In past posts, we’ve roughed out for readers the definition and rational behind a carbon cap-and-trade system for lowering greenhouse gases and mitigating climate change. In 2005 such a system began in the EU under the Kyoto Protocol, and theUS Senate will start to debate the idea in June.
Now, we’d like to dig in a bit deeper to explain a hot point of debate and a new study that adds fuel to the cap-and-trade fire. If you can hold on through the acronyms, there’s reward at the end.

Key to the EU system (known as the European Trading System or ETS) is the notion of carbon offsets, more officially referred to in the Kyoto Protocol as Certified Emissions Reductions (CER), which allow carbon emitters (think big coal company) to contribute funds to projects (think wind or hydro) with small carbon footprints in developing countries (think Kenya and China). The carbon emitters get credit within the ETS for their contribution, but only if these projects wouldn’t have occurred without their support.

In theory, the exchange helps emitters comply with ETS regulations and helps developing countries avoid building greenhouse gas-emitting projects. And to assure that the new projects are legitimate, an executive board, as well as an independent third party, oversees the deal. It’s their job to make sure that all this haggling results in a reduction in greenhouse gases.

But the devil is in the details, or so finds a new study by David Victor, director of the Program on Energy and Sustainable Development at Stanford University, and his colleague Michael Wara. They write that the most popular type of CER, the Clean Development Mechanism (CDM), “…does not reflect actual reductions in emissions, and that trend is poised to get worse.”

Not good! And yet almost predictable. The system for verifying CDM credits is riddled with conflicting incentives. Victor and Wara write:

“The host governments and investors that seek credit have a strong incentive to claim that their efforts are truly additional. The regulator — in this case, the CDM Executive Board — can’t in many cases gather enough information to evaluate these claims…the CDM Executive Board is massively under-staffed and the CDM system relies on third-party verifiers to check the claims made by project proponents. In practice, these verifiers, who are paid by the project developers, have strong incentives to approve the projects they check. Further, there is scant oversight on the integrity of the verification process and no record of punishing verifiers for misconduct. Lacking any other source of information about individual projects and facing pressure from both developing and developed country governments, the CDM Executive Board is prone to approve projects.”

Their study goes on to suggest possible reforms to the CDM system, such as requiring an entity other than project developers to pay third party verifiers and limiting the number of CDM projects under consideration.

Now about that reward we promised. Having made it this far in the ethereal world of climate change policy, you have officially reached the level of ‘carbon wonk’  a term so insidery it hasn’t even hit Wikipedia. Congratulations, Grasshopper.

Story by Victoria Schlesinger . This article originally appeared in Plenty in May 2008. The story was added to in July 2009.

Copyright Environ Press 2008