TAXWatch: Carbon Credits

Today I have some help from the Hawaii State Watch Doggie’s wife, who is a passionate researcher.  Those who know them know who’s the brains in their family!

Q:  I’ve been reading about our Department of Land and Natural Resources, which is doing a reforestation project in East Maui.  It’s hired a vendor to certify the project for “carbon credits.”  Why are they doing that if we don’t even have a carbon tax (which we have written about before here and here)?

A:  Carbon credits have nothing to do with a carbon tax.  The same end goal, perhaps, but the mechanism is very different.

Q:  How so?

A:  In the Kyoto Protocol, an international treaty adopted by over 190 countries other than the United States, the treaty countries agreed to cap the amount of greenhouse gases that each country generates.  The cap is measured in “Assigned Amount Units,” with each unit representing the emission of one metric ton of carbon dioxide or other equivalent greenhouse gas.  Each member country then sets quotas on the emissions of greenhouse gases by “operators,” which refer to local businesses and other organizations.  An operator that wants to emit more greenhouse gases than its quota has the option to buy “carbon credits,” which can be sold by either another operator who agrees to reduce its own quota by the number of credits sold or – and this is where we come in –other organizations that can demonstrate that they have reduced the emissions of greenhouse gases elsewhere.

Our DLNRis saying thatreforestation of 4,700 acres in the Kahikinui/Nakala area of East Maui will withdraw about 94,000 metric tons of carbon dioxide from our atmosphere.  If validated, 94,000 carbon credits could be made available for sale.

Q:  So where would the buyer come from?  Somewhere on the mainland U.S.?

A:  Could be.  Although the U.S. has not ratified the Kyoto Protocol and there is no central national cap-and-trade carbon pricing, some states such as California have such systems in effect, so the buyer could come from the Northeast and mid-Atlantic States or California.  

Australia, the European Union, and several European countries have ratified the Doha Amendment, which extended the Kyoto Protocol past its original expiration date in 2012.  A buyer could easily come from one of those countries.

Son:  Mom!  What’s Doha?

A:  It’s the capital of Qatar, on the coast of the Persian Gulf.

Son:  Oh!  Reminds me of shishkabobs!  Mom, I’m hungry!

A:  Grrr…anything reminds you of food, and you just had lunch!  Growf!

Son:  Yipe!  I think I’ll take a nap then.

Q:  Carbon credits can come from a project here on Maui even though our country didn’t ratify the Kyoto Protocol?

A:  Yes, if the project is validated internationally.  This was to encourage emission reduction projects to be undertaken in less developed countries that otherwise might not care about greenhouse gases.

Q:  So how much are carbon credits selling for these days?

A:  The market for credits rises and falls like the stock market, and the prices vary by project type.  One website here is listing reforestation project credits at about 14 Euros a credit (US $15.75).  At that price, the DLNR project credits could fetch about $1.5 million.  And DLNR estimates its cost for carbon credit certification at $150,000.

Q:  The money we might be able to get from mainland or foreign companies would help pay for the expenses of our government without reaching into our own pocketbooks.  That’s a good thing, right?

A:  Especially considering that reforestation is something we should be considering anyway because of the benefits to our environment.

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Tom Yamachika is the President of the Tax Foundation of Hawaii, a private, nonprofit educational organization dedicated to informing the taxpaying public about the finances of our state and local governments in Hawaii. Tom is also a tax attorney in solo practice and has been since early 2013. Prior to 2013, he was with the accounting firm Accuity LLP, which was formed in 2006 from the Honolulu office of Coopers & Lybrand (which later became PricewaterhouseCoopers). Before that, he served as an Administrative Rules Specialist in the State of Hawaii Department of Taxation from 1994 to 1996, where he drafted rules, interpretive releases, and legislation on several different state taxes. Prior to that, he practiced litigation and tax law with Cades Schutte Fleming & Wright in Honolulu