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Why COP15

Danish Accord Failed?
The devil was in the details.

TRANSPARENCY (Benefits & Pitfalls)

Comparing the “DANISH TEXT”

with the OBAMA BASIC Deal





Understanding the Base model

Benefits and Pitfalls assessment

Developing a suitable architecture











• Mitigation of Emission as per EU ETS Model

• Method of Measurement Reporting and Verification MRV of the EU ETS

• Performance of UK to measure up to Kyoto Targets under EU ETS

• Cost of implementation of EU ETS mitigation policy

• Financial irregularities in the implementation of the EU ETS
• Pricing : In a free market economy nothing ever is free.
• Issuance of free carbon allowances under EU ETS
• Lobbying by big business to get free Carbon permits
• Profiteering on free Carbon permits
• Raising of Energy prices across Europe after EU ETS
• VAT Evasion in Carbon trade leads to Tax losses of Billions of Euros

• Macro economic distortions due to emission mitigations

• Revenue movement without transfer of assets within EU
• The Effect of money supply on non-commodity trading.
• Are free carbon credits subsidies to the emitters?
• Accepting the Carbon economy
• The consequences of speculative losses for developing economies
• The Alternate Equitable solution for non Annex 1 nations


Mitigation of Emission as per EU ETS Model

After the failed Copenhagen summit of last month, we began a 10 Part
analysis of “Why COP 15 failed” in major documentation and presentation
sites of the world. We come to the conclusion, that Transparency is one of the
key issues in Emission talks that was holding the progress and causing much
of the heartburn and distress amongst the negotiators. It is not for nothing that
nations distrust one another. The problem is that transparency, its robust and
effective model haunts climate change not only in Asia, but in the US and the
EU too. Since all know how to cheat, nobody trusts the other.

We are examining currently the model EU ETS (as US is not a signatory to
Kyoto) and the model nation U.K. as a standard for emission transparency,
and investigating the actual strides made by them to stop emission rise. In the
Part 3A of our analytics we came up with startling facts as per DECC and
British Government published documentation that our chosen model nation
UK measures only 43% of the total emissions and mitigates just about 3%
Surprisingly U.K. has perhaps the best credentials in the European Union in
enforcement of emission norms.

The fact that EU ETS at UK has achieved 3 % mitigation after 12 years of the
1997 Kyoto pact looks alarming and snail paced to stop climate change.
Nonetheless, let us accept the argument that this time was required for the
early stage development, and the results learnt from EU ETS can be put to
use by later day followers. Hence let us explore few more critical issues
before accepting or rejecting the EU ETS as a role model for developing
nations as per the OBAMA BASIC accord at Copenhagen.


As the discussion is being enlarged in view of reader feedback, the releases
of the COP Failure Analytics shall be henceforth on a weekly basis and not bi-
weekly. The issues which are to be considered for testing the robustness and
the effective role of the model EU ETS in curbing emission rise, are:

Method of Measurement Reporting and Verification MRV of the EU ETS

Cost of implementation of the EU ETS mitigation policy

Financial irregularities in the implementation of the EU ETS

Macro economic distortions due to EU ETS emission trading

Method of Measurement Reporting and Verification MRV of the EU ETS

The regulators in U.K. for the EU ETS scheme are essentially local
Government bodies. To date emission control measures in the EU ETS 2 are
not controlled or monitored by any international agency which is surprising for
the largest emitter group, the Annexure I countries. National level regulators
are responsible for monitoring and reporting, registry administration,
verification, enforcement and data management. The regulators include: the
Environment Agency, Scottish Environment Protection Agency (SEPA)
Northern Ireland Environment Agency (NIEA) and the Department of Energy &
Climate Change (DECC) for offshore installations of the United Kingdom.

The measurement, reporting and verification MRV procedures adopted by
U.K. for emissions are not by any standard restrictive. They are to say the
least quite user (emitter) friendly, and has severable debatable assumptions
such as “all coal fired power stations would use the coal of the same calorific
value or have the same emission values”. Since these observations would be
numerous and technical in nature, they are not being discussed here. There
are also few obvious and inherent problems even in the EU ETS 3 that has
been supposedly revised learning lessons of phase 2 and is due to be applied
from 2013. However instead of going into the basic core deficiencies and
technicalities of the MRV we will present for our readers the results of the EU
ETS as per published data by the British Govt, the Europol and the audit
committees of UK to assess the performance of the model.


Performance of UK to measure up to Kyoto Targets under EU ETS

The first phase of EU ETS 1 2005-2008 saw teething troubles as expected.
Due to the lax monitoring of EU ETS 1 several EU countries recorded double
digit emission rise like Finland, Estonia and Denmark. However we shall
restrict our discussion here to the model country U.K. chosen for evaluation.
Emissions in U.K. rose by approx 5.8 % from 242,513,099 Metric Tonnes of
CO2 in 2005 to 256,581,600 MT in year 2007 as per European Commission
Press Release of 23rd March 2008. [Ref EU ETS 1] .
The EU ETS -1 Cap of 245.3 MMT CO2 as per Kyoto was missed by U.K. like
most European industrial giants. They got additional relief when the Cap for
EU-ETS 2 for the year 2008-2012 was raised further to 246.2 MMT CO2, after
additional allocation of a carbon offset limit of 14.5 MMT (6.9%) which it could
purchase externally from the third world countries in Phase 2. In short this
would actually result in U.K. emitting 260.7 MMT CO2 within the UK in the year
2012, as against 242.5 MMT of CO2 emitted in the year 2005.
Hence the EU ETS interpretation of the Kyoto protocol would help UK raise
emissions by 7.5% legally during the short period of 2005-2012 instead of
reducing it by 8% during the extended period of 1997-2020. Whether the UK
meets or overshoots this limit again depends on the British Government. Still
as the Kyoto protocol is a moral impediment in the path of larger emissions,
all out efforts are being made by EU to kill it or bury it, so that no restrictions
or performance evaluation are there as per international treaties.

Cost of implementation of EU ETS mitigation policy

The cost of developing and implementing a model like the EU ETS would be
phenomenal for any developing nation. The implementation of the EU ETS 2
is estimated to cost the U.K. anything from GBP 2.0 Billion to 2.5 Billion with
an additional GBP 60 million estimated for administration costs. Though this
cost will not be uniform across Europe, the preliminary estimates suggest that
EU overall will spend around Euro 20 billion in the phase 2 of the EU ETS in
addition to local administrative costs. For large countries like the China, India,
Brazil, or South Africa with low energy density and a wide geographic spread
of small energy units the cost of implementing the EUETS type emission MRV
would be much greater, though the total energy produced could be lower.


NOTE OF CAUTION: Developing nations must be extremely cautious and
carry out their own feasibility analysis before committing to reduce
emissions by the EU way. The January deadline in the OBAMA BASIC
accord is for modes to be adopted for mitigation and not quantified
figures to be committed by Non-Annex 1 nations. Ad hoc commitments
without due diligence could be way off the mark and unnecessary.
The big question however is whether despite the considerable investment,
and the failure to meet the Kyoto targets by a mile, the emission control
model of the EU ETS and model country U.K. provides a Transparent,
Rigorous, Robust and Effective emission control mechanism , for the
developing nations to adopt.
Financial irregularities in the implementation of the EU ETS
Carbon Credit Frauds have been the bane of the European Union Emission
Trading Schemes EU ETS since its inception in the year 2005. Various forms
frauds haunt the Carbon industry from lobbying for excess EU Allowances, to
the falsification of plant carbon allowance requirements, to buying of false
Kyoto credits from the third world nations to the swapping of virgin rainforests
for fast growing commercial plantations, to the evasion of VAT.

However for the sake of brevity we will highlight only two types of frauds here
in the EU ETS that could create major problems for the developing
economies, should the EU Model be duplicated in Asia , Africa or South
America. They are directly related to Energy Pricing and Tax evasion and has
nothing to do with the environment and hence will be of greater interest to the
political masters of the developing world.

Pricing : In a free market economy nothing ever is free.
The nexus between big business and politicians have always been the talk of
the town, though at times unsubstantiated. Free market economies of the
West had shown a way in the seventies and the eighties how to nip the bud of
this nexus, by taking away controls from the hands of politicians to simplified
well laid out transparent policy directives executed by the bureaucracy and
administration. This hard earned transparency was achieved because nothing
was given away free in the free market economies and every object had a
price and business competitors were made to bid for the objects on offer a
price. Emerging nations like China and India gained enormously by discarding
the socialist “Discretionary Permit ” policies, and ushering free market
economics, as it did away with corruption and encouraged open competition.


Issuance of free carbon allowances under EU ETS
The issuance of free Carbon permits or the EU emission allowances
destroyed this fair play and fair price equilibrium of the free markets. By
issuing billions of Dollars of free EU ETS Carbon allowances to the emitters in
the first phase of the EU ETS (2005-2008) several anomalies arose which
have still not been brought under control in the revised EU ETS 2 despite five
year of operations.
The initial distortions were brought about by nations grabbing excess permits
than required during the allocation of EU ETS 1 allowances for distribution
through the National Allocation Plans NAP . In the first phase of the EU ETS
France and Germany haggled and got a higher quota allocated than required,
whereas the United Kingdom in its bid to reduce emission went in for a fairly
conservative estimate of EU ETS allowances, which ultimately resulted in
large payouts for emissions by the British industry.
Lobbying by big business to get free Carbon permits
At the industry level, the big business houses, usually the largest emitters
quickly got into play, lobbying for greater EU allocations, sometimes even
based on higher plant “rated” capacities, instead of the “operating” capacities,
and got their share. The small units like single owner medium scale plants,
hospitals and charitable trusts got left behind and many had to purchase the
carbon credits from the open market to meet their emission needs .
Fortunately they did not have to pay a fortune to buy as the Carbon prices
plummeted since allowances exceeded the market demand by almost 6%.
Profiteering on free Carbon permits
The BBC research team in a report last year stated that power firms which
had previously raised en energy prices on the pretext of emission control
claimed multi million pound bonuses . by selling
off its excess free permits that it had got through lobbying. The subsequent
year saw power companies loose out as it was the cement and steel giants
this year to reap the benefit of free Quotas.
This year steel plants such as Drax in Yorkshire U.K. , Glocke Salzgittar of
Germany and Accelor Mital Gent of Belgium had each over 5 million excess
free permits, with Germany's Integriertes Huttenwerk Duisburg sitting on
10.million permits. They all made their opportunistic billions at the time prices
had peaked. Worse as feared the steel companies and Cement majors who
were masters of lobbying the EU to ensure they benefited at a time when
permits can be traded at €15 (per tones) threatened to pull out of Europe if
such free permits were not allotted in future under the EU ETS . The EU
administration it is learnt is sympathetic to their cause. //


Raising of Energy prices across Europe after EU ETS
As financial traders from Goldman Sachs to Citibank to Barclay’s reaped
multimillion dollar profits in Carbon Trade, the energy prices across Europe
almost doubled from 2004 (Before implementation of EU ETS 1) to 2007. The
big emitters’ in the energy sector (especially the Coal based power stations
who are allocated more EU ETS emission rights) benefitted two fold both from
the consumers as well as the regulatory authorities. They first raised the
prices of energy to meet the emission mitigation costs and then sold of the
excess carbon credits in the markets to profit from emission trading. Such
profits were to the extent of GBP 2 billion which more than compensated for
the minor modifications made by the industry to add additional emission
Bloomberg energy analyst Mathew Carr further predicted that energy costs
would bounce with the revival of carbon prices “Pollution permits, the biggest
money- loser for commodity investors this year, are poised for a rebound that
may spark a 10 percent jump in electricity costs for the 260 million consumers
from London to Bucharest “

Macro economic distortions due to emission mitigations

The Carbon trade has been long called the hot air trade by the street smart
trading circles which is probably the most appropriate terminology both from
the technical as well as the economic angle. Emissions are basically the hot
exhaust gasses from the chimneys. So from a technologist’s point of view
Carbon trade is essentially hot air. From the macro-economic point of view
Carbon is neither a Good nor a Service, which is being priced. Rather it is a
right to emit, a notional non-commodity that is being priced. Hence it is an
asset bubble or a hot air commodity, as far as the commodity markets are
Revenue movement without transfer of assets within EU
Against the EU ETS phase 1 the UK had to pay out around Euro 2 to 3 billion
for over 22 million Carbon Credits it bought whereas French and German
companies profited around Euro 3 billion each from selling surplus carbon
credits. This in no case meant that UK polluted more than Germany or even
France, only that its negotiators were not smart enough to hanker and get
more Carbon Credits allotted due to which it lost out substantial sums of
money. In short the credits after being transferred to the industries actually
ensured that the British Industries paid out a few Billions to the German
Industry not to buy goods or services but to buy the right to pollute.

In the EU ETS Phase 2 when the Germans where pressurised to reduce their
demands for Emission allowances, they agreed to it on condition that they are
allocated more Carbon offset rights, which are permissible for phase 2 of the
EU ETS. So the Germans ensured that they got more than they needed this
time too. The British however did not err this time around are sufficiently well
placed with 3 to 6 percent excess Carbon credit allocations which they may
sell at a later date as per knowledgeable sources. Even Russia with Euro 2
billion surplus carbon credits, since its own industry had collapsed after Kyoto
allocations, is eyeing the EU market with its own version of “hot air” supplied
with cheap Russian Gas.
The Effect of money supply on non-commodity trading.
The carbon exchanges at Amsterdam and London, Germany and Paris have
all started functioning. The Prices of Carbon ( 98.5% free issues across the
EU ) rose sharply at the Amsterdam and London exchanges initially to touch a
peak of Euro 33 before the market collapsed in April 2006 when carbon
prices crash landed to Euro 8.5 in a few trading sessions. Ever since then,
the EU has tried to throttle supplies, but the prices kept dropping to go below
1 Euro before recovering, but never stabilising. With the market float being
soaked up and with supplies being cut, Carbon trading volumes sunk to a third
at the Energy exchanges and the total trading last year fell to around Euro 30
Billion. Major players like France and Germany are reported to be sitting on
huge piles of unsold EU allowances from EU ETS due to this sudden and
unexpected price crash.

Are free carbon credits, subsidies to the emitters?
Carbon Credit or hot air could be treated as state subsidies to energy units, as
suggested by some economists, if it was uniform across nations, even within
the EU, and not tradable. However this virtual money given largely as a free
issue is also a tradable unit. Since it is not capitalized against goods or
services and not real money, but is tradable it is a non- commodity in the
commodity markets which makes it a doubtful asset or asset bubble. Hence
prices can rise or drop very sharply and quickly depending on the availability
of free marketable emission certificates at the exchanges, which will ultimately
be in the hands of the big commodity traders and financers of the Wall Street.


Accepting the Carbon economy
If the developing nations accept this carbon economy, they have to contend
with the fact that huge money transfers could be drawn out of economies of
those who are slow to understand the carbon game and react retrospectively
like the UK, did in phase I of the EU ETS. Their will be many swift and
complex rule changes in the oncoming years, and nations must have the
capacity to learn and grow. One mistake and either they have to cut down
growth and their energy needs during a phase or else will have to buy the
carbon credits off the market as the UK did. On the other hand they may also
see their notional carbon wealth vanish overnight as France did, when the
bottom fell out of the Carbon markets and they were left holding huge excess
of Carbon credits. Not being related to productivity of goods and services, this
innovative energy market financial instrument could be a unique tool in the
hands of the richer nations to adjust trade imbalances.
The consequences of speculative losses for developing economies
This problems in selling Carbon is due to the fact that it is not backed up by
any assets created, like in a commodity, and can increase money supply to
an unlimited extent based on international speculation, as well as lead to a
price collapse With energy deficient, high growth China and India drawn into
such a market, carbon price fluctuations can result in large fluctuations in
energy prices in the developing world and give a huge bonanza to the
western economies, and speculators and trade cartels with deep pockets .
However if weaker economies participate in the Carbon casino they may find
themselves totally at a loss with foreign exchanges totally wiped out or holding
huge amount of undervalued carbon credits from time to time due to market
fluctuations, that could affect cash flow. While the G7 or the EU can afford to
engage in such speculative virtual trading, it is doubtful that the developing
countries are geared to engage in such activity. The difference in treatment
between a bankrupt Argentina and highly borrowed Greece (EU) or Dubai (oil
cartel) today may be taken into consideration while decision making.


The Alternate Equitable solution for non Annex 1 nations
The alternate equitable solution for the developing countries would be to
develop a low carbon economy with a solution vastly different from the
standard carbon and emission reduction metrics that the Kyoto has proposed
and the EU has designed. This is because the western economies who
account for 80% of emissions must make effort to reduce those by emission
cutting or carbon reduction as per Kyoto. The developing nations who occupy
only 20% of the carbon space today must take the alternate path, a renewable
energy challenge, to ensure that they do not follow the footsteps of the
western economies and destroy the planet earth. So whereas Kyoto calls for
5% emission cuts for developed nations, from 1997-2020 the developing
nations must have their own pact of 5% renewable energy growth during the
same period to ensure a carbon free world. The international commitments
and suitable framing of possible counter proposals will be discussed next
week in our Part 3c of the COP15 Failure Analysis.


References of previous works on COP / Climate Change

Why COP15 Danish Accord Failed. DISTRUST Part 1 (Slide Share )

Why COP15 Danish Accord Failed EQUITY Part 2 (Scribd)

Why COP15 Danish Accord Failed TRANSPARENCY Part 3A (Slide Share)

VAT Scam dogs Europe’s Hot Air Trade Technorati

COP 15 : Deal Sabotage : Burying Kyoto at Copenhagen ( Slide Share)

COP 15 : Gassing 15 years on Carbon Economy ( Slide Share )

COP 15 : Bullshitting 15 yrs on Climate change (Slide Share)

The Imelda story of Cap & Feed. Why the planet earth suffers (You tube)

Cap & Trade Energy Mathematics (You tube video)

The Imelda Story ( Scribd)

Cap & Trade energy maths at Scribd ( Scribd)

For any Queries, Objections or Source confirmation of data please contact the
author Sandip Sen at