The Cost of Carbon

The "Cost" of carbon emissions is significant. The vast majority of international scientists agree that CO² concentrations are dangerously high and will cause major climate changes if we do not drastically reduce our emissions in the next 8 years. Pre-industrial levels of CO² concentration were at approximately 290 ppm. The concentration of CO² in the atmosphere in 2007 is approximately 382 ppm. Scientists estimate that the rate of CO² is growing each year by approximately 2 ppm per year. Scientists are in general agreement that CO² levels need to be reduced to no more than 350 ppm. The IPCC estimates that global warming of more than 2-3 degrees Celsius (from pre-industrial times) may be dangerous. Hansen et al estimates that a rise of more than 1 degree Celsius form the year 2000 is necessary to avoid practically irreversible ice sheet and species loss. Even if we stopped emitting CO² today, global temperatures would continue to rise due to the resilient nature of carbon concentrations in the atmosphere. Current GHG reduction targets are set to mitigate the speed and intensity of the rise in temperature but will not avoid global warming and significant climate challenges in our future. Failure to significantly curb the burning of fossil fuels, specifically coal will cause carbon levels to exceed 400 ppm and would devastating climate changes that will challenge our economic and basic needs as a civilization. According to The Stern Review on the economics of climate change estimates that the cost of inaction on global warming is 5 - 20 % of world GDP each year. Several sources including Architecture 2030 estimate that the costs of replacing coal power and investing in efficiency in new buildings and renovation of the existing building stock will cost only between 1 and 1.5% of US GDP. Other strategies such as clean coal and nuclear power will not come on line fast enough to curb our CO² levels and would cost far more. The Architecture 2030 strategy would also create many more new jobs and promote new technologies that can further work towards our goal to prevent and reverse climate change. Efficiency needs to be at the core of our strategy on CO² emissions reduction for the sake of our planet and our economy.

There are two types of markets that actively trade carbon or "GHG offsets" for a price, the regulated market such as Kyoto and the voluntary markets such as The Chicago Climate Exchange (and others). GHG offsets are emissions reductions or increases in GHG sequestration that are "additional"1 to what is happening for other reasons. GHG offsets can be based on reducing emissions of several greenhouse gases, and are generally expressed as metric tons of CO² equivalent (CO²e). The Kyoto protocol is a mandatory cap and trade GHG system that is regulated by the United Nations in response to the Kyoto international treaty that went into effect in 2005. The cap and trade system sets a limit on the amount of CO² that is allowed by each industry and nation and institutes a fee system for those that exceed their limits. Kyoto is an international treaty that has been signed by every major developed nation except for The United States. The United States has recently signed on to a long term commitment to significantly reduce GHG's by 2050 and the remaining hold-outs in undeveloped nations have begun to identify conditions under which they would participate in future treaties that will require mandatory reductions of greenhouse gasses ("GHG's"). The current price for a ton of carbon on the Kyoto Protocol through the European Climate Exchange was approximately 22.00 Euros per ton or $34.28 in US Dollars on July 21st, 2008 a trading volume of over 1 billion metric tons changing hands².

The voluntary market consists of a variety of unregulated exchanges that provide access to carbon credits (sold by the ton of CO²e) for those individuals that wish to purchase them. The demand side of this market is populated by individuals and corporations that want to "offset" part or all of their carbon emissions as a statement of personal or corporate responsibility and as a marketing effort in large companies so that they can claim to be environmentally conscious and attract customers that admire that quality. Due to the variety of credits available and the fact that the market is not regulated, the quality of credits varies significantly within these exchanges. Generally speaking, carbon offsets should be able to demonstrate emission reductions that are additional, quantifiable (you can measure them), transparent (the process is fully disclosed and verifiable) and permanent3. While these factors generally drive the quality and subsequent value of the credit, they are not a guarantee of value since the appeal of the story behind the emissions reduction activity that created the credit is also a significant component of the perceived value and subsequent price. Buyers of these credits will often look into the story behind the credit to determine which types of offsets they most want to support. This concept of voting with their dollars is a markedly different approach to the commodity based carbon credit system in the regulated market. The median price of a ton of carbon on the Chicago Climate Exchange for 2008 has ranged between a low of $1.90 in January to a high of $7.40 in June (US dollars) per ton4. Terrapass.com was selling voluntary offset credits directly to the public for just over $13 US dollars per ton on July 31, 2008⁵.

European Climate Exchange Price and Volume for 2008

Renewable Energy Certificates (REC's) or "Green Tags" are certificates from the generation of carbon free power production. The purchase of these products promotes renewable energy markets and more renewable energy projects and can be purchased to lower the carbon emissions or "footprint" of a particular company or individual that wishes to manage their CO²e levels. However, REC's do not qualify as emissions "offsets" from business-as-usual ("BAU") levels because much of the renewable energy that is purchased is already available in the market and was not created specifically because of an individuals purchase. Also, the increase in energy and fuel costs plus increasing public subsidies have made renewable energy generation more and more profitable which pushes the overall generation into a BAU practice.

Another type of mitigation is called carbon sequestration. This is the process of using technology, adding natural systems to capture carbon such as planting forests and a more controversial practice of using legal means to ensure that forests that might be cut down for commercial purposes are placed into trust to prevent the deforestation. An example of a technological strategy to capture carbon from the atmosphere is the technique of creating algae beds in the ocean that will soak up carbon and sink to the bottom of the ocean. A similar concept is being used to "scrub" carbon directly from smokestacks using algae. Creating new forests for the purpose of sequestering carbon has some limitations since you have to rely on some inexact science to determine the actual rates of sequestration, the rates of sequestration are not linear (trees only sequester carbon while they are actively growing) and the carbon is released when the tree dies. Nonetheless, creating new tree groves has significant additional benefits to habitat, clean water and creates natural areas to appreciate and enjoy. Even the folks Forest Guardians admit that are selling these credits is not a solution to our carbon problem. "Americans emit on average 5 metric tons of carbon per person per year. To offset their lifetime carbon emissions, a person who lives 80 years would need to plant 400 / 130 = 3 hectares (7.4 Acres) of currently un-forested land. The total area of the United States is only about a billion hectares, and we have 300 million people. (The total area required for just our current population for one year would require foresting roughly 90% the size of the United States.) Thus, even if the whole country were bare, and we were able to reforest all of it, via tree planting we can only offset a small fraction of our carbon emissions." Carbon sequestration technologies are not a lost cause by any stretch but we will need significant innovation to get the traction necessary to off-set current emissions levels. Certainly it makes sense to radically reduce the amount of carbon per capita while we search out these new technologies.

There is not a current law in the United States that limits the amount of carbon that any individual or commercial venture can emit... yet. In 2006, The Supreme Court issued a ruling that disputed the EPA's position that they could not regulate CO2 for a variety of reasons. In the syllabus of the ruling for Massachusetts v. EPA, the Supreme Court said:

Because greenhouse gases fit well within the Act's capacious definition of "air pollutant," EPA has statutory authority to regulate emission of such gases... That definition - which includes "any air pollution agent... , including any physical chemical,... substance... emitted into... the ambient air... ," embraces all airborne compounds of any stripe... The Court has no difficulty reconciling Congress' various efforts to promote interagency collaboration and research to better understand climate change with the agency's preexisting mandate to regulate "any air pollutant" that may endanger the public welfare.

The EPA has continued to stall action on this front with support from the current administration but a new administration is likely to take action on any major carbon emissions under the existing authority of the Clean Air Act ("Act"). In the meantime, there are current limits on other compounds that commonly accompany carbon emissions such as: mercury, carbon monoxide and others. Since the bulk of our electricity and fuel is generated by the burning of fossil fuels such as natural gas, oil, gasoline, coal and methane, the consumption of energy is generally associated with the creation of carbon and these other pollutants. Therefore, the more energy that is required to perform commercial services and create, sell and distribute products, the more carbon is emitted. Energy has been largely inexpensive in the United States and for much of the world for modern history. Except in the 1973, 1979 and recent times, electricity and fuel have been readily available and so cheap that it has not encouraged behavior to manage their use. In our culture, many Americans still regularly leave lights on in empty rooms, heat and cool our homes when they are unoccupied, drive long distances for incidentals or entertainment and fail to group trips or carpool on a regular basis. The waste of energy is firmly embedded in our culture and may be seen by some as a status symbol of America. If we can afford to waste money and energy, we must be really successful. The freedom not to manage our energy is being fiercely defended by some in our political discourse. It seems that many feel that if only we could just get more oil and the price could stay low, we would not have any problems to solve - except of course the massive emissions of carbon and its effect on our climate.

A comprehensive timeline and milestone inventory of climate change available on a website by Spencer Weart, http://www.aip.org/history/climate.

Projects and emissions reduction are considered "additional" if they would not have occurred in the absence of the carbon offset market. These reductions must be performed for the express reason of lowering emissions and cannot be otherwise profitable or motivated by business-as-usual practices. For example, purchasing more efficient equipment that saves energy and makes financial sense for your business practices would not be an "additional" benefit and therefore not qualify for credit.
This data sourced from www.europeanclimateexchange.com
This portion of the paper contains paraphrased statements from the Birtcher Development Final Report from EcoSecurities dated July 16, 2008
This data sourced from www.chicagoclimateex.com
This data sourced from www.terrapass.com