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It Pays to be Clean June 22, 2007

Posted by Janjan in All, Armchair Economist, Legally Opinionated and Jurisprudent.
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A few nights ago, I was talking with Ken, a key member of the Thursday Group and one of my co-founders in a future project we are calling “Section Six.” The topic was about Japan’s recent investment towards biofuel production in Leyte, where they are reportedly putting up $100M and $50M in a bioethanol and biodiesel production facility, respectively. I was thinking along ostensible reasons for the investment, namely so that Japan could directly import its biofuel from the Philippines and have its own captured supply.

However, Ken put up an interesting viewpoint in the matter, namely that Japan has a higher stake other than biodiesel supply. He propounds that Japan is in it to cash in on the Philippines’ considerably high carbon credits. To quote Wikipedia:

“Carbon credits are a tradable permit scheme. They provide a way to reduce greenhouse gas emissions by giving them a monetary value. A credit gives the owner the right to emit one tonne of carbon dioxide.

International treaties such as the Kyoto Protocol set quotas on the amount of greenhouse gases countries can produce. Countries, in turn, set quotas on the emissions of businesses. Businesses that are over their quotas must buy carbon credits for their excess emissions, while businesses that are below their quotas can sell their remaining credits. By allowing credits to be bought and sold, a business for which reducing its emissions would be expensive or prohibitive can pay another business to make the reduction for it. This minimizes the quota’s impact on the business, while still reaching the quota.

Credits can be exchanged between businesses or bought and sold in international markets at the prevailing market price. There are currently two exchanges for carbon credits: the Chicago Climate Exchange and the European Climate Exchange.”

In other words, it’s now profitable to be ecologically-sound. The genius behind this scheme recognizes a fundamental principle in economics, which is that scarcity creates demand, and demand, in turn, creates market economies. Clean air has become a product that you can buy and sell over the global market. In other words:

Carbon credits create a market for reducing greenhouse emissions by giving a monetary value to the cost of polluting the air. This means that carbon becomes a cost of business and is seen like other inputs such as raw materials or labor.

By way of example, assume a factory produces 100,000 tonnes of greenhouse emissions in a year. The government then enacts a law that limits the maximum emissions a business can have. So the factory is given a quota of say 80,000 tonnes. The factory either reduces its emissions to 80,000 tonnes or is required to purchase carbon credits to offset the excess.

A business would buy the carbon credits on an open market from organizations that have been approved as being able to sell legitimate carbon credits. One seller might be a company that will plant so many trees for every carbon credit you buy from them. So, for this factory it might pollute a tonne, but is essentially now paying another group to go out and plant trees which will, say, draw a tonne of carbon dioxide from the atmosphere.

As emission levels are predicted to keep rising over time, it is envisioned that the number of companies wanting/needing to buy more credits will increase, which will push the market price up and encourage more groups to undertake environmentally friendly activities that create for them carbon credits to sell. Another model is that companies that use below their quota can sell their excess as ‘carbon credits.’ The possibilities are endless hence making it an open market.

Japan is a highly industrial country with manufacturing as one of its driving industries. So, if Japan were to comply with the Kyoto Protocol, it would have two choices: reengineer its own manufacturing facilities to have them produce less greenhouse gases, and/or buy carbon credits from other countries.

Ken propounds further that perhaps, by setting up the biofuel facility in the Philippines, Japan found a way to claim some of our carbon credits as theirs.

The way I see it, the whole of the Philippines IS a big carbon credit manufacturing facility, due to the vast track of rainforests covering some parts of our country. (Rainforests, which, we are sad to note, are rapidly dwindling because of illegal logging and mining activities in the country.) Heck, if carbon credits were a tradable resource, the whole of Mindanao should be considered as an export processing zone.

Considering however that our country’s stance is now towards biofuel production, if we were to cash in on our carbon credits, we’d have to rethink our economic strategies. Biofuel produces less greenhouse gas emissions but it does release chloroflourocarbons (CFC’s) nonetheless.

Maybe our country should also make moves towards other forms of renewable energy like wind, geothermal, and solar power generation. In fact, this is the contention that environmental advocacy group World Wildlife Fund Philippine chapter has urged, by pushing for the passage of the long stagnating Renewable Energy Bill.

The bottomline is that the Philippines’ clean air has now become a valuable resource, one that we could trade in the global market in the form of carbon credits. It now makes economic sense for us to be ecologically-sound and environmentally friendly. (Not to mention that with or without economic reasons, we really should be protecting and conserving our natural resources). Therefore, both our government and our private sectors should work towards harnessing this valuable resource. Wouldn’t you agree?

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