How Big Companies Profit from Greenhouse Gas Pollution

What's the true price of a carbon permit? That's a trick question, according to data from a United Kingdom nonprofit called Sandbag. Carbon permits are supposed to be allowances to emit greenhouse gases that companies purchase -- at a loss to their bottom line. But since the recession began, some of the biggest emitters have actually been profiting from Europe's cap and trade scheme.

The European Union's auctioning system is the source of the problem. Instead of auctioning all the permits at the beginning of the year, the EU gives away a large number to carbon-intensive industries. Power companies get some, along with steel and cement makers, automakers, oil refiners, and so forth.

It's a tough trick to make sure that each industry gets exactly the right number of permits. The EU's system was never perfectly in balance, and the recession, which lowered demand for steel and other materials, has pushed it seriously out of whack. Right now, a group of 10 companies is racking up profits from pre-allocated credits, led by the steelmaker ArcelorMittal. From Sandbag's report:

By 2012, all the spare permits will be worth $3.2 billion. As Sandbag points out, that's around the same amount the EU currently spends on renewable energy.

Sandbag's preferred solution is just to hand out fewer carbon permits, and the EU is considering changes to its auctioning model. But the system has a number of weak points; for example, power companies have been responsible for more than their fair share of emission reductions.

There's also the problem of carbon offsets. A carbon offset is something like a permit, bought from a project that can show that it spends extra money on saving emissions -- for example, a pig farm that burns off its methane emissions, instead of releasing them into the atmosphere. Offsets are verified by inspectors who are in turn licensed by the United Nations, which also sets the standards for "additionality", or how much emissions a project saved.

The offset system is shot through with even more flaws than carbon permitting, according to a recent expose in Harper's (subscription only). There's no real way to measure saved emissions, and once a verifier approves a project, the offsets are sold into the system and can remain there for decades, even if the emissions savings are later found to be imaginary.

Even worse, the verifiers are paid by the project owners, so it's in their interest to approve as much of an offset as possible. The UN has already suspended the two largest verifying companies for problems, but the system is quickly growing beyond the point that the UN can exert any meaningful control -- even if the organization weren't hobbled by the demands of countries that profit from offsets. Ultimately, there's probably much more room for companies to illicitly profit in the offset market than in permit trading.

Carbon trading may be fixable, but as I wrote last Thursday, there's a growing movement in both Europe and the United States to give up trading and impose carbon taxes. That might solve some of the problems.

Yet as critics of any carbon reduction plan will point out, any national or regional plan, trading or taxing, retains one more weak point: there's nothing to prevent companies from moving to countries without carbon limits, then exporting their goods back to the countries with emissions limits.

And that's exactly what's already happening, according to yet another study, this time published in the Proceedings of the National Academy of Sciences. As you can see from the map below, the United States (in red) is a "net carbon importer", while China is a major exporter. What remains to be figured out is how to solve the emissions export problem without causing a trade war.
[Image credits: The Simpsons / Sandbag / Carnegie Institution for Science]