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| What Price Carbon Credits? (Photo JBC) |
EU Emissions Trading Scheme Sees Carbon Price Tumble More Than by Half
Over the Past Year.
I am by no means an expert on the trading of carbon credits
by Eurozone industrial companies so I checked the EU site and the following is
the site’s description for the ETS:-‘Launched in 2005, the EU ETS works on the "cap and trade" principle. This means there is a "cap", or limit, on the total amount of certain greenhouse gases that can be emitted by the factories, power plants and other installations in the system. Within this cap, companies receive emission allowances which they can sell to or buy from one another as needed. The limit on the total number of allowances available ensures that they have a value.
At the end of each year each company must surrender enough allowances to cover all its emissions, otherwise heavy fines are imposed. If a company reduces its emissions, it can keep the spare allowances to cover its future needs or else sell them to another company that is short of allowances. The flexibility that trading brings ensures that emissions are cut where it costs least to do so.’
This ‘market’
effectively establishes a price for the ‘carbon credits’ traded between
companies. The scheme is supposed to
encourage the introduction of non-fossil fuel sources of electricity and to
reduce the EU’s output of carbon dioxide, a major greenhouse gas and
contributor to global warming. The
system is a “carrot and stick” one as you can see. Energy producing companies are encouraged to
produce low, preferably zero carbon power.
Power consuming industries are encouraged to become more efficient. They benefit if they are below the allowances
set for them and are fined if they do not.
It is ironic that a
combination of a weak Eurozone economy, increased investment in renewable
resources combined with a mild winter has actually helped to achieve one of the
primary objectives of the scheme. In
fact it has over-achieved! According to the FT (see * link below), the EU
has increased non-fossil fuel power generation by 50 Gigawatts over the past
two years despite the closure of Germany’s nuclear power plants. This is due to an
increase in solar and wind renewable power sources. As a past commodities futures trader and analyst I might venture to suggest that
this is a typical case of supply and demand in action rather than an effective
fiscal regulatory system impacting on how we produce electricity.
As the FT has
reported*, the response to the glut of carbon trading units and the collapse in
the price of carbon is to propose increasing the emissions reduction target below
1990 levels by a further10% to 30% . The
UK is a major supporter of this increase and will certainly do so in Denmark on 19th April when the increased will be discussed. However, the UK is also able to predict that it
can already meet this target increase, unlike certain other EU countries.
Again I am not an expert in carbon trading
but if the objective of the proposed 30% target (apart from decreasing
dependence of fossil fuels) is also to increase the cost of carbon, then I can
see a problem. Successful countries
like the UK will still have surplus credits to trade whilst others dependent on
more traditional power generation will struggle to meet the target and may have to
pay to buy the more expensive surplus credits. Even worse, they may be fined. This is not something that companies in
countries striving to climb out of recession will need, especially as this
could inhibit their ability to invest in renewable energy sources or
manufacturing efficiencies.
Then there is the
situation of the unilateral inclusion of international airlines not based in the EU in the
ETS. Whilst they do contribute to the global aviation CO2 footprint
of between 2% and 3% of all world CO2 emissions (IPCC) the majority is obviously not sourced in or above the EU. The airline industry as a whole is already committed
to reducing greenhouse gases and noise pollution in line with current
targets. They have a vested interest in
doing so as they operate on very, very small margins. The more fuel and operational
efficiencies they can achieve the more viable their businesses become. As this blog has often underlined aviation is
NOT anti climate-change legislation and the reduction of its greenhouse gas
emissions through legislation. Far from
it! The aviation organization IATA has
long championed the introduction of an INTERNATIONAL aviation carbon trading
scheme such as being proposed by the ICAO which already has broad international
support.
Therefore should
an increase in CO2 targets to 30% take place and achieve an increase
in the price of carbon, it will very likely harden the stance of countries
protesting the inclusion of their airlines in the EU ETS. They have already said they will not
participate in the EU ETS or pay for carbon credits when the time comes in 2013
for the first payments to be made by international carriers using EU
airspace. This is not unreasonable
given that, even Greg Barker, climate change minister, in a recent Financial Times interview*
said: “………………It’s what happens in the air, not what happens on the ground that
counts for aviation.”
This might be a guess too far at this stage
but, if as already threatened, those countries already protesting about the ETS
are provoked further to actually cancelling orders with EU industries or to take
other action against the EU in terms of trade or access, the Eurozone recovery
could be delayed. Then, as a possible
consequence, due to a further delayed recovery, the price of carbon could remain
depressed despite the price support intervention currently being considered by Brussels.
If anyone who really understands the ETS mechanism please do comment on my assumptions above. No one is perfect as my wife keeps telling me pointedly..........
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When you are everywhere, you are nowhere / When you are somewhere, you are everywhere.
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