The Kyoto Protocol was established under the UN FCCC -- the "Framework Convention on Climate Change." The Kyoto Protocol states that starting in 2008 the developed countries and the Economies in Transition will on a country by country basis reduce their CO2 equivalent emissions to below 1990 levels.

The protocol covers six greenhouse gases using CO2 equivalents for measurement. The countries have until 2012 to reach that reduction. Each country must create its own plan and its own country inventory of CO2 emissions.

The Kyoto Protocol suggests three ways to meet its targets:
1. Reduction in the country itself.
2. Reduction in other developed countries or countries in transition. In this case a county with a shortage could buy the credits that were assigned to the other developed country which would be excess to the selling country.
3. Sponsoring the creation of new credits by buying CDM credits.


CDM-- The Clean Development Mechanism is the term for the project specific creation of new CO2 credits in Non-Annex I countries -- i.e., the developing countries. The project should involve some transfer of technology, but it must:
1. Need the money from the sale of the credits in order to make the project achieve economic feasibility -- this requirement is known as "additionality."
2. Be a reduction in CO2 emissions (or a creation of emissions free energy) that is not required by any other law or treaty.

For instance HCFC (sometimes call FREON or cholorodifluoromethane) under the Montral Protocol that went into effect in 1989 will be eliminated by 2040. Therefore it is not eligible for CDM, but the by-product of HCFC's creation, HFC-23 (trifluormethane) is eligible because HFC-23 was not covered by the earlier treaty.

Examples of what goes into the calculation of a country's total CO2 emissions under the Kyoto Protocol include CO2 produced by:
* Cars and Trucks -- from the gas and diesel they burn.
* Cows and other farm animals -- from their enteric fermentation or the release of methane gas by burps and farts.
* Power Plants that produce electricity from coal, gas or oil, etc.
* Fire Extinguishers and Air Conditioners -- which use hydrofluorocarbon gases (but not including the gases covered under the Montreal Treaty, i.e., HCFC),
* Fertilization of soil for farming using ?????
* Cement manufacture which releases CO2 in the mining of raw materials used to make cement clinker. By replacing some of the clinker materials with fly ash from coal plants (or other unused waste products) CO2 released in mining could be reduced..


The European Trading Scheme (ETS) is the way the EU decided to take the Kyoto Protocol Seriously and get ready for it. The ETS is basically the EU's national plan to meet the Kyoto targets. The EU works as a unit and assigns allocations itself to each of its member countries.

The ETS started operation before the Kyoto Protocol will take effect on January 1, 2008. The ETS also added an earlier two year phase from 2005 through 2007. It of course has an additional five year phase that coincides with the Kyoto Protocol.

Part of what the ETS did was to foster an electronic trading market like a stock exchange to encourage the buying and selling of EU credits called EUA's (European Allowance Units).

An EUA, starting in 2008, will be quite similar to a CER (certified emission reduction) under the Kyoto Protocol's CDM or a ERU (emission reduction unit) representing a reduction that could be sold of existing emissions also under Kyoto.

One difference between the Kyoto Protocol emission reduction units and the European Union EU Allowance is that in the EU neither nuclear power nor reforestation are permitted for sale of new CDM credits. Under Kyoto reforestation can be up to 1% per year per country of its credits.

Starting in 2008 the ETS also allows the purchase of unused credits from other countries (in addition to the CDM CER's). This brings up the issue of "hot air" from countries like Russia that are already below their 1990 targets. It appears a compromise will allow the hot air to be sold as long as the money is used by the country for additional green projects. This would be the sale of the extra credits by the country itself, rather than by a specific company they may otherwise have been allocated to.

Verification
CDM credits are verified by a system set up by the Secretariat of the UN Framework Convention on Climate Change. The UN has essentially set up a regulator called the CDM--Accreditation Panel with its own assessment team that makes visits to what are essentially project auditors. There auditors must be approved by the UNFCCC, first as an applicant entity and then as a designated operational entity. They make sure that the project design document is followed for the CER's to be issued.

A voluntary market has arisen for companies and individuals wanting to offset their use of carbon by supporting green projects. Some of these have been reforestation. Theses credits are verified or issued by a number of different competing organizations. They are sold at a large discount to Kyoto approved credits. The total value of this market is relatively small in $100 millions vs. US$ billions for Kyoto credits.

Development bankers could:
1. Support the establishment of DOE's (designated operational entities) approved by the UN to audit CDM projects.
2. Become more involved in the voluntary market as a brand name like for instance Fiji Water, which is bottled in Fiji and sold around the world.
3. Support educational programs to teach companies or entrepreneurs how to do carbon credits.
4. Work on ways to package several smaller projects together to meet CDM requirements, while reducing certification costs.


NOTES ON CARBON CREDITS

Frequently used Acronyms:

Terms for Kyoto Protocol

* COP The Conference of Parties to the Kyoto Protocol is the rule making authority (MOP -- meeting of parties)
* EB The executive board of the COP
* UNFCCC United Nations Framework Convention on Climate Change -- the original treaty agreement that later was modified as the Kyoto Protocol
* CDM Clean Development Mechanism
* CER Certified Emission Reductions
* LULUCF Land Use, Land Use Change and Forestry -- refers to reforestation of areas depleted before 1989.
* RMU Removal units for LULUCF (use limited in percentage by Kyoto and not permitted under the ETS)
* TCER Temporary 5 year CER credits used in conjunction with LULUCF
* ICER 20 year CER credits used in conjunction with LULUCF
* ERU Emission Reduction Unit -- a ton of co2 under the JI -- additional reduction of existing emissions to sell credits already issued, but not creating a new credit
* JI Joint Implementation -- credits from the projects reducing emissions in Annex 1 countries (i.e., unlike CER, these are not newly created credits)
* AAU Assigned Amount Units -- the carbon emissions allowed to a country
* GIS Green Investment Scheme -- countries that are below their 1990 targets (have 'hot air' because of economic decline) can sell their AAU's to other countries. The money should be used to further reduce emissions.
* IET International Trading of Emissions used when discussing GIS
* DNA Designated National Authority -- for each member country
* AE An applicant entity: essentially on the way to becoming a DOE.
* DOE A designated operational entity, authorized by the UNFCCC to validate, verify and certify CDM projects; essentially an auditor.
* CDM-AP CDM Accreditation Panel -- approves DOE's. Essentially a regulator.
* CDM-AT CDM Assessment Team -- makes visits to check AE's and DOE's and reports to the CDM-AP.
* PPD Project Design Document submitted in applying for CER's



Terms for the European Trading Scheme

* ETS The EU Emissions Trading Scheme
* EUA EU Allowance -- allocated under the NAP and must be used or sold within the period (ending Dec 31, 2007 and then 5 years later)
* NAP National Allocation Plan in the EU

Terms for the Voluntary Market

* VER Verified Emission Reductions for the voluntary market (estimated to reach 100 million tons in 2007)

General Terms

* Sinks Removals of CO2 from the atmosphere, such as by the growth of a tree.
* EIT Economies in Transition

Regional Terms

* RGGI US North Eastern states' Regional Greenhouse Gas Initiative -- would start in 2009 and lead to a stabilization of emissions at current levels (an average of 2002-2004 levels) by 2015. This would be followed by a 10% reduction in emissions between 2015 and 2020. The proposal would also allow participants to purchase offsets to meet 50% of their emission reductions.

Logs

* ITL International Transaction Log -- UN coordination of national registries, the EU log (CITL) and the CDM registry for Kyoto set up by the United Nations Framework Convention on Climate Change (UNFCCC) Secretariat

Demand Side Management

* EPP Efficiency power plant: the idea of creating the energy equivalent of a new power plant (300 to 500MW) by investing in energy efficiency rather than production. This method is not necessarily supported for carbon credits under the CDM.

Green House Gases

The Kyoto Protocol targets cover national CO2 equivalent emissions of the six main greenhouse gases:
* CO2 Carbon dioxide - HFCs Hydrofluorocarbons
* CH4 Methane - PFCs Perfluorocarbons
* N2O Nitrous oxide - SF6 Sulphur hexafluoride



Practical Application of Country Limits in the European Union

The EU ETS is not an economy-wide cap-and-trade system. Rather, it regulates downstream about 12,000 emissions sources, accounting for half of all EU emissions. Covered sources include iron and steel; cement, glass, and ceramics; pulp and paper; electric-power generation, and refineries.
* Transport is not currently included in the system, although the EU will include air transport in 2011.

Prior Treaty -- Montreal Protocol on Ozone Depleting Substances

The Montreal Protocol on ozone layer depleting substances (in force from 1989) reduced Chlorofluorocarbons (CFCs). They were substituted with others powerful greenhouse gases (but ones not as bad for ozone), for example by hydrochlorofluorocarbons, or HCFCs, and hydrofluorocarbons, or HFCs. The Montreal Protocol currently calls for a complete phase-out of HCFCs by 2030-40, but does not place any restriction on HFCs,

HFC-23

A large part of the CDM certificates have been for reduction of HFC-23 (trifluromethane) emissions. HFC-23 is a waste by-product of the production of HCFC-22 (Freon-22 or Chlorodifluoromethane). HCFC-22 is a powerful greenhouse gas used in foam sprays, fire extinguishers, refrigerators and the production of Telflon (PTFE Polytetrafluoroethylene). For each ton of HCFC-22 produced, three to four percent of HFC-23 is also created in the process; the HFC-23 has been released into the atmosphere, even though it could easily be incinerated instead. Each ton of HFC-23 is equivalent to over 11,000 tons of CO2 in greenhouse gas equivalent and is counted that way under the Kyoto Protocol. China has established the Clean Development Fund which will receive 65% of the revenue produced by all HFC-23 carbon credit projects in China from 2005 on (also shares from other CDM projects). The funds will be used for other environmental projects.

Exchanges:

Euets.com Trading of European allowances (EUA's)

European Climate Exchange (ECX) Trading of futures and options on EUA's through the Intercontinental Exchange electronic market (ICE)

Chicago Climate Exchange (CCX) In the US -- trading in Verified Emission Reductions (VER's) for US states and companies which agree to reduce emissions.



Comparisons

A 500 MW coal plant creates about one kilogram of CO2 per kilowatt/hour or about 4 million tons CO2 per year.

A hectare of corn in Ontario, Canada, for example, removes about 22 tons of carbon dioxide per annual season. (To counteract the 500 MW annual coal plant release of CO2 would take about 180,000 hectares of corn.

Parties to the UN Convention on Climate Change

The Convention divides countries into three main groups according to differing commitments:

* Annex I Parties. These include the industrialized countries that were members of the OECD (Organization for Economic Co-operation and Development) in 1992, plus countries with economies in transition (the EIT Parties), including the Russian Federation, the Baltic States, and several Central and Eastern European States.

* Annex II Parties. These consist of the OECD members of Annex I, but not the EIT Parties. They are required to provide financial resources to enable developing countries to undertake emissions reduction activities under the Convention and to help them adapt to adverse effects of climate change. In addition, they have to "take all practicable steps" to promote the development and transfer of environmentally friendly technologies to EIT Parties and developing countries. Funding provided by Annex II Parties is channeled mostly through the Convention’s financial mechanism.

* Non-Annex I Parties. These are mostly developing countries. Certain groups of developing countries are recognized by the Convention as being especially vulnerable to the adverse impacts of climate change, including countries with low-lying coastal areas and those prone to desertification and drought. Others (such as countries that rely heavily on income from fossil fuel production and commerce) feel more vulnerable to the potential economic impacts of climate change response measures. The Convention emphasizes activities that promise to answer the special needs and concerns of these vulnerable countries, such as investment, insurance and technology transfer.

The Associated Press reported today that the US agriculture department will release details on $16.5 billion of farm subsidies it paid this year. Hmmm. That's almost $50 for every person in the country. Enough to fill a grocery bag.

America has a long history of denying civil rights to its poorer "non-citizens" for the economic benefit of the priveleged classes.

First American Indians, the black slaves brought from Africa, now Mexican and Central American "illegal" immigrants.

Let's conveniently ignore the fact that the Mexicans are working in the US. That over 10 million "illegal immigrants" are here.

They are illegal, not citizens, and like the slaves of an earlier generation, are put in a position in which their labor is gladly accepted, and they are given no rights.

Dollar Stability

Why contrary to popular wisdom the US dollar will rise in the long term.

The US is slowly being sold to foreigners who accept our dollars on exchange for their goods. They buy treasury notes, real estate, raw materials and US companies. They are happy to own US assets. The US is a politically secure country with low inflation and a high quality of life; it is a good place to live -- a safe country. When people look at the balance of trade, they apply the economic principle that in the long run the currency will adjust (fall) to bring the balance of trade back into equilibrium. That's because an imbalance in trade cannot last forever. Eventually Americans will be able to borrow no more from foreigners because eventually with continued borrowing and trade deficits we will have sold them a claim on everything we own in exchange for the goods they sold us and we consumed. Goods like TV's, cars, oil, lumber. We've given them claims like treasury bill and securitized mortgages, as well as direct title to property they buy here like office buildings and companies.

Our country is more geared towards consumption than investment. We consume large amounts of medical services, we consume through military expenditures, by government payments to the retired and disabled (although in theory their prior payments (social security and disability wage taxes should have funded the current expense), by farm subsidies, and government services like jail and welfare, police and fire departments, snow plowing of streets, etc. We invest publicly in road construction and privately in house construction and renovation. We have put a great deal of our wealth (and of the money we've borrowed) into house construction and after all that's a good thing because no foreigner is going to take that house and walk away with it. It makes our own country more desirable. They may however buy the mortgage and collect the interest each month.

It's a bad thing because, while making the neighborhood, and the country, a nicer place, a fixed up house does not produce any additional goods by virtue of its creation like for instance the expansion of a printing press would print more newspapers that would then be sold.

So what, you ask, does all this have to do the US dollar going up? Doesn't it sound like it will go down?

Yes, actually many believe that the dollar will fall because foreigners will stop wanting to hold US treasury bills and other assets. As Americans continue to borrow, the foreigners will want higher interest rates and not seeing them as high as they'd like, they will sell more of their dollars than they otherwise would have, causing the price of dollars to fall relative to other currencies. After the dollar falls, the foreign goods will rise in price, Americans will buy less of them and eventually the trade deficit will become smaller and smaller, eventually turning into a small surplus each year. This scenario, widely accepted by economists is certainly a definite possibility. But I think the imbalances will have a different result.

Foreigners like investing in the US -- I don't think that will change. As you look around the world, asset prices (i.e., real estate) are sky-high almost everywhere. There is political risk, risk of wars, risk of epidemics, risk of inflation. These risks are much lower in the US than most other countries. Many foreigners want to move here to live; owning a big chunk of the country may be an acceptable alternative to them.

The basic premise behind the idea that the dollar will fall to restore the trade balance is that foreigners will decide first that they don't want to fund ever rising trade deficits with huge loans. Borrowing by government and individuals clearly funds the trade deficit, yet I believe that it will work out that foreign demand for US assets is greater than US demand for foreign goods. That the tipping point for the US dollar will be that Americans, fully satiated, stop importing quite so much, start exporting a little more, expand domestic capacity in a continued shift to services, decide to reduce government deficits, and see the dollar rise. Of course a higher US dollar will make foreign goods appear even cheaper, but Americans will not buy more as they have already been buying all they need. Instead they will shift after this long orgy of consumption, shocked by high gasoline and electricity bill and continuing mortgage payments, into a culture of more measured consumption.

Eternal Youth, Anyone?

Today I read two articles that got me thinking about repairs to the ravages of old age. One is about how Ray Kurzweil anticipates that nanobots will one day flow through our bodies repairing DNA. With good nutrition, supplements and exercise we might live to that day. And then we will live much longer.

The other article about research published in Science tells how the injection of embryonic stem cells have been shown to replace missing genes in the hearts of genetically engineered gene deficient mice. Two specific secreted molecules send signals that cause the cells to be repaired. It is hoped that the molecules could be isolated to create drugs.

Now I don't know how easy it is to clone embryonic stem cells. But it does sound very promising for Ray Kurzweil's hopes of repairs for aging. I bet it won't be long before people fly off to less regulated countries for a shot of stem cells. Any why not? Like oxygen bars it might even become a fad. . . . that is if the UN doesn't ban it first (as they have been debating).

Repartee on Taxes

In 2001 John fowarded this email about the tax cuts George Bush had proposed:

If you think the Bush tax cut plan is unfair, read this rebuttal [by Don Dodson] that appeared in the Sunday, March 4, Chicago Tribune. By the way, the ratios are roughly accurate:

A.. 10% of the taxpayers pay about 60% of the taxes collected,
B. 30% pay 37%, and
C. 60% collectively pay only 4%.

If every night, 10 men met at a restaurant for dinner. At the end of the meal, the bill would arrive; they owed $100 for the food that they shared. Every night they lined up in the same order at the cash register to pay the bill.

A.. The first four men paid nothing at all.
B.. The fifth, grumbling about the unfairness of the situation, paid $1.
C.. The sixth man, feeling a little put out, paid $3.
D.. The next three men paid $7, $12 and $18, respectively.
E.. The last man was required to pay the remaining balance, $59; He realized he was paying for not only his own meal but the unpaid balance left by the first five men.

The 10 men were quite settled into their routine when the restaurant threw them into chaos by announcing that it was cutting its prices. Now dinner for the 10 men would only cost $80.

A.. This clearly would not affect the first four men; they still ate for free.
B.. The fifth man announced he would now pay nothing either.
C.. The sixth man lowered his contribution by 1/3, and paid only $2.
D.. The seventh man deducted $2 from his usual payment and paid only $5.
E.. The eighth man paid $9 instead of his usual $12.
F.. The ninth man paid $12, $6 less than before.
G.. This left the last man with a bill of $52, $7 less than before.

Outside of the restaurant, the men began to compare their savings, and angry outbursts erupted.

The sixth man yelled: "I got only $1. out of the $20 in cost reduction, and he got $7," pointing at the last man.

The fifth man joined in: "Yeah! I only saved $1 too. It is unfair that he got seven times more than me."

The seventh man cried, "Why should he get a reduction of $7 when I only got $2?"

The nine men formed an outraged mob, surrounding the 10th man.

The first four men followed the lead of the others: "Even though we weren't paying anything in the first place, we didn't get any of the $20 reduction in cost; where is our share?"

The nine angry men then carried the 10th man up to the top of a hill and lynched him.

The next night, the nine remaining men met at the restaurant for dinner. But when the bill came, there was no one to pay it.

Then I replied:

Let's revisit this dinner....

10 men got together for dinner. They had all been invited by the owner to share a meal in a restaurant called Earth (just a coincidence, folks).

Four of the men were served one pea each by the very gracious waiters. The fifth man got a quarter glass of beer in addition to wash down the pea. The sixth got a side order of mashed potatoes on top of the pea and the quarter glass of beer.

The seventh man got his beer refilled. The eighth man was served a hamburger and fries, a pint of beer and a pea, but no mashed. The ninth man got a steak with vegetables instead of the burger and fries. The tenth man received a scotch before the meal, an antipasto salad, some oysters, a steak with vegetables, a choice of wine, champagne, beer (or all three).

Then they were offered some dessert. The tenth man said, "I think I should have almost all the dessert because, after all I have already had a scotch before we ate, a delicious antipasto salad, some very fine oysters, a tender steak with vegetables, and a bottle of Chateau Mouton Rothschild Premier Grand Cru Classe - Pauillac from 1990 (which was an excellent vintage), while many of you only ate a single pea."

But then the tenth man reconsidered and said, "Why don't you all share some of this dessert with me, even though you have such poor appetites. I'll offer you all half of this dessert, so you may share it amongst yourselves."

After finishing her half of the strawberry shortcake, the tenth man smiled contentedly, wondering how the others would manage without her, took off her man's bald-spot wig, and then Ayn Rand left the dining room.

Kevin responded:

That's pretty good, but Ayn Rand would have made them earn the 10% ofthe dessert...

Italy in Abyssinia; the League of Nations; the United Nations; the US Invasion of Iraq

I have been reading Evelyn Waugh's travel account "When the Going was Good." Or rather listening to it on tape from the library. At times it is a rather dull description of places in Africa that were probably little known to Europeans, at other times a more interesting account of people he met and hardships he endured.

In 1930 Waugh traveled to Addis Abbaba, the capital of Abyssinia, to see the coronation of Prince Ras Tafari as Emperor Haile Selassie I of Ethiopia. Waugh would not have guessed then that a greater significance would emerge to Jamaicans Rastafarians of the man Ras Tafari.

According to Waugh the Ethiopians were surprised by the attention the coronation received from Europeans. Though he later became a war correspondent, he only hints in this visit that some thought the attention had a sinister purpose. I learned from other sources that some decades before Italy had been defeated when it tried to invade Abyssinia. In five more years Mussolini would be successful. In 1935 when Italy was waging was against them, Ethiopia requested help from the League of Nations of which Italy was a member. The League did not want Italy to invade, and it place mild trade sanctions against Italy. It did not include harsher ones, such as oil. Italy ignored them, demonstrating that the League had little influence when it came to controlling its members. Some have suggested that if Britain or other countries had taken more decisive action Mussolini might not have joined with Hitler or even if he had, the fascists might have been deterred from future invasions.

One could look at the mild action of the League of Nations and compare it to the UN dealing with Iraq, Iran and the Sudan. The UN makes mild and just demands, but is reluctant to authorize hard action after primarily being ignored.