The End of Hard and Soft Greening

This might be all irrelevant if the Canadians duck out of Kyoto, or if there is no second commitment period to substantiate the value of AAUs, but the working assumption is that there will be some AAU trading and there will continue to be some debate on greening.

A mistake has been made in the creation of an over-simplistic and misleading concept of “hard” and “soft” greening. The names for greening need to be revised, and this note makes some suggestions.

Today the “thinking” says:

— Hard greening is about spending proceeds of AAU sales on physical projects which will lead to further reductions in emissions in an amount of tonnes of CO2e similar or equal to the number of AAUs sold.

— Soft greening is about spending money on things where the relationship between the number of AAUs sold and the number of tonnes of CO2 emission reduction achieved is less clear, less direct. Such as “capacity building”.

Taking a step back, greening is not mandatory. It is just a commitment which a Seller might make in order to get better terms of sale for their AAUs. Why? Because Buyers are under political pressure[1] to ensure that the money is spent in a way which helps the countries of Central and Eastern Europe on a path to a low-carbon economy. They won’t pay so much unless they can justify the purchase by virtue of the greening commitment.

What happens then is that buyers want to start to list “projects” they want the money to go into: funding of windfarms, refurbishment of district heating plants, financing insulation of housing. This is the greening the Buyer wants. It is attractive because it is quite easy to make a direct connection between the money spent and the reduction in emissions. Support of these projects is known as “hard greening” today, but they do not necessarily imply the biggest reductions in emissions for a given spend. That is, they are not necessarily the most cost-effective use of tax-payers money.

Spending on projects is often unnecessary because many of the projects which the buyers want to promote will happen anyway sooner or later. It is not cost-effective because it is much more cost effective to stimulate the private sector into making such investments.

Look at some other things the government can do with its money to reduce emissions:

It can introduce regulations, such as:
§ A green power pricing scheme
§ A favourable cogeneration tariff scheme
§ An emission trading scheme
§ Market-based pricing for heat and power
§ Elimination of fossil fuel subsidies
§ Privatisation of the power sector

The implementation of these measures, which don’t actually cost much cash, will lead to substantial and pervasive reductions in greenhouse gas emissions through aligning environmental interest with economic interest. So these are surely the “hardest” form of greening, because they bring the biggest reductions.

It can “green” some of the services it provides to the population, for example:
§ Primary and secondary education: find and implement hundreds of fun ways for children to learn about the environment and the need to protect it
§ University education: Fund scholarships, professorships, research and development and so forth in relevant areas

It can politicise the issue and play an advocative role:
§ PR programmes to promote sustainable behaviour
§ Funding of national prizes and competitions to stimulate green thinking and behaviour
§ Promotion of telecommuting instead of physical commuting

These measures could have long-term and substantial impacts on people’s behaviour leading to large reductions in emissions.

A much richer taxonomy is needed to replace the old terminology of “hard” and “soft”. The taxonomy should consider at least four dimensions: (i) emission reductions per AAU, (ii) directness, (iii) timing, and (iv) political expedience. There are probably other dimensions – other ways of slicing the cake. This is just one view.

(i) Emission reductions per AAU: you might want to target 1:1. But you might want a lower ratio if the spending target is important but the marginal abatement cost is higher than the market price of AAUs

(ii) Directness looks at how short or long is the chain between cause and effect is: if you refurbish a power plant, your reductions are immediate and relatively certain. If you train farmers how to grow energy crops, you may be playing a critical role in the development of a biomass industry, but the reductions are several steps removed. Ditto, if you use AAU proceeds to invest equity into ESCO companies. Directness includes questions of risk, measurability, and certainty.

My hunch is that indirect greening, such as regulatory reform, education, research and development, despite its risks, uncertainty of outcome, and difficulty of measuring, will give massively more reductions per unit of spend, than direct greening. But for some reason it is not so popular.

(iii) Timing looks at when the emission reductions will take place. An education programme might lead to massive reductions but only in twenty years time. Whereas the reductions from turning out the lights are instant. Of course, politicians need instant gratification, even if that is not the best value for money.

(iv) Finally political expedience, which is really the difference between hard and soft greening today. Even though reform of heat and power pricing would lead to much bigger reductions than plonking €25 million into a heating plant, the former is not politically expedient while the latter is. So actually I would look at what we call “hard greening” as “Easy Way Out Greening”. There is nothing hard about it at all. Every project developer will love you for ever if you wire him a load of cash.

Why does all this matter? Because if all goes to plan, then governments are going to be disbursing billions of dollars. You have to be sure that it will be money well spent. Because you have to give your tax payers value for money. Boring point, but true.

Hard and soft greening are meaningless terms and need to be thrown out of the window and forgotten. We have to be more rigorous and clear in our naming. There is value for money greening. There is long-term or short-term greening. There is greening by project, greening by policy, and greening by advocating behavioural change. There is easy-way-out greening. There are probably other types. Let’s not shut our minds before we have opened them.

Beyond naming, we have to go to substance. Back to the drawing board and rethink – both in principle and in practice. We have to look much more intelligently at how policy improvements can create pervasive greening, and not just shy away from things which might be politically difficult. And if you really have to go for easy-way-out greening, you have to be ready to demonstrate that it is the best use of the money.

[1] See earlier Blog (Rights and Wrongs of Requiring Greening) as to whether or not this pressure is strictly justified

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