We’ve got good news, bad news and worse news. The good news is that China has announced its target for emissions reductions. The bad news is that the 40% target is an “intensity-based” goal. The worse news is that the intensity-based approach is not a very good model at all and is a difficult model on which to build a market structure.

For those who disagree, we only have to look at Canada, for an example of a government that reluctantly engaged in the carbon markets with intensity-based targets. In all actuality, it killed the budding carbon-market that was being formulated with the help of the Montreal Exchange (Now TMX) and the Chicago Climate Exchange, which formed a joint venture called the Montreal Climate Exchange, established in 2006. Because of the Harper government’s insistence on intensity-based targets, which helped protect its valuable Alberta oil sands production, the market has been stymied. Intensity based caps are measured by the quantity of emissions per unit produced.

For example, it provides a ratio of emissions per barrel of oil produced. One of the criticisms of this model is that emissions intensity can fall while production increases, but that still could mean that overall emissions actually increase.
Intensity-based emission caps versus absolute emissions caps, which are used by the EU’s Emissions Trading Scheme and in the Regional Greenhouse Gas Initiative (RGGI) as well as the US SO2 and NOx emissions trading models, are used for very good reason by the Chinese. They are cheaper.

The 2003 MIT report called “Absolute vs. Intensity-Based Emission Caps” by Denny Ellerman and Ian Sue Wing, says “if GDP growth is greater than expected, an absolute cap will require more abatement and therefore higher cost than an intensity cap.” Intensity caps also stand as a square peg to a round hole, which is the Kyoto Protocol and post-Kyoto framework. It should be pointed out that Ellerman and Wing do not say that absolute caps are better than intensity-based targets, just that they are different approaches to the same problem.

That said, the intensity-based approach has another problem – and that is, it adds an additional layer of verification to the process. In other words, someone has to count all the widgets or barrels that come out of that factory in addition to all the emissions. And given the reluctance by the Chinese to allow that type of verification, it will be tough, if not impossible to see if they are indeed meeting their targets or simply inventing their own figures. This complexity also makes it difficult to design a tradeable market around it.

So for the time being, no, this isn’t the jumpstart Copenhagen supporters were hoping for.

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