Wednesday, July 23, 2008

Carbon Credits Being Gamed

The WSJ reports on a French company operating in Korea (which is designated as 'lesser developed'), that makes 30 times more money by selling “carbon credits” to fight global warming than it makes by selling chemicals.

its Onsan project was approved by both local authorities in South Korea and administrators of the U.N. program. Its projects prevent tens of thousands of tons of nitrous oxide -- which is 310 times more potent a greenhouse gas than carbon dioxide -- from floating into the atmosphere, the company says.
Under the global agreement known as the Kyoto Protocol, developing nations don't have to curb their greenhouse-gas emissions, but they get a nice bonus if they do: Each ton of emissions cut generates a credit that can be sold through the U.N. program. Rich countries (most of which are required to cut emissions under the Kyoto treaty) can buy the credits in lieu of cleaning up what comes out.

The advent of credit sales under the U.N. program in 2004 made nitrous-oxide abatement lucrative. In 2006, Rhodia turned on the furnace to destroy the gas at the Onsan plant. The furnace cost roughly $15 million to install. It was a good investment: The plant is projected to generate more than nine million credits a year, and Rhodia is initially authorized for seven years of credits.

So, build in a 'poor' country like Korea, and then, add some modern emissions saving technology that generates more in pollution credits than you get making widgets, or whatever. As Kyoto was designed for stereotypical basket cases like Africa, these credits generally pay much more than modern technology costs, merely because these countries are so unproductive that anything created there endogenously need ridiculously high bribes to make sense.

This is like Roosevelt's famous 'paying not to farm' subsidy from the 1930's. Instead of cutting production, farmers figured out they could designate marginally productive land for farming, and get paid not to farm that, while then paying attention to the most productive acres (see Mitchell, Depression Decade: from New Era Through New Deal). Your total production increases even as more and more cropland is taken offline--acreage that probably would have been offline anyway. If you are getting paid to not do something, the number of ways to not produce something are infinite. This is why a straight carbon tax is more efficient than a cap and trade, because cap and trade, worldwide, need taxes and subsidies. You can't tax the lesser developed countries, as they are already poor (eg, Africa). But then, like the definition of a disadvantaged minority, the definition of less developed grows over time. You then cherry pick the subsidies by looking at existing plant, or building them, in the appropriate locale. Brilliant!

Every top down government solution has these problems, because the rich companies are more efficient than the poor companies. Thus, the recent $300B federal mortgage bailout, I suspect, will all end up a subsidy to lenders. If you want to give poor people money, raise taxes on the rich and write them checks. These indirect schemes are very inefficient.

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