the climate.

Under Phase One of the EU-ETS which ends in 2007, polluting industries were allocated free permits and allowed to sell any surplus to those who exceeded their ceilings.

Critics said as allocation of these allowances is based on historical emissions, it has the negative effect of favouring less efficient facilities. In other words, the largest allocations have gone to what have historically been the worst polluters.

Subsequently, it was discovered that the polluters had also inflated their reduction baseline. Industries had been found to over-claim their emission levels and when they stayed below their limits, they profited by selling their excess allowances to others.

As a result, the power sector was enjoying windfall profits of some 20 billion euro (RM81 billion) a year in the EU-ETS first phase. The costs of meeting emission target were translated into higher utilities prices to consumers, creating public uproar particularly in Netherlands and Germany.

Acknowledging the mistake, ceilings for emission under Phase Two which runs from 2008 to 2012, have been reduced with a small percentage to be auctioned but yet a vast majority will still be handed free.

The European Commission was contemplating an average of 60% of permits to be auctioned from 2013 (the third phase), rising to 100% in 2020.

However, its reform plan was met with fierce criticism from the business communities. Oil majors like Shell and BP were lobbying to have oil refineries excluded from the sectors that will have to buy emissions permits at auction.

Needless to say, economic interests trumped climate ambition as illustrated in EU climate change packages that are rolled out in the last few years from Brussels, and we continue to see an EU that is losing its climate leadership position.

Pioneer status

Another form of perverse incentive is in the many developing countries race to outdo each other in attracting foreign investments.

They compete to offer tax exemption pioneer status to any investments with little thoughts given to the adverse impact from such investments.

I am reminded of the copper mine venture in Mamut, Sabah. The country’s first open-cast mine began churning out copper ore in 1975. Throughout its peak production years, and up until 1994, the annual production of copper concentrate was 100,000 tonnes or 25,000 pure copper. Over its lifespan, the mine earned an export revenue of about RM3.4 billion.

Notwithstanding accidents while the mine was in operation including a burst tailing pipeline that contaminated 800ha of rice fields and the dust pollution from the tailing dam, residents continue to suffer from the lack of clean water from the polluted rivers and risk of diseases as they come into contact with the contaminated water and air.

The attractiveness of country like Malaysia, Vietnam and Indonesia extends beyond tax-exemption. Many developed countries were exporting their polluting industries to the developing world where environmental legislations either do not exist or are extremely lenient.

Such was the case of Mamut where the Japanese-Malaysia joint venture exploited the lax environmental regulation.

A new federal law that provides for the rehabilitation of mining land did not come into effect until 1994 and was only adopted by Sabah in 1999 after the closure of the mine, negating any responsibilities of the polluters (a succession of them as the venture was sold and resold).

Have we learnt from this mistake? Just look around you for the so-called “pioneering” development projects and you will be able to answer that question.

Hilary Chiew is a socio-environmental researcher and freelance writer based in Kuala Lumpur.

No comments: