The currently preferred method for reducing greenhouse gas emissions efficiently involves transferable permits. In principle, this enables the market to identify and exploit the lowest-cost emission reducers so that greenhouse gas abatement imposes the lowest possible cost.
New York Times reporter Keith Bradhsher says that, in practice, emissions trading appears to be inviting a lot of rent-seeking and corruption that undermine both their theoretical economic efficiency advantages and their political legitimacy.
Bradsher explains succinctly how emissions trading works:
Under the program, businesses in wealthier nations of Europe and in Japan help pay to reduce pollution in poorer ones as a way of staying within government limits for emitting climate-changing gases like carbon dioxide, as part of the Kyoto Protocol.
Among their targets is a large rusting chemical factory here in southeastern China. Its emissions of just one waste gas contribute as much to global warming each year as the emissions from a million American cars, each driven 12,000 miles.
According to CarbonCounter, that’s over 4 million tonnes of greenhouse gas equivalent expressed as CO2. Carbon Counter sells “carbon offsets” to individuals at a price of about $10 per tonne; presumably, for about $4 million it would offset the CO2 emissions from 1 million passenger cars. That’s very close to the amount Bradsher says it would cost to clean up this particular Chinese plant:
Cleaning up this factory will require an incinerator that costs $5 million — far less than the cost of cleaning up so many cars, or other sources of pollution in Europe and Japan.
But here the United Nations’ tradable permit regime falls prey to rent-seeking and corruption:
Yet the foreign companies will pay roughly $500 million for the incinerator — 100 times what it cost. The high price is set in a European-based market in carbon dioxide emissions. Because the waste gas has a far more powerful effect on global warming than carbon dioxide emissions, the foreign businesses must pay a premium far beyond the cost of the actual cleanup.
The huge profits from that will be divided by the chemical factory’s owners, a Chinese government energy fund, and the consultants and bankers who put together the deal from a mansion in the wealthy Mayfair district of London.
Bradsher worries that “the lure of quick profit will encourage short-term fixes at the expense of fundamental, long-run solutions, including developing renewable energy sources like solar power.” That misses the point of transferable permit systems, which is precisely to take advantage of the lowest cost alternatives first. But more importantly, Bradsher ignores the destructive effect on the moral legitimacy of emissions trading and greenhouse gas abatement that will occur when it becomes clear that that 99% of the value of the transaction is going to rent-seekers — in this case, mostly the Chinese government.
And the rent-seekers are corrupting the program. The waste gas emitted by the Chinese plant is trifluoromethane (HFC-23), which is said to be 11,700 times as potent a greenhouse gas as CO2. According to Bradsher, the UN calculates “industrial nations could [afford to] pay $800 million a year to buy credits” sufficient to cover these emissions. Bradsher says the cost of actually incinerating the HFC-23 is $31 million a year. That means any price between $31 million and $800 million a year is beneficial to both buyer and seller. The difference — in this case, $495 million — is just a transfer of wealth from Western industrialized countries to the Chinese government. But it could have been worse; at least this deal “saves” Western nations $300 million a year.
Bradsher implies that all parties fully understand what they are doing:
The situation has set in motion a diplomatic struggle pitting China, the biggest beneficiary from payments, against advanced industrial nations, particularly in Europe. At a global climate conference in Nairobi, Kenya, in November, European delegates suggested that in the case of Freon factories now under construction in developing countries, any payments for the incineration of the waste gas should go only into an international fund to help factories retool for the production of more modern refrigerants that do not deplete the ozone layer.
But the Chinese government blocked the initiative, insisting that money for Chinese factories go into the government’s own clean energy fund. Negotiators ended up setting up a group to study the issue.
According to Bradsher, Western manufacturers like DuPont have routinely incinerated HFC-23. But the UN’s distorted emissions trading program creates truly perverse incentives for China and other nations not subject to restrictions of the Kyoto Protocol. They can if they choose emit powerful greenhouse gases like HFC-23 solely for the purpose of collecting windfall rents for incinerating them.
This problem could be easily solved by capping the exchange price of tradable permits at the minimum cost of emission controls. But that would cut out the rent-seekers — most notably, the Chinese government — who seem to fully appreciate the depths of Western foolishness.