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Ozone Depleting Substances Redux – Instrument choice

First off, thank you to the many people that have responded, both via email and in the comments section of the blog.   The point of a blog is to elicit a conversation, and that has certainly ensued.  The comments have all been very thoughtful and needless to say, I’ve learned a lot. I strongly recommend that readers take the time to read through them.   I’ve also continued reading on the issue and have a few more thoughts to add.

All ODS projects are not created equal

First off, as Jeff Cohen of EOS Climate is at pains to point out, it is important to distinguish between so-called “virgin” stockpiles of ODS that exist in both government and private hands in developing countries and the more dispersed banks that are where most ODS reside. The stockpiles were the focus of my previous post. Cohen states that, as far as he knows, government stockpiles currently eligible for import into the US for destruction under the CAR protocol, are relatively small – on the order of 300,000 tons. If that estimate is accurate and the total mass of ODS in government hands is not growing, then this is probably not worth focusing too much attention or effort on. On the other hand, we’ve already seen close to 2 million CRTs (23% of issued credits) enter the market from virgin stockpiles to date.  Presuming that these are the last of the privately held stockpiles that made it into CAR before the deadline for private stockpiled imports closed, this represents about 2 months of issuance at current rates and is perhaps not something to be too concerned about as well.

The more interesting and important question then is, what do we do about the dispersed banks of ODS, both in developed and developing countries?

These are (relatively) small volumes of gas incorporated into things like building HVAC systems, large industrial chillers, residential refrigerators, and the like.  The big question is instrument choice for these dispersed ODS banks, in developed and developing countries. In developed countries, most of this gas is recycled under current law and regulation with only the fraction that is too polluted to clean up being destroyed. In developing countries, the extent of recycling is less clear.

In my previous post, I made the argument that these dispersed banks would be better addressed under the auspices of the Montreal Protocol for developing countries.  Many in the ODS offset community argue that carbon markets are essential.  For developed countries, I think there are real questions that need to be answered before we rush into a carbon market approach.

Dispersed ODS in developing countries

A key point of negotiation at the most recent MOP, second only in importance to the issue of an early HFC phaseout, were the developing country banks of ODS. There is a desire on the part of some to utilize the Multilateral Fund (MF) of the Montreal Protocol, mentioned in my previous post, to begin dealing with the problem of banks. There are two big problems with an MF approach – one financial, one legal.

The more important of the two can be summed up with one word: money. It would cost quite a bit – estimates vary but on the order of 50-150 billion dollars over 10 years – to deal with the existing and predicted ODS banks. The MF doesn’t operate with nearly this large of a budget and so would need substantial additional resources to take a crack at it. On the other hand, the last time I checked, that’s about what was being promised on an annual basis for long-term climate funding to the developing world in 2020. Of course one might not actually believe that the developed country parties to the Copenhagen Accord have any intention (or are capable of making a credibly commitment) to long-term climate finance. Given that the MF as an institution has demonstrated long-standing success in assisting (capacity and finance) developing countries with implementation of relatively complex regulatory programs, it might then make sense to utilize at least a part of the climate finance to fund the MF for these activities. This funding would have the advantage of helping to insure both a rapid reduction in GHG emissions and a more rapid repair of the ozone layer – a double dividend of sorts. Further, since the MF operates on a 3-year budgeting cycle, it would be possible to gradually increase the scale of funding for bank-related activities as they proved their success. To sum up, the use of a portion of the funds promised to 2020 for climate to fund an expansion of MF opportunities would be a highly credible alternative to the current situation where MRV of both the sources and the uses of climate finance is one of the key issues at the climate negotiations.

A separate but not unimportant problem is that there is an unclear legal basis for the MF to engage in abatement of banks. The Montreal Protocol was never designed to regulate banks – it governs production and consumption of ODS, not their ultimate fate post-consumption. One response is to suggest that the MF is not actually regulating anything – of course it is used to assist developing countries in complying with their Montreal Protocol obligations, but so long as this new role did not conflict with its mandare, then there need not be a problem with a bit of mission creep. A better response is to argue that the Montreal Protocol has been amended numerous times – it is a living document. The addition of control measures aimed at banks after phase-out need not be unprecedented. Indeed, provided the banks targeted were post-phase out (eg CFC-11 and -12), then there wouldn’t even be a conflict with the Montreal Protocol’s method for accounting for consumption of ODS. One could add an Article that stated that all nations were responsible for managing their ODS banks post-phase out to the maximum extent feasible and then provide that Article 5 countries would be provided agreed incremental cost funding for such activities via the MF.

Dispersed ODS projects in developed countries

So what about the United States? Should we use the carbon market or traditional regulatory measures (command and control) to handle ODS banks? I think the best answer is probably both. My view is that a market based approach is appropriate for situations where the regulator lacks either (1) capacity to get the job done or (2) the information necessary to identify and abate sources of pollution or (3) where the market can do the job for a lower social cost than a more traditional approach. We have evidence from a number of regulatory programs as to the effectiveness of a traditional approach to ODS bank management, most notably from Australia. Jeff Cohen of EOS Climate argues that this program has been ineffective and has led to widespread venting. People I spoke with both in government and in academia in Australia beg to differ and regard the effort as “pathbreaking.” I do not know enough to be able to comment here, except to say that there is a debate on the issue.

What seems clear is that some sources will be easier to manage than others. HVAC systems in large commercial buildings: easier – these ODSs are already recycled. Insulating foams in residential refrigerators: harder. Perhaps the right approach would be to phase in regulatory controls for destruction for the lowest cost most easily identifiable ODS banks in developed countries (a Montreal Protocol TEAP study could no doubt identify these quite easily) and leave the remainder for the carbon market – with periodic updates to the split between regulatory and market-based efforts. The effect of this would be to leave to the market what the market does best – creating incentives to cost-effectively abate hard to identify or control emissions sources – while leaving to the regulators what they do best – abating easily identifiable sources of pollution that are relatively small in number.

Could EPA or CARB implement such a program? Absolutely. The issue is political will. The road that the Climate Action Reserve has taken, making all offsets from ODS destruction additional, makes this mixed outcome, far less likely.

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