Revisiting Green Investment Schemes I

Green Investment Schemes are finally starting to happen. Several countries of Central Europe are in serious negotiations with West European counterparties to sell Assigned Amount Units (AAU) and use the proceeds for setting up Green Investment Schemes. After many years of contemplation and elaborate design, transactions could be consummated within weeks.

In late 2005 and early 2006 this blog wrote some views on Green Investment Schemes. Too wordy and too early. This and the next article summarise the main points, which remain largely valid.

This article aims to clear confusion about the origins, and the rights and wrongs of greening. Buyers of AAUs claim that there is something “wrong” with buying “hot air” from Central and Eastern European countries. Actually, the facts are as follows:

§ The surpluses of AAUs in Central and Eastern Europe arise from their having many more AAUs than emissions

§ The principles for establishing the number of AAUs were agreed by consenting sovereign parties in free negotiations on the Kyoto Protocol in 1997

§ In 1997 it was known that the economies of Central and Eastern Europe had collapsed since the late 1980s, accompanied by devastating social pain and a fall in greenhouse gas emissions

§ Neither the Kyoto Protocol nor the Marrakech Accords contain any provisions regulating the use of proceeds from the sale of AAUs

So: the surplus of AAUs results from free and fair negotiations held by consenting parties in knowledge of the material facts. There can be no complaints. Hot air sounds like a bad word. But actually it is a fair deal.

The truth is that the Protocol as originally agreed was insufficiently robust, and the surplus knowingly granted to Central and Eastern Europe was the price for their participation. Greening is a way to compensate for this.

Greening allows buyers to justify transferring large sums of money to Central and East European governments. The scare stories about villas in Spain are a disingenuous and expedient political sound-bite. It is too complicated to explain to the public that there is nothing immoral about hot air, and that greening seeks to remedy an inbalance from back in 1997 when the Kyoto Protocol was agreed.

It is worth noting that sellers also like greening. They like greening because they want to establish an upmarket instrument against which they believe Russia and Ukraine cannot compete, with their vast nuclear stockpiles of rusting and ungreened AAUs. And there is another small detail: an insistence on greening ensures that it is the Ministry of Environment which controls the purse strings.

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