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As the storm surrounding HFC credits rumbles on questions are starting to be asked about other offset credit types. In a short report entitled ‘Hydro CERs and the EU ETS 2009’ Sandbag takes a brief look at another credit type and one which is already subject to additional quality criteria, Hydro CERs.

Article 11b paragraph 6 of the EU ETS directive sets out that Member States shall ensure hydroelectric power production exceeding 20MW adhere to relevant international criteria and guidelines approved, including those contained in the November 2000 World Commission on Dams report.

Based on this additional requirement Sandbag has made the distinction between credits from ‘large’ and ‘small’ hydroelectric power projects. In 2009 a total of 78.3 million CERs were surrendered for compliance in the EU ETS, 3% of that total came from hydroelectric projects (2% large and 1% small). This equates to 2.3 million (1.6m large and 0.8m small) hydro CERs being used for compliance in the EU ETS. This report pinpoints which EU Member States are surrendering the most, from which host countries they originate from and a more detailed look at the CERs from the lone Gold Standard project present.

The debate about the quality of offset credits that can be used in the ETS is already underway with the European Commission expected to publish recommendations for introducing more stringent quality criteria well before the start of the next trading period in 2013. These will apply to offset usage in the ETS only. Separate policy decisions would need to be reached to limit credits used by EU countries for their Kyoto compliance.

Two issues are central to this debate – whether the credits represent good value for money for the EU and whether the emissions reductions credited are genuine, additional and contributing to meaningful sustainable development in the host country. Some hydro projects can prove problematic in that in many countries they represent Business As Usual development patterns. In some cases they can also lead to very negative social and environmental impacts. Once built, however, they can also provide countries with a long lasting renewable source of reliable and low cost energy, with many advantages over alternative, fossil based development options.

It seems likely that in the future criteria based on size alone will not prove effective at distinguishing between ‘good’ and ‘bad’ hydro projects and the EU will need to develop its own comprehensive assessment criteria.

Commissioner Connie Hedegaard stated on the 25th August 2010 that she has asked her department “to prepare a proposal for a measure to introduce further quality restrictions on the use of credits from industrial gas projects in the post-2012 EU ETS.” This is the strongest signal yet that the EU is gearing up to address the spiraling dispute about the quality of international offsets being used for compliance in the EU’s emissions trading scheme (ETS).

Much of this debate stems from the ongoing row about the legitimacy of HFC clean development mechanism (CDM) projects and their role within the EU ETS. This ongoing dispute has drawn in a wide range of stakeholder including environmental groups, the UN, the European Commission, financial institutions, project developers and the chemical industry itself. Tensions are running high. On one side are those who are seeking to protect vested interests – HFC projects have proven to be hugely profitable for all involved and many do not wish to see the gravy train come to an end. On the other are those who believe such cheap forms of emissions savings should be more properly regulated, leaving the market to fund projects which have clearer environmental and
development benefits.

It’s regrettable that the World Bank is currently on the side of the vested interests. It has tasked itself with contributing to efforts to combat climate change, which goes hand in hand with its missions to reduce poverty and improve living standards in the developing world. However, the World Bank’s Umbrella Carbon Facility invests in two of the biggest HFC-23 projects. Such projects are currently under intense scrutiny, facing allegations of gaming, acting as a perverse incentive, holding back more cost effective regulation, generating vast windfall profits and flooding the market with cheap credits which prevents projects in the lease developed countries accessing the markets. HFC projects are contained within chemical installations and have no meaningful sustainable development benefits for the local area let alone improving living standards for those living near them.

Sandbag welcomes the move to by the Commission to set in place quality restrictions for all international offsets being used for compliance within the EU ETS. The removal of industrial gas credits from the EU ETS will have an overwhelmingly positive effect on the distribution and viability of CDM projects from not only Least Developed Countries (LDCs) but also from the most environmentally sound projects. HFC emissions will still remain a problem but we now know they are very cheap to solve, in particular via the Montreal Protocol. Therefore, in parallel, regulations must be swiftly introduced and removing the profit incentive will help to achieve this.

So far the EU ETS has seen 97 million HFC credits surrendered into the EU ETS (roughly 60% of all surrendered). These, originated from just 18 HFC projects, which account for only 0.8% of all CDM projects. There are more desirable CERs making it into the EU ETS, such as those from the lone Gold Standard project, La Esperanza Hydroelectric Project, which generated 1,676 credits for use in the EU ETS. Where it’s positive to see the inclusion of such projects, and praise is due to those surrendering these credits, including EDF's Eggborough power station. Before we sing the praises of EDF too much, it's worth bearing in mind of the 875,000 surrendered by Eggborough power station, only 38 were Gold standard CERs and 658,278 were HFC CERs.

The emissions trading trade body, IETA, recently suggested that ‘Africa is turning into a major source of premium Clean Development Mechanism projects.’ Sadly this is just speculation at this point. Although existing rule changes in the next phase of trading will, in theory, open up markets in least developed countries, Africa is currently home to only 3% of all CDM projects, with just over 80,000 CERs having entered the EU ETS to date, ironically from an energy efficiency project in a steel works and an industrial gas project.

The EU needs to act quickly to ensure that not only credits from industrial gas projects are prevented from entering the EU ETS but a broader policy framework is put in place that is able to apply quality standards to all credits being used for compliance. This will provide much better value for money for EU citizens, spur investment in the most environmentally sound projects and also encourage investment to flow to those countries most in need.

As for whether these changes will scare of any future investment in the carbon market, as some are claiming, this appears an empty threat. Given the rates of return that have been generated so far it would be a very foolish investor who turned his back on this market completely – the challenge instead is to find the next low cost solution to climate change – something which the market has proven it is more than capable of achieving.

Commissioner Connie Hedegaard stated on the 25th August 2010 that she has asked her department “to prepare a proposal for a measure to introduce further quality restrictions on the use of credits from industrial gas projects in the post-2012 EU ETS.” This is the strongest signal yet that the EU is gearing up to address the spiraling dispute about the quality of international offsets being used for compliance in the EU’s emissions trading scheme (ETS).

Much of this debate stems from the ongoing row about the legitimacy of HFC clean development mechanism (CDM) projects and their role within the EU ETS. This ongoing dispute has drawn in a wide range of stakeholder including environmental groups, the UN, the European Commission, financial institutions, project developers and the chemical industry itself. Tensions are running high. On one side are those who are seeking to protect vested interests – HFC projects have proven to be hugely profitable for all involved and many do not wish to see the gravy train come to an end. On the other are those who believe such cheap forms of emissions savings should be more properly regulated, leaving the market to fund projects which have clearer environmental and
development benefits.

It’s regrettable that the World Bank is currently on the side of the vested interests. It has tasked itself with contributing to efforts to
combat climate change, which goes hand in hand with its missions to reduce poverty and improve living standards in the developing world.
However, the World Bank’s Umbrella Carbon Facility invests in two of the biggest HFC-23 projects. Such projects are currently under intense
scrutiny, facing allegations of gaming, acting as a perverse incentive, holding back more cost effective regulation, generating
vast windfall profits and flooding the market with cheap credits which prevents projects in the lease developed countries accessing the
markets. HFC projects are contained within chemical installations and have no meaningful sustainable development benefits for the local area
let alone improving living standards for those living near them.

Sandbag welcomes the move to by the Commission to set in place quality restrictions for all international offsets being used for compliance
within the EU ETS. The removal of industrial gas credits from the EU ETS will have an overwhelmingly positive effect on the distribution
and viability of CDM projects from not only Least Developed Countries (LDCs) but also from the most environmentally sound projects. HFC
emissions will still remain a problem but we now know they are very cheap to solve, in particular via the Montreal Protocol. Therefore, in parallel, regulations must be swiftly introduced and removing the profit incentive will help to achieve this.

So far the EU ETS has seen 97 million HFC credits surrendered into the EU ETS (roughly 60% of all surrendered). These, originated from just
18 HFC projects, which account for only 0.8% of all CDM projects. There are more desirable CERs making it into the EU ETS, such as those
from the lone Gold Standard project, La Esperanza Hydroelectric Project, which generated 1,676 credits for use in the EU ETS. Where it’s positive to see the inclusion of such projects, and praise is due to those surrendering these credits, including EDF's Eggborough power station. Before we sing the praises of EDF too much, it's worth bearing in mind of the 875,000 surrendered by Eggborough power station, only 38 were Gold standard CERs and 658,278 were HFC CERs.

The emissions trading trade body, IETA, recently suggested that ‘Africa is turning into a major source of premium Clean Development
Mechanism projects.’ Sadly this is just speculation at this point. Although existing rule changes in the next phase of trading will, in
theory, open up markets in least developed countries, Africa is currently home to only 3% of all CDM projects, with just over 80,000
CERs having entered the EU ETS to date, ironically from an energy efficiency project in a steel works and an industrial gas project.

The EU need to act quickly to ensure that not only credits from industrial gas projects are prevented from entering the EU ETS but a
broader policy framework is put in place that is able to apply quality standards to all credits being used for compliance. This will
provide much better value for money for EU citizens, spur investment in the most environmentally sound projects and also encourage
investment to flow to those countries most in need.

As for whether these changes will scare of any future investment in the carbon market, as some are claiming, this appears an empty threat.
Given the rates of return that have been generated so far it would be a very foolish investor who turned his back on this market completely
– the challenge instead is to find the next low cost solution to climate change – something which the market has proven it is more than
capable of achieving.

The UN has recently confirmed that it will delay issuing offset credits to three already approved industrial gas projects, pending a review. This is a sign that they are taking the allegations that some projects are gaming the system seriously and could signal the beginning of the end for the inclusion of such projects in the carbon market.

Over recent weeks the use of carbon credits generated through Clean Development Mechanism (CDM) ‘HFC 23’ projects have come under increased scrutiny. HFC-23 is a potent greenhouse gas (GHG) which is the unwanted by product of manufacturing the refrigerant gas HCFC-22. HFC-23 is a green house gas (GHG) which is some 12,000 times more potent than CO2, this means under the CDM HFC-23 projects are able to generate a vast number of emissions credits at low cost which are then sold to companies to meet their targets under the EU emissions trading system (ETS).

There are a number of concerns surrounding the use of these credits for compliance within the EU (ETS). The one that has risen to prominence recently is the alleged gaming of the system undertaken by some of these projects. The financial benefits of HFC projects are so lucrative that the CDM is increasingly acting as a perverse incentive, encouraging projects to over produce GHGs in order to destroy them and claim the credits. Likewise the favourable conditions created by including such projects in the CDM also prevent domestic legislation as well more effective international legislation dealing with this waste gas. The Montreal Protocol – tasked with eliminating ozone-depleting gases - could offer a feasible alternative to addressing HFC-23 emissions. The USA, Canada and Mexico submitted a draft decision to address the issue but this submission was met with opposition by China and India, both of whom profit substantially from the inclusion of HFC-23 projects in the CDM.

Furthermore, the continued use of HFC credits does not represent good value for money for Europe, which pays around €8- €12 a tonne to destroy this gas compared to a mere €0.17 a tonne if it was dealt with through the Montreal Protocol. If HFC 23 were to come under the remit of the Montreal Protocol the total cost of destruction is estimated to be around €7.7m per year. Considerably less than the estimated €371-556m the EU spent on HFC credits in 2009 for compliance use in the EU ETS alone. The use of HFC credits dominates the compliance market; in 2009 59% of all CERs surrendered into the EU ETS were HFC CERs, originating from a mere 18 projects which represent just 0.8% of all CDM projects worldwide. If they were removed this would open up a market in projects which much clearer sustainability benefits that represented better value for money.

The CDM executive board (EB) met at the end of July 2010 and tasked the methodology panel with investigating the claims of gaming of the system by HFC projects. Following this meeting, the recent decision taken by the EB to review the request for CER issuance of three Chinese HFC projects is further evidence that the EB is taking the allegations against these projects seriously. Nevertheless, this review of the issuance requests is a fact finding mission which does not guarantee that HFC projects will be removed from the CDM. This review process will delay the issuance of HFC credits, but it is likely that any more fundamental decision on the removal of HFC projects from the CDM will be a political one, which will be taken at the Conference of the Parties (COP), this year held in Mexico.

In the meantime, under the EU Emissions Trading Scheme, (the main source of demand for offset credits), a review of policy urgently needs to get under way and reforms need to be agreed.

The CDM is a crucially importance mechanism that has been incredibly effective in creating a legitimate method of funnelling investment into developing counties. It has the capacity to help fund meaningful projects in corners of the world that are in desperate need of foreign investment. Europe’s role is crucial, it drives the demand for the global carbon market and thus has a responsibility to only accept credits that meet the highest level of environmental integrity. Furthermore, with an expected time delay before the UNFCCC is able to effectively address the HFC issue, the onus is on the EU to make a stand and set the standard. The EU has set out in the ETS Directive the clause to ‘restrict the use of specific credits from project types’. It’s time for Europe to rule out HFC and other credits from industrial gas projects and ensure investment is sent to projects with only the highest environmental integrity and stop this irrational subsidy of Chinese and Indian chemical works. For the time being HFC credits are down but they are not out.

Click here to hear an interview with Sandbag Climate Campaign

The chances of federal cap and trade legislation in the US being passed any time soon appear to be receding, however, this means the spotlight will inevitably fall back onto state-level proposals.

In total, some 50 States could be included in a future capped carbon market, made up of three linked regional schemes: the existing Regional Greenhouse Gas Initiative (RGGI) in the east, the Western Climate Initiative (WCI) and the Midwestern Greenhouse Gas Reduction Accord (Midwestern Accord).

All eyes are currently on the WCI where 7 US States, (representing 20% of US GDP), and 4 Canadian provinces, (representing 76% of Canadian GDP), have come together to develop a common framework for implementing a scheme by the start of 2012. However, at the moment only two US states (California and New Mexico) and 3 Canadian provinces (Quebec, British Columbia and Ontario) have passed the necessary legislation to introduce a scheme, so other partners may only join at a later date .

And in California – the largest of the partners – there is a cloud hanging over the scheme’s future. A referendum has been called to suspend the regulations until such time as unemployment in the state decreases below 5.5%, it is currently at 12.6% (and not expected to drop below 8% any time soon). The vote will take place in November with energy companies largely funding the lobbying effort behind it. If successful it would severely reduce the likelihood of the other partners proceeding with their plans.

Despite this potential set back, WCI issued detailed design details for how the scheme would operate at the end of July.

Here’s a quick summary:

- seeks to reduce emissions by 15% compared to 2005 by 2020 ,
- intended to cover 90% of all greenhouse gases,
- could mean up to 1.3 bn tonnes capped by 2015,
- applies to installations responsible for emitting over 25,000 metric tones per annum,
- starts in 2012 capping power and heavy industry, with transport and heating fuels joining in 2015,
- mixture of benchmarked free allocation and auctioning for distribution of allowances,
- initial allocations to match projected BAU emissions in starting year and then steadily decline year on year,
- no restrictions on who can trade,
- floor price introduced into auction to stem supply if overallocated,
- no price cap but the price safety valves include three year compliance periods, limited used of offsetting, linking to other schemes, limited borrowing and potential reserves and ‘special purpose pools’ of permits being set aside and released under certain scenarios,
- a set aside of permits to be retired for voluntary renewable investments,
- importation of electricity from non-capped states to be included in the scheme,
- penalties for non-compliance require purchasing of excess plus a multiplier of 3 applied.

Comparing the scheme to the EU’s scheme there are some welcome differences but also some unfortunate similarities. The most problematic are the relatively low ambition (a reduction of only 1% per annum) and the decision about which sectors to include from the start. Beginning with heavy industry alongside power follows in the EU’s footsteps but it will inevitably hinder the development of the scheme by antagonising powerful lobbies, who can use competitiveness concerns to attack the scheme. If the scheme survives, regulators will inevitably come under pressure to agree generous free handouts of inflated allocations to these sectors. To give the scheme breadth and liquidity, it would have been better to include transport and domestic heating fuels from the start and to leave trade exposed industries to the very last.

Introducing an auction floor price to choke off supply in the event of an oversupply of permits is a good idea and one the EU would do well to copy. The absence of a price cap is also sensible, though it will be important that the various other proposed mechanisms for relieving high prices maintain the integrity of the cap.

Overall, if the scheme succeeds in getting off the ground, it will be a welcome step forward. RGGI, the pre-existing scheme on the eastern seaboard, though well designed, is currently floundering under a huge over-supply of permits. There is already talk of caps there being tightened in order to make a link with the west coast initiative possible – something which is long overdue.

A lot therefore rests on the good citizens of California and how they vote in November. Let’s hope they see beyond the industry lobbying and scare tactics and allow things to proceed.

While Australia has been forced to put emissions trading plans on ice until 2012 and the US struggles to achieve the 60 votes necessary to pass any kind of progressive energy policy (that may or may not include the creation of a carbon market), China it seems is quietly moving forward with plans to introduce its own internal market in emissions reductions.

According to an article in China Daily this week, the next five-year plan beginning in 2011 could contain an emissions trading policy to help create a broad based stimulus for lower carbon investment. Until now China has focused on more command and control policies designed to shut down the least efficient of its industrial plant and to spur development of specific renewable technologies. This article states that China has realised that there are limits to how effective such policies can be and that a broader, outcomes based approach would be less costly and more efficient.

This is welcome news. As ever the devil will be in the detail, with China developing at such a pace arriving at any kind of cap that doesn’t create hugely inflated volumes in emissions rights will be a big challenge. But the report hints that on at least one detail they may have already learned a valuable lesson from the European ETS experiment: it makes sense to start with a limited number of participants and that should be those in the power sector. If we’d done that in Europe we’d have created a much less cumbersome and much more ambitious scheme. The UK Government is consulting at the moment on the hugely complex rules for handing out free permits to heavy industry according to benchmarks. Anyone contemplating introducing a trading scheme would do well to read this document and take note that starting with 100% auctioning from the outset is by far and away the easiest option and that can be introduced from the start in the power sector.

Part of the reason China’s per capita emissions are catching up with the West – recent figures suggest they already match those of France – is because the carbon intensity of their electricity system is so high. According to the website CARMA, China’s emissions per MWh generated are over 850 kg – much higher than the US’s (600kg) or UK’s (550 kg) where old coal is less dominant. A well-designed carbon market which meets targets for achieving a lower carbon intensity, even while overall demand grows, could stimulate investment in efficiency upgrades and fuel switching to lower carbon fuel sources such as gas and energy from waste. It will also help to make renewables, nuclear and carbon capture storage more cost competitive.

If this report is true, and let’s hope it is, then by 2012 the dominant players in the carbon market may well be Europe and China. If Europe can implement some important changes and China gets the design right it could mark the beginning of a genuinely impressive market for delivering global emissions reductions. One that the US should pay close attention to since it may find that as well as being reliant on imports of expensive fossil fuels it will also be reliant on importing all the technologies it needs to wean itself of them.

European companies, whilst claiming tougher emissions targets would be ‘impossible to meet’ [1] and are damaging their competitiveness, are making extensive use of offsetting to meet their targets and even using it to directly subsidising their international competitors by for example purchasing offset credits originating in Chinese and Indian steel works.

A new report by climate campaign group Sandbag into the use of international carbon offsets to meet legally binding caps in Europe in 2009 reveals for the first time direct evidence of how Europe is subsidising its competitors and calls for reforms.

In 2009, European companies used 78 million international offsets, with an estimated value of €860 million, from developing countries (CERs) to comply with their caps under the EU emissions trading system (ETS). This represents 4.2% of total emissions from capped sectors, which include all power generators and many heavy industry sectors such as iron and steel works.

The vast majority of offsets used in 2009 (84%) originated from industrial gas projects in China, India and South Korea. These provide healthy profits to chemical companies in these countries and in China provided a source of tax income for the Government. However, a significant number have also been sourced from more directly competing sectors, For example over 2 million steel CERs worth approximately €22 million were used for compliance in 2009.

EU steel companies have been very vocal in pointing out that they compete in a global market and that caps on emissions have to potential to force them to move overseas resulting in so-called ‘carbon leakage’ out of the EU. Sandbag can reveal, however, that iron and steel companies are voluntarily sending cash to their competitors in developing countries – undermining their claims.

The single biggest purchaser of offsets in 2009 was steel company Salzgitter’s ‘Glock Salzgitter’ plant, which offset 99.5% of its emissions in 2009 using CERS. 89% of these CERs used were from HFC and N2O projects but an additional 40,000 were sourced from an Indian steel work CDM project.

The report and interactive map published today which uniquely link the types and locations of offsets with who has used them, recommends the EU reform its rules to phase out the use of credits from industrial projects in rich developing countries in favour of more sustainable projects in least developing countries.

The report’s author Sandbag’s Rob Elsworth said,

“The EU’s policy on offsetting needs updating – it has great potential to harness the flow of capital to deliver big advances in clean technology in developing countries but at the moment it is being used to make industrial companies in rich countries even richer. The EU can and should introduce changes both to protect our own industries and make sure finance flows to the most deserving projects and countries.”

Sandbag founder and director, Bryony Worthington said, “Frustratingly, it seems that EU installations seem to have a greater incentive to fund abatement projects amongst their competitors rather than invest in these improvements themselves. While it is perfectly legal and on one level economically rational to do this, it begs the question of why companies would choose to send a direct subsidy to their international competitors if fears of carbon leakage were so pronounced.”

For more information contact Bryony Worthington +447876130352 / bryony@sandbag.org.uk or Rob Elsworth +447771871448 / rob@sandbag.org.uk

Notes to the Editor

Sandbag is a UK based not-for-profit campaigning organisation dedicated to achieving real action to tackle climate change and focused on the issue of emissions trading.

The full report can be accessed at: http://sandbag.org.uk/files/sandbag.org.uk/offset2009.pdf

Our new and improved interactive maps can be accessed at: http://www.sandbag.org.uk/offsetmap

Salzgitter’s ‘Glock Salzgitter’ surrendered 40,000 steel CERs from CDM project (id 696) ‘Usha Martin Limited - Waste Heat Recovery Based Captive Power Project activity’.

All value estimations are based on the assumption of an €11 CER price

One of the many disappointments in one of the least green budgets you could imagine was the lack of detail about key elements in the coalition Government’s green agenda. Having announced that they intend to intervene in the energy market in various ways to support low carbon investment it is important that a clear timetable is adhered to and yet there were no more details made available in yesterday’s budget. If ideas such as the green investment bank and introducing a carbon floor price take a long time to be realized, rather than encourage more investment, they are likely to dissuade investors who will not want to commit funds to projects if the rules of the game are about to be changed.

The issue closest to our heart is the potential introduction of a floor price into the carbon market in the UK and we’ve written a briefing looking at what I means and how it might operate.

The basic idea is to reform the existing Climate Change Levy so that it applies upstream and acts as an insurance policy against lower than expected prices in the carbon market. There are lots of details that need to be fleshed out before a conclusion can be reached about whether it is a sensible policy or not.

A few things can be said already, however:

Reform of the CCL is long overdue as it currently taxes energy use not the carbon content of the energy used, so looking again at its design is a welcome development.

The carbon floor price may create a clearer investment opportunity in the UK, however, it will not save a single tonne extra of carbon unless fewer permits are issued into the market. (This is because caps are preset by the number of permits handed out so any policy that just affects price and not the supply of permits has no additional environmental impact overall). So in terms of value for money it must be assessed as an industrial rather than environmental policy. And it must not become an alternative to seeking the long term solutions to the problems in the carbon market which are tighter caps, more use of auctioning and more limits on offsetting.

Finally, if introduced now it has the potential to deliver large windfalls to existing low carbon generation currently on the system and already paid for/ subsidised by the public purse or via our energy bills. One of the main beneficiaries would be EDF/British Energy who currently operate a large portion of the UK’s existing nuclear power stations. They also have public plans to build more.

Call me cynical but this could be a well-timed windfall-generating policy mainly benefiting one major company. UK consumers of electricity should be very interested in this and demand to know the proposed details as soon as possible.

Judging from last night’s address from the Oval Office it seems Barack Obama is moving away from a policy of introducing a price on carbon via comprehensive cap and trade legislation in favour of more specific energy policy regulations.

In the 18 minute long speech last night he set out a plan of action for addressing the Mexican Gulf oil crisis which included clean up plans, sorting out corruption in the Minerals Management Service and requiring that an independent third party administer the handing out of compensation payments provided by BP.

Many people had expected the plan also to contain a reference to the need to pass legislation to deliver on the US’s climate reduction targets. There was speculation that he would use the opportunity to reaffirm his backing for the need to introduce carbon pricing to help wean the nation of fossil fuels in favour of cleaner alternatives. They were disappointed. Instead the President said he was 'open to ideas' and that inaction was the only idea he would not consider. He name checked a few: applying similar regulatory standards to buildings as have been passed for vehicles, requiring higher percentages of energy to come from wind and solar and as yet unspecified ways of encouraging industry to invest more in energy R+D.

This appeared to be an open invitation for legislators to bring forward 'energy only' bills without cap and trade elements. On Monday Senator Jeff Merkley unveiled his proposals for how the US can end its addiction to oil taking a regulatory approach to improve energy efficiency, boosting use of alternative fuels, including biofuels, and encouraging modal shift. There was no mention of carbon pricing or cap and trade. He it seems may now have the ear of the President who may see this as a less politically contentious way to move forward on an agenda to reduce dependence on oil and emissions.

This new turn of events was perhaps inevitable given the vehemence of opposition towards cap and trade in some quarters and the apparent difficulty in securing the required number of votes for legislation, but is still nevertheless disappointing. To achieve absolute emissions reductions in a cost effective and efficient way there is no better policy that a cap and trade system using auctioning of permits. Other countries who have tried to use less comprehensive energy regulations to reduce emissions, such as the UK, have found that such measures are not able to keep pace with the rising demand for cheap energy and consequently emissions keep rising. Energy efficiency may reduce emissions per vehicle or appliance but the total use of energy can continue to rise as more units are used more often. Increased use of renewables and alternate fuels can reduce emissions but only on a relatively small scale initially and they do nothing to stimulate the important switch from high carbon fuels such as coal and oil to the low carbon fuels such as gas and nuclear. Modal shift in transport is also a difficult and expensive thing to achieve if it goes against market realities and consumer and business preferences.

Obama says he is open to ideas but sadly I suspect the one idea that is no longer on the table is the application of cap and trade on emissions from power and transport. Both sectors are not exposed to international competition and both have the potential to deliver large volumes of emissions reductions quickly. It is still possible that the EPA will press ahead with plans to introduce caps on large stationary sources of emissions using existing powers under the Clean Air Act but their confidence may also now be dented thanks to the lack of mention of carbon pricing in yesterday’s speech.

And although making oil companies pay for the pollution arising from the use of their product would clearly be the best way to steer investment into alternatives it now seems this has little to no chance of being passed in the near future. This is a great shame and one which both the US and world may live to regret.