UAE pushes for action on emissions

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Article Summary

This article discusses steps that the United Arab Emirates (UAE) is taking to encourage industry to reduce Greenhouse Gas emissions (GHG) by using its own trading scheme. Currently it uses emissions reduction certificates to trade emission rights with other nations.

The UAE is expecting that there will be no binding agreement reached at the current UN talks in Durban on climate change. This will mean that there will be no renewal of the Kyoto protocol. If Kyoto is not extended, the article claims that US $142 billion per year--around 80% of the current emissions trading—would be wiped out. The article suggests t that the UAE is attempting to be a leader in renewable energy sources, but later points out that it is relying on carbon credits to finance several large projects. The UAE is supporting a system where individual countries set their own targets for emissions. The richer countries would then buy emission rights from poorer countries.

Even though the UAE promotes renewable energy, it is also the world’s fourth largest oil producer. It is estimated that if the world adopted a GHG target of 450ppm, the GDP of Opec nations (of which the UAE is part) would drop by 40%.

Analysis

From the description in the article, the emissions reduction certificate is the same as a transferable emission permit. UAE would be able to buy emission certificates from poorer counties so it could emit GHG’s beyond the countries stated limits. On the other side, it could sell certificates to other carbon consumers based on its renewable energy projects and bring capital into the country to build this infrastructure. As stated in the article, if Kyoto is not extended—which is highly likely—the value of these certificates will be greatly reduced on. This is because Kyoto creates a demand for the emission permits and therefor drives the price up. With the specter of Kyoto’s demise, market prices are already falling. UAE’s strategy of encouraging other counties to set their own limits is a clever way to re-establish this demand. It is clear that Canada, the US, and Russia will not be signing any GHG agreements. In the absence of Kyoto, creating localized demand is the only alternative.

Hot spot issues and localization would be interesting with this method. Would counties manipulate the emission limits to suit their current situation? A developing nation in early stages of industrialization would likely want to set a high emissions level so they did not need to buy as many permits. On the other hand, a developing nation invested largely in agriculture and “cleaner” resources would also want a high level of emissions so they had lots of permits to sell. Monitoring of such a system would also be very difficult. Under this system we believe the value of the permits would still be low as the perceived intrinsic value would be low. The main beneficiaries would likely be the trading firms. Since such a system would be open to manipulation we would expect that it would not operate at the efficient point for society as a whole.

I am reminded of a quote: “carbon trading is like paying someone else to go on a diet while you stay fat”. If the developing county was never going to emit the GHG in the first place—which is likely why they are selling the permit—what is really gained from the trade? Likewise, the transfer of capital to the UAE from the sale of permits to finance the renewable energy project will also likely have little effect on reducing overall GHG’s.

Prof's Comments

For international carbon trading, you should be thinking the same way as thinking about firms. It is simply more cost effective to pay developing nations to build new, efficient plants than to convert those in developed world. Globally, it is cheaper to have a market for emissions or for credits than it is to do all the emissions reductions at home. The real challenge is that developed nations don't want to transfer wealth to the developing world.

7/10