Per capita carbon

A fantastic graphic (HT: Env-econ) that clearly shows why the odds of finding a climate solution are so distant.

Simply look at the China circle on both pictures and there is your answer.

Click HERE for a large version.

Those naughtly Gibratarians.

.

Fraud, missing traders and the emissions market

Some readers maybe more surprised that others that there was fraud on the European carbon allowances market.

I am pleased that someone has looked at this issue using "forensic econometric methods" which sound fun to use (although seemingly difficult to understand).

It sounds good but I am still unclear how this works - I will have to read the paper.

MISSING TRADER FRAUD ON THE EMISSIONS MARKET[PDF]

Marius-Cristian Frunza, Dominique Guegan and Fabrice Thiebaut

Abstract

Purpose – The aim of this paper is to show evidence and to quantify with forensic econometric methods the impact of the missing trader fraud on European carbon allowances markets. This fraud occurred mainly between the end of 2008 and the beginning of 2009. In this paper we explore the financial mechanisms of the fraud and the impact on the market behaviour as well as the consequences on its econometric features.

Design/methodology/approach – In a previous work (Frunza and Guégan, 2010), we showed that the European carbon market is strongly influenced by fundamentals factors as oil, energy, gas, coal and equities. Therefore, we calibrated Arbitrage Pricing Theory-like models. These models enabled us to quantify the impact of each factor on the market. In this study, we focused more precisely on spot prices quoted on Paris based Bluenext market over 2008 and 2009. We observed during this period a significant drop in performances and robustness of our model and a reduced sensitivity of carbon prices to fundamentals.

Findings – Therefore, we identify the period where the market was driven by missing trader fraud movements and we were able to measure the value of this fraud. Soon after governments passed a law that cut the possibility of fraud occurrence the performance of the model improved rapidly. We estimate the impact of the VAT extortion on the carbon market at 1.3 billion euros.

Originality/value – This paper is the first study that attempts to prove and quantify scientifically the missing trader fraud on emission markets.

.

Carbon induced trade wars

A story right up Globalisation and the environment's street. Trade wars are always ugly and often fiendishly complicated.

It is fine for the EU to rant about imposing tariffs on imports from polluting countries but one must ask who exactly is producing these products. Often it will be EU multinationals so the EU is taxing its own companies (who will lobby hard against such a policy).

Moreover, these imports are consumed by EU citizens. It is our quest for greater and greater material consumption that is causing part of the pollution in the first place.

I can say now categorically that this scheme will not work and should be abandoned as soon as possible. There are other solutions.

Carbon Tariffs On Imports Risk Trade War: EU Study [PlanetArk]

The European Union is considering border tariffs on imports from more polluting countries, but an initial assessment shows such levies could spark trade wars, draft reports show.

Two European Commission reports do not explicitly reject a push for border tariffs by France and Italy, but say they would be fiendishly complex to calculate, create a huge administrative burden and risk trade conflict.

"Border measures risk clashing with the obligations under the WTO (World Trade Organization)," said one study looking at the cost of increasing EU curbs on climate-warming emissions.

France and Italy are worried that their industries, which pay for EU permits to emit carbon dioxide, will lose out to cheaper imports from countries that impose no such charges.

The Commission said it would continue to look at how imports might be included in the Emissions Trading Scheme, the EU's carbon market and its main tool against climate-warming emissions. But the prospect of such measures looks dim.

"The introduction of border measures may also trigger retaliatory measures and even hinder international negotiations," added the document, seen by Reuters. "The system could at best only be envisaged for a very limited number of standardized commodities, such as steel or cement."

Sanjeev Kumar at environmental think-tank E3G said: "This is pretty much the death of the border-tax adjustment discussions in Europe. We've known for a long time it would put the whole European economy at risk."

ECO-IMPERIALISM

Border tariffs on countries that do not play their part in fighting climate change are a hot topic in the United States, where legislators are weighing up their own climate laws.

"Similar proposals are also being discussed in the U.S., and obviously any further political and operational steps taken in this direction should be taken together," said a related EU draft.

Folker Franz, of industry group BusinessEurope, said: "In a theoretical world where Japan, the U.S. and Europe could move together, then it might work. But if Europe imposed tariffs alone it would not."

Germany, as one of the EU's biggest exporters, is worried about retaliation. Berlin last year criticized the idea of carbon tariffs as "eco-imperialism.

French President Nicolas Sarkozy and Italian Prime Minister Silvio Berlusconi wrote to the European Commission two weeks ago calling for trade levies, but said they should respect WTO rules.

The Commission draft says that although levies could be made WTO-compliant, in theory, it would be almost impossible to tailor them to individual imports without knowing the carbon emissions up and down the manufacturing process -- and monitoring those emissions "may be unfeasible."

.

Can Global De-Carbonization Inhibit Developing Country Industrialization?

This is the question raised in a recent World Bank Working paper. The answer has to be "yes" without reading the paper. The question is the magnitude.

The numbers from the abstract to not strike me as too far off for China and India. You can bet that the Chinese and Indian government's have already worked this out - this is exactly why Copenhagen is doomed to fail

Can Global De-Carbonization Inhibit Developing Country Industrialization?

Aaditya Mattoo
World Bank - Development Research Group (DECRG)
Arvind Subramanian
International Monetary Fund (IMF); Center for Global Development
Dominique Van der Mensbrugghe
World Bank
Jianwu He
affiliation not provided to SSRN

World Bank Policy Research Working Paper No. 5121

Abstract:
Most economic analyses of climate change have focused on the aggregate impact on countries of mitigation actions. The authors depart first in disaggregating the impact by sector, focusing particularly on manufacturing output and exports because of the potential growth consequences. Second, they decompose the impact of an agreement on emissions reductions into three components: the change in the price of carbon due to each country’s emission cuts per se; the further change in this price due to emissions tradability; and the changes due to any international transfers (private and public). Manufacturing output and exports in low carbon intensity countries such as Brazil are not adversely affected. In contrast, in high carbon intensity countries, such as China and India, even a modest agreement depresses manufacturing output by 6-7 percent and manufacturing exports by 9-11 percent. The increase in the carbon price induced by emissions tradability hurts manufacturing output most while the Dutch disease effects of transfers hurt exports most. If the growth costs of these structural changes are judged to be substantial, the current policy consensus, which favors emissions tradability (on efficiency grounds) supplemented with financial transfers (on equity grounds), needs re-consideration.

Keywords: Climate Change Mitigation and Green House Gases, Climate Change Economics, Environment and Energy Efficiency, Energy and Environment, Carbon Policy and Trading

.

Carbon Capture and Storage - next steps: finance, demonstration and feasibility

London based seminar for all those interested in Carbon Capture (from the inbox).

Westminster Energy, Environment & Transport Forum Keynote Seminar

Carbon Capture and Storage - next steps:
finance, demonstration and feasibility

with
Martin Deutz
Director of the Cleaner Fossil Fuels Unit
Department of Energy and Climate Change

and

Tony Grayling
Head of Environmental Policy
Environment Agency

Morning, 23rd October 2009
The Royal Society, 6-9 Carlton House Terrace, London SW1Y 5AG

This seminar is supported by Scottish Power

Seminar

This seminar will focus on the implications of the recent announcement from the Department of Energy and Climate Change on latest plans for the demonstration and deployment of CCS, and examine the outstanding practical issues. We are delighted that Martin Deutz, Director of the Cleaner Fossil Fuels Unit, Department of Energy and Climate Change; and Tony Grayling, Head of Environmental Policy, Environment Agency, have agreed to take part.

Other confirmed speakers include: Dr Jeff Chapman, Chief Executive, The Carbon Capture & Storage Association; Dr Pierre Dechamps, Adviser - Energy and Climate Change, European Commission; Sean Furey, Deputy Director, Protect Kent - The Kent Branch of CPRE; Simon Giles, Lead, Smart Technology Strategy, Accenture; Munir Hassan, Partner, CMS Cameron McKenna; Professor Stuart Haszeldine, Professor of Geology/co-leader, University of Edinburgh/UK Carbon Capture and Storage Consortium; David Hone, Group Climate Change Adviser, Shell; and Chris Littlecott, Senior Policy Advisor, Green Alliance. We are in touch with Ofgem, who have offered, in principle, to speak - and we are just sorting out details.

Supported by Scottish Power, this seminar is organised impartially and independently by the Westminster Energy, Environment & Transport Forum.

Sessions will look at key challenges for implementation, including:
• Current thinking on the key factors - technical, economic and practical - determining the feasibility of Carbon Capture and Storage;
• The Environment Agency’s proposed role as independent assessor of the financial and technical viability of CCS;
• Latest plans for the demonstration competition;
• First indications from trials in Germany - and emerging ‘numbyism’ public opinion barriers;
• Investment incentives, the role of the EU ETS and the potential impact on energy prices; and
• The likely effect of an emissions performance standard and options for a ‘safety net’ should the technology take longer than expected to prove.

Other themes in this complex set of issues will also be up for discussion. I have copied the current draft agenda below my signature, to give you a feel for the morning. You can follow the updated, live agenda here, at our website. This meeting is organised on the basis of strict impartiality by the Westminster Energy, Environment & Transport Forum.

Cap and Trade - Krugman style

Paul Krugman writes on "cap n trade" in the NY Time.

The textbook economics of cap-and-trade [NY Times]

I realized, after the last post, that it might be useful to write down just what the Econ 101 version of cap and trade looks like; as it happens, this also helps explain the intellectual sins of Glenn Beck and Martin Feldstein.

I am currently writing a paper with someone who is also the co-author of two of Krugman's ex-PhD students (from many years ago). Does that count for anything?

.

Who Pays a Price on Carbon?

Given the proposed US legislation the following paper is a timely piece of research.

The distributional effects of a carbon tax are worthy of further research.

Who Pays a Price on Carbon?

Corbett A. Grainger
University of California, Santa Barbara - Department of Economics

Charles D. Kolstad
University of California, Santa Barbara - Department of Economics

August 2009

NBER Working Paper No. w15239

Abstract:
We use the 2003 Consumer Expenditure Survey and emissions estimates from an input-output model to estimate the incidence of a price on carbon induced by a cap-and-trade program or carbon tax in the US context. We present results on how much difference income deciles pay for a carbon tax as well as which industries see the largest increase in costs due to a carbon tax. We illustrate the main determinant of the regressivity: consumption patterns for energy-intensive goods. We find that a policy targeting CO2 from energy consumption is more regressive than a price on all emissions. Furthermore, on a per-capita basis a carbon price is much more regressive than calculations at the household level. We discuss policy options to offset the adverse distributional effects of a carbon emissions policy.

JEL Classifications: H22, Q43, Q5, Q52, Q53, Q54, Q58

.

EU in carbon tax fraud shocker!

The only surprise about the story that carbon trading is up to its neck in fraud is that it is not a surprise.

Given my knowledge of how the EU operates stories of wide scale fraud are pretty much par of the course.

Traders Call For EU Response To Carbon Tax Fraud [PlanetArk]

L

ONDON - Britain's exemption of carbon emissions credits from value-added tax (VAT) is just a temporary fix for a tax fraud that will just resurface in other European Union countries, traders said, calling for an EU-wide response.

On Thursday, the UK Treasury said it was acting to prevent the risk of carousel tax fraud, alleged to have occurred on a French emissions exchange earlier this year. These allegations prompted the French government in June to make carbon credits VAT-free.

"While these moves will serve to flush out any criminal element that may have been operational in those countries, they do nothing to solve the problem for the EU carbon market as a whole," said James Emanuel, commercial director at brokers CantorCO2e.

"Any fraudsters will now simply set up camp in another EU jurisdiction."

Through carousel fraud, also called missing trader fraud, fraudsters import goods VAT-free from other countries, then sell the goods to domestic buyers, charging them VAT. The sellers then disappear without paying the tax to the government.

The European Commission said on Friday it had been informed by EU member states that there was a strong suspicion of carousel fraud in carbon credit trading.

"The Commission intends later this year to propose the application of reversed charge to the supply of certain goods or services on an experimental basis," a Commission spokeswoman told Reuters.

"This could be an opportunity to include carbon emission certificates in the list of services (if proved necessary)."

Earlier this month, the Netherlands applied a reversed charge approach to its carbon credit trading, meaning the buyer, not the seller, is liable to pay the VAT.

Other governments including Spain are reportedly looking into their own preventative measures.

Although the UK said it is engaged in discussions with the European Commission on establishing an EU-wide solution, tax experts said the unilateral moves by member states could be illegal under EU tax laws.

"We've applied to the EU for a derogation ... Though (our VAT exemption) may be outside of EU regulation, I think the Commission will understand," said a UK Treasury spokesman.

"The VAT revenue on this is marginal but the potential for fraud and the risk to the exchequer and the taxpayer is huge. We needed to act now."

Asked whether it would take legal action against Britain, France and the Netherlands, the Commission said it was examining the measures taken and that it was too early to say. (Editing by Sue Thomas)

.

US should pay for carbon content

The blindingly obvious come back to the recent US regulation is summarised by the headline of this blog post. This is no surprise and shows why troubled negotiations are ahead.

It comes down to the simple question of whether the consumer or producer pays for the pollution caused by the production. If American consumers did not demand the product the pollution would not exist. Then we have the fact that a lot of the production in China is produced by US owned firms.

The US regulatory framework is flawed.

U.S. Should Pay for Carbon Content of Imported Goods: Locke [PlanetArk]

SHANGHAI - To address the serious threat of global warming, Americans should be required to "pay" for the carbon content of goods they consume from countries around the world, a top U.S. official said on Friday.

"It's important that those who consume the products being made all around the world to the benefit of America -- and it's our own consumption activity that's causing the emission of greenhouse gases, then quite frankly Americans need to pay for that," Commerce Secretary Gary Locke told the American Chamber of Commerce in Shanghai.

Locke spoke to the business group after meetings this week with Chinese Premier Wen Jiabao and other officials on how the two countries could work together to reduce carbon dioxide and other greenhouse gas emissions blamed for global warming.

Unless China, the United States and other countries begin to reduce output of the heat-trapping gases, the world faces a "catastrophe" in the form of more frequent floods, droughts and rising sea levels, Locke said.

The U.S. House of Representatives has passed legislation that creates a market for companies to trade permits to emit greenhouse gases, which would be capped at a certain level and then reduced over time.

The bill also contains "carbon tariffs" that would allow the United States to slap duties on imports of carbon-intensive goods such as steel, cement, paper and glass from countries that have not taken steps to reduce their own emissions.

Locke said Chinese officials raised concern about those provisions this week.

"They feel in essence it's a tax on their carbon activity," he said.

China has recently surpassed the United States as the world's largest emitter of greenhouse gases. Its emissions come largely from production of steel, cement, aluminum, paper and chemicals, most of which are consumed in China rather than exported.

In contrast, U.S. greenhouse gas emissions come mainly from domestic consumption, such as fuels to heat and cool buildings and to power vehicles. Only about 25 percent of U.S. emissions are caused by factories.

Though U.S. President Barack Obama has expressed concern about the House "carbon tariffs," Locke said it was an open question whether he opposed them or not.

"The president has not taken a position on any particular element of the legislation," Locke said.

"It's simply premature to talk about individual pieces of the legislation without seeing it in it's totality," Locke said, noting the Senate still has to pass its version of the bill.

Once that happens and negotiations begin between the House and the Senate, the administration will weigh in more heavily on various elements of the bill, Locke said.

.

The EU Emissions Trading Scheme: assessment and outlook

After setting this question to my Econ 211 students as part of their assessment I was interested to come across an academic answer to the question. I hope this paper does not "too" closely resemble the answers given by my students for their sakes.

The EU Emissions Trading Scheme: assessment and outlook

Sébastien E. J. Walker

The Queen's College, University of Oxford

ABSTRACT

In this article I assess the design of the EU Emissions Trading Scheme and the performance of its first Phase. The article argues that, contrary to common belief, Phase I fulfilled its objectives. It then discusses the changes that have been made to the Scheme's framework for Phase II, and those that are planned for Phase III, covering the latest developments and the recent price trends for emissions allowances. I conclude that the aforementioned changes constitute substantial improvements to the Scheme, while unwelcome uncertainties nevertheless remain over long-term price signals.

.

US and Green Protectionism

The US move to become "greener" may have wider political implications. Such protests were not unexpected but China has a point.

Chinese official warns US on protectionism [FT]

A top adviser to the Chinese government on Tuesday warned that a proposed US border tax on carbon sensitive materials “smells of protectionism” and could spark retaliation from developing countries.

During a speech at New York University about how the US and China can forge a closer partnership, Tung Chee-hwa, vice-chairman of the Chinese People’s Political Consultative Conference (CPPCC), the Chinese government’s official advisory, said that a proposed “border adjustment” programme could be challenged through the World Trade Organisation and that he was “distressed” by the new bill introduced to Congress.

The programme in question was introduced earlier this month by two powerful Democrats in the House of Representatives. The bill includes aggressive climate targets to be met through a green house gas emissions cap and trade programme, where companies would be eligible for rebates to compensate for cost they incur. More controversially, the US government would be able to levy import taxes on foreign manufacturers to cover carbon contained in US-bound products.

“This is particularly unfair to China,” Mr Tung, who was chief executive of Hong Kong from 1997 until 2005, said.

In March, Steven Chu, US energy secretary, told Congress that a carbon border tax would help “level the playing field” with countries with looser carbon standards.

The legislation, introduced by Henry Waxman, California Democrat and chairman of the Energy and Commerce Committee and Edward Markey, Democrat from Massachusetts and Chairman of the Energy and Environment Subcommittee, aims to cut green house gas emissions by 20 per cent by 2020 and by more than 80 per cent by 2050, from 2005 levels.

The draft proposal would require electricity suppliers to get 25 per cent of their power from renewable sources, such as wind and solar, by 2025. It would establish a national renewable energy standard and an energy efficiency standard aimed at cutting power demand by 15 per cent by 2020 and natural gas demand by 10 per cent.

On Tuesday Mr Tung said that China was taking its own aggressive measures to combat climate change but that he was concerned about the US taking a more protectionist stance.

“The lesson from 1929 was that we went to protectionism and the whole world collapsed,” he said. “China and America are on the same boat.”

A vote could on the border tax bill could come as early as June, with the Senate expected to make its proposal in the autumn.

.

Carbon will kill us all

This article from Peter Huber is fantastically bleak and makes great reading. It is refreshing to see someone talking about the reality of climate change and just how hard (and expensive) it will be to do anything about it.

This is the dismal science at its most dismal. It is hard to get away from the conclusion that we are all inevitably doomed.

This article is long but unmissable,

We Cannot Make a Dent in Global Carbon Emissions [Opposing views]

Like medieval priests, today’s carbon brokers will sell you an indulgence that forgives your carbon sins. It will run you about $500 for 5 tons of forgiveness—about how much the typical American needs every year. Or about $2,000 a year for a typical four-person household. Your broker will spend the money on such things as reducing methane emissions from hog farms in Brazil.

But if you really want to make a difference, you must send a check large enough to forgive the carbon emitted by four poor Brazilian households, too—because they’re not going to do it themselves. To cover all five households, then, send $4,000. And you probably forgot to send in a check last year, and you might forget again in the future, so you’d best make it an even $40,000, to take care of a decade right now. If you decline to write your own check while insisting that to save the world we must ditch the carbon, you are just burdening your already sooty soul with another ton of self-righteous hypocrisy. And you can’t possibly afford what it will cost to forgive that.

If making carbon this personal seems rude, then think globally instead. During the presidential race, Barack Obama was heard to remark that he would bankrupt the coal industry. No one can doubt Washington’s power to bankrupt almost anything—in the United States. But China is adding 100 gigawatts of coal-fired electrical capacity a year. That’s another whole United States’ worth of coal consumption added every three years, with no stopping point in sight. Much of the rest of the developing world is on a similar path.

Cut to the chase. We rich people can’t stop the world’s 5 billion poor people from burning the couple of trillion tons of cheap carbon that they have within easy reach. We can’t even make any durable dent in global emissions—because emissions from the developing world are growing too fast, because the other 80 percent of humanity desperately needs cheap energy, and because we and they are now part of the same global economy. What we can do, if we’re foolish enough, is let carbon worries send our jobs and industries to their shores, making them grow even faster, and their carbon emissions faster still.

We don’t control the global supply of carbon.

Ten countries ruled by nasty people control 80 percent of the planet’s oil reserves—about 1 trillion barrels, currently worth about $40 trillion. If $40 trillion worth of gold were located where most of the oil is, one could only scoff at any suggestion that we might somehow persuade the nasty people to leave the wealth buried. They can lift most of their oil at a cost well under $10 a barrel. They will drill. They will pump. And they will find buyers. Oil is all they’ve got.

Poor countries all around the planet are sitting on a second, even bigger source of carbon—almost a trillion tons of cheap, easily accessible coal. They also control most of the planet’s third great carbon reservoir—the rain forests and soil. They will keep squeezing the carbon out of cheap coal, and cheap forest, and cheap soil, because that’s all they’ve got. Unless they can find something even cheaper. But they won’t—not any time in the foreseeable future.

We no longer control the demand for carbon, either. The 5 billion poor—the other 80 percent—are already the main problem, not us. Collectively, they emit 20 percent more greenhouse gas than we do. We burn a lot more carbon individually, but they have a lot more children. Their fecundity has eclipsed our gluttony, and the gap is now widening fast. China, not the United States, is now the planet’s largest emitter. Brazil, India, Indonesia, South Africa, and others are in hot pursuit. And these countries have all made it clear that they aren’t interested in spending what money they have on low-carb diets. It is idle to argue, as some have done, that global warming can be solved—decades hence—at a cost of 1 to 2 percent of the global economy. Eighty percent of the global population hasn’t signed on to pay more than 0 percent.

Accepting this last, self-evident fact, the Kyoto Protocol divides the world into two groups. The roughly 1.2 billion citizens of industrialized countries are expected to reduce their emissions. The other 5 billion—including both China and India, each of which is about as populous as the entire Organisation for Economic Co-operation and Development—aren’t. These numbers alone guarantee that humanity isn’t going to reduce global emissions at any point in the foreseeable future—unless it does it the old-fashioned way, by getting poorer. But the current recession won’t last forever, and the long-term trend is clear. Their populations and per-capita emissions are rising far faster than ours could fall under any remotely plausible carbon-reduction scheme.

Might we simply buy their cooperation? Various plans have circulated for having the rich pay the poor to stop burning down rain forests and to lower greenhouse-gas emissions from primitive agricultural practices. But taking control of what belongs to someone else ultimately means buying it. Over the long term, we would in effect have to buy up a large fraction of all the world’s forests, soil, coal, and oil—and then post guards to make sure that poor people didn’t sneak in and grab all the carbon anyway. Buying off people just doesn’t fly when they outnumber you four to one.

Might we instead manage to give the world something cheaper than carbon? The moon-shot law of economics says yes, of course we can. If we just put our minds to it, it will happen. Atom bomb, moon landing, ultracheap energy—all it takes is a triumph of political will.

Really? For the very poorest, this would mean beating the price of the free rain forest that they burn down to clear land to plant a subsistence crop. For the slightly less poor, it would mean beating the price of coal used to generate electricity at under 3 cents per kilowatt-hour.

And with one important exception, which we will return to shortly, no carbon-free fuel or technology comes remotely close to being able to do that. Fossil fuels are extremely cheap because geological forces happen to have created large deposits of these dense forms of energy in accessible places. Find a mountain of coal, and you can just shovel gargantuan amounts of energy into the boxcars.

Shoveling wind and sun is much, much harder. Windmills are now 50-story skyscrapers. Yet one windmill generates a piddling 2 to 3 megawatts. A jumbo jet needs 100 megawatts to get off the ground; Google is building 100-megawatt server farms. Meeting New York City’s total energy demand would require 13,000 of those skyscrapers spinning at top speed, which would require scattering about 50,000 of them across the state, to make sure that you always hit enough windy spots. To answer the howls of green protest that inevitably greet realistic engineering estimates like these, note that real-world systems must be able to meet peak, not average, demand; that reserve margins are essential; and that converting electric power into liquid or gaseous fuels to power the existing transportation and heating systems would entail substantial losses. What was Mayor Bloomberg thinking when he suggested that he might just tuck windmills into Manhattan? Such thoughts betray a deep ignorance about how difficult it is to get a lot of energy out of sources as thin and dilute as wind and sun.

It’s often suggested that technology improvements and mass production will sharply lower the cost of wind and solar. But engineers have pursued these technologies for decades, and while costs of some components have fallen, there is no serious prospect of costs plummeting and performance soaring as they have in our laptops and cell phones. When you replace conventional with renewable energy, everything gets bigger, not smaller—and bigger costs more, not less. Even if solar cells themselves were free, solar power would remain very expensive because of the huge structures and support systems required to extract large amounts of electricity from a source so weak that it takes hours to deliver a tan.

This is why the (few) greens ready to accept engineering and economic reality have suddenly emerged as avid proponents of nuclear power. In the aftermath of the Three Mile Island accident—which didn’t harm anyone, and wouldn’t even have damaged the reactor core if the operators had simply kept their hands off the switches and let the automatic safety systems do their job—ostensibly green antinuclear activists unwittingly boosted U.S. coal consumption by about 400 million tons per year. The United States would be in compliance with the Kyoto Protocol today if we could simply undo their handiwork and conjure back into existence the nuclear plants that were in the pipeline in nuclear power’s heyday. Nuclear power is fantastically compact, and—as America’s nuclear navy, several commercial U.S. operators, France, Japan, and a handful of other countries have convincingly established—it’s both safe and cheap wherever engineers are allowed to get on with it.

But getting on with it briskly is essential, because costs hinge on the huge, up-front capital investment in the power plant. Years of delay between the capital investment and when it starts earning a return are ruinous. Most of the developed world has made nuclear power unaffordable by surrounding it with a regulatory process so sluggish and unpredictable that no one will pour a couple of billion dollars into a new plant, for the good reason that no one knows when (or even if) the investment will be allowed to start making money.

And countries that don’t trust nuclear power on their own soil must hesitate to share the technology with countries where you never know who will be in charge next year, or what he might decide to do with his nuclear toys. So much for the possibility that cheap nuclear power might replace carbon-spewing sources of energy in the developing world. Moreover, even India and China, which have mastered nuclear technologies, are deploying far more new coal capacity.

Remember, finally, that most of the cost of carbon-based energy resides not in the fuels but in the gigantic infrastructure of furnaces, turbines, and engines. Those costs are sunk, which means that carbon-free alternatives—with their own huge, attendant, front-end capital costs—must be cheap enough to beat carbon fuels that already have their infrastructure in place. That won’t happen in our lifetimes.

Another argument commonly advanced is that getting over carbon will, nevertheless, be comparatively cheap, because it will get us over oil, too—which will impoverish our enemies and save us a bundle at the Pentagon and the Department of Homeland Security. But uranium aside, the most economical substitute for oil is, in fact, electricity generated with coal. Cheap coal-fired electricity has been, is, and will continue to be a substitute for oil, or a substitute for natural gas, which can in turn substitute for oil. By sharply boosting the cost of coal electricity, the war on carbon will make us more dependent on oil, not less.

The first place where coal displaces oil is in the electric power plant itself. When oil prices spiked in the early 1980s, U.S. utilities quickly switched to other fuels, with coal leading the pack; the coal-fired plants now being built in China, India, and other developing countries are displacing diesel generators. More power plants burning coal to produce cheap electricity can also mean less natural gas used to generate electricity. And less used for industrial, commercial, and residential heating, welding, and chemical processing, as these users switch to electrically powered alternatives. The gas that’s freed up this way can then substitute for diesel fuel in heavy trucks, delivery vehicles, and buses. And coal-fired electricity will eventually begin displacing gasoline, too, as soon as plug-in hybrid cars start recharging their batteries directly from the grid.

To top it all, using electricity generated in large part by coal to power our passenger cars would lower carbon emissions—even in Indiana, which generates 75 percent of its electricity with coal. Big power plants are so much more efficient than the gasoline engines in our cars that a plug-in hybrid car running on electricity supplied by Indiana’s current grid still ends up more carbon-frugal than comparable cars burning gasoline in a conventional engine under the hood. Old-guard energy types have been saying this for decades. In a major report released last March, the World Wildlife Fund finally concluded that they were right all along.

But true carbon zealots won’t settle for modest reductions in carbon emissions when fat targets beckon. They see coal-fired electricity as the dragon to slay first. Huge, stationary sources can’t run or hide, and the cost of doing without them doesn’t get rung up in plain view at the gas pump. California, Pennsylvania, and other greener-than-thou states have made flatlining electricity consumption the linchpin of their war on carbon. That is the one certain way to halt the displacement of foreign oil by cheap, domestic electricity.

The oil-coal economics come down to this. Per unit of energy delivered, coal costs about one-fifth as much as oil—but contains one-third more carbon. High carbon taxes (or tradable permits, or any other economic equivalent) sharply narrow the price gap between oil and the one fuel that can displace it worldwide, here and now. The oil nasties will celebrate the green war on carbon as enthusiastically as the coal industry celebrated the green war on uranium 30 years ago.

The other 5 billion are too poor to deny these economic realities. For them, the price to beat is 3-cent coal-fired electricity. China and India won’t trade 3-cent coal for 15-cent wind or 30-cent solar. As for us, if we embrace those economically frivolous alternatives on our own, we will certainly end up doing more harm than good.

By pouring money into anything-but-carbon fuels, we will lower demand for carbon, making it even cheaper for the rest of the world to buy and burn. The rest will use cheaper energy to accelerate their own economic growth. Jobs will go where energy is cheap, just as they go where labor is cheap. Manufacturing and heavy industry require a great deal of energy, and in a global economy, no competitor can survive while paying substantially more for an essential input. The carbon police acknowledge the problem and talk vaguely of using tariffs and such to address it. But carbon is far too deeply embedded in the global economy, and materials, goods, and services move and intermingle far too freely, for the customs agents to track.

Consider your next Google search. As noted in a recent article in Harper’s, “Google . . . and its rivals now head abroad for cheaper, often dirtier power.” Google itself (the “don’t be evil” company) is looking to set up one of its electrically voracious server farms at a site in Lithuania, “disingenuously described as being near a hydroelectric dam.” But Lithuania’s grid is 0.5 percent hydroelectric and 78 percent nuclear. Perhaps the company’s next huge farm will be “near” the Three Gorges Dam in China, built to generate over three times as much power as our own Grand Coulee Dam in Washington State. China will be happy to play along, while it quietly plugs another coal plant into its grid a few pylons down the line. All the while, of course, Google will maintain its low-energy headquarters in California, a state that often boasts of the wise regulatory policies—centered, one is told, on efficiency and conservation—that have made it such a frugal energy user. But in fact, sky-high prices have played the key role, curbing internal demand and propelling the flight from California of power plants, heavy industries, chip fabs, server farms, and much else (see “California’s Potemkin Environmentalism,” Spring 2008).

So the suggestion that we can lift ourselves out of the economic doldrums by spending lavishly on exceptionally expensive new sources of energy is absurd. “Green jobs” means Americans paying other Americans to chase carbon while the rest of the world builds new power plants and factories. And the environmental consequences of outsourcing jobs, industries, and carbon to developing countries are beyond dispute. They use energy far less efficiently than we do, and they remain almost completely oblivious to environmental impacts, just as we were in our own first century of industrialization. A massive transfer of carbon, industry, and jobs from us to them will raise carbon emissions, not lower them.

The grand theory for how the developed world can unilaterally save the planet seems to run like this. We buy time for the planet by rapidly slashing our own emissions. We do so by developing carbon-free alternatives even cheaper than carbon. The rest of the world will then quickly adopt these alternatives, leaving most of its trillion barrels of oil and trillion tons of coal safely buried, most of the rain forests standing, and most of the planet’s carbon-rich soil undisturbed. From end to end, however, this vision strains credulity.

Perhaps it’s the recognition of that inconvenient truth that has made the anti-carbon rhetoric increasingly apocalyptic. Coal trains have been analogized to boxcars headed for Auschwitz. There is talk of the extinction of all humanity. But then, we have heard such things before. It is indeed quite routine, in environmental discourse, to frame choices as involving potentially infinite costs on the green side of the ledger. If they really are infinite, no reasonable person can quibble about spending mere billions, or even trillions, on the dollar side, to dodge the apocalyptic bullet.

Thirty years ago, the case against nuclear power was framed as the “Zero-Infinity Dilemma.” The risks of a meltdown might be vanishingly small, but if it happened, the costs would be infinitely large, so we should forget about uranium. Computer models demonstrated that meltdowns were highly unlikely and that the costs of a meltdown, should one occur, would be manageable—but greens scoffed: huge computer models couldn’t be trusted. So we ended up burning much more coal. The software shoe is on the other foot now; the machines that said nukes wouldn’t melt now say that the ice caps will. Warming skeptics scoff in turn, and can quite plausibly argue that a planet is harder to model than a nuclear reactor. But that’s a detail. From a rhetorical perspective, any claim that the infinite, the apocalypse, or the Almighty supports your side of the argument shuts down all further discussion.

To judge by actions rather than words, however, few people and almost no national governments actually believe in the infinite rewards of exorcising carbon from economic life. Kyoto has hurt the anti-carbon mission far more than carbon zealots seem to grasp. It has proved only that with carbon, governments will say and sign anything—and then do less than nothing. The United States should steer well clear of such treaties because they are unenforceable, routinely ignored, and therefore worthless.

If we’re truly worried about carbon, we must instead approach it as if the emissions originated in an annual eruption of Mount Krakatoa. Don’t try to persuade the volcano to sign a treaty promising to stop. Focus instead on what might be done to protect and promote the planet’s carbon sinks—the systems that suck carbon back out of the air and bury it. Green plants currently pump 15 to 20 times as much carbon out of the atmosphere as humanity releases into it—that’s the pump that put all that carbon underground in the first place, millions of years ago. At present, almost all of that plant-captured carbon is released back into the atmosphere within a year or so by animal consumers. North America, however, is currently sinking almost two-thirds of its carbon emissions back into prairies and forests that were originally leveled in the 1800s but are now recovering. For the next 50 years or so, we should focus on promoting better land use and reforestation worldwide. Beyond that, weather and the oceans naturally sink about one-fifth of total fossil-fuel emissions. We should also investigate large-scale options for accelerating the process of ocean sequestration.

Carbon zealots despise carbon-sinking schemes because, they insist, nobody can be sure that the sunk carbon will stay sunk. Yet everything they propose hinges on the assumption that carbon already sunk by nature in what are now hugely valuable deposits of oil and coal can be kept sunk by treaty and imaginary cheaper-than-carbon alternatives. This, yet again, gets things backward. We certainly know how to improve agriculture to protect soil, and how to grow new trees, and how to maintain existing forests, and we can almost certainly learn how to mummify carbon and bury it back in the earth or the depths of the oceans, in ways that neither man nor nature will disturb. It’s keeping nature’s black gold sequestered from humanity that’s impossible.

If we do need to do something serious about carbon, the sequestration of carbon after it’s burned is the one approach that accepts the growth of carbon emissions as an inescapable fact of the twenty-first century. And it’s the one approach that the rest of the world can embrace, too, here and now, because it begins with improving land use, which can lead directly and quickly to greater prosperity. If, on the other hand, we persist in building green bridges to nowhere, we will make things worse, not better. Good intentions aren’t enough. Turned into ineffectual action, they can cost the earth and accelerate its ruin at the same time.

FT on Carbon Prices

Carbon is not immune from the vagaries of the free market capitalism.

If I was a ruthless investor I would been shorting the heck out of carbon for the last 6 months and making a tidy profit. It would be in poor taste though for an environmental economist to make lots of hard cash betting against the price of carbon.

However, the long term outlook is probably stronger than many now think. It could almost be time to put a couple of "long" bets on the price of carbon. The big unknown is regulation.

Carbon prices [FT - subscription required]

Idle factories, fewer fume-belching smokestacks. So it's no surprise prices of carbon emissions permits have plunged in line with prospects for the world economy. More surprising is their recent rally. In Europe, prices of permits that allow cement factories, power plants and other big polluters to spew greenhouse gases under the European Union's carbon cap-and- trade scheme have jumped 40 per cent from their mid-February nadir.

Over the same period, the FTSE Eurofirst 300 index of European stocks has shed about 7 per cent. Some perspective is required. In spite of their recent jump, at just under €12 per tonne, EU allowance prices remain near the all-time low of €8.20 reached last month - and well below the €30-per-tonne highs of last summer. Back then, forecasters were expecting only a mild economic slump. The outlook has darkened.

Does CO2 endanger public health?

In a news item that could change the face of the US climate change debate the EPA is claiming that CO2 endangers health.

EPA Raises Heat on Emissions Debate[Wall Street Journal]

WASHINGTON -- The Environmental Protection Agency has sent the White House a proposed finding that carbon dioxide is a danger to public health, a step that could trigger a clampdown on emissions of greenhouse gases across a wide swath of the economy.

If approved by the White House Office of Management and Budget, the endangerment finding could clear the way for the EPA to use the Clean Air Act to control emissions of carbon dioxide and other greenhouse gases believed to contribute to climate change. In effect, the government would treat carbon dioxide as a pollutant. The EPA submitted the proposed rule to the White House on Friday, according to federal records published Monday.

Such a finding would raise pressure on Congress to enact a system that caps greenhouse gases -- which trap the sun's heat in the earth's atmosphere -- and creates a market for businesses to buy and sell the right to emit them, as President Barack Obama has proposed.

A White House representative said Monday that Mr. Obama's "strong preference is for Congress to pass energy security legislation that includes a cap on greenhouse-gas emissions. The Supreme Court ruled that the EPA must review whether greenhouse-gas emissions pose a threat to public health or welfare, and this is simply the next step in what will be a long process that engages stakeholders and the public."

The administration has proposed a cap-and-trade system that could raise $646 billion by 2019 through government auctions of emission allowances. Environmentalists want the administration to act on climate change before December, ahead of talks aimed at forging a successor to the Koyoto Protocol, the 1997 agreement that commits many industrialized countries to reducing their greenhouse-gas emissions.
Opinion

* Carbon Caps Are the Best Policy

EPA spokeswoman Cathy Milbourn declined to comment on the details of the endangerment proposal, saying it is "still [an] internal and deliberative" document. But in a move that indicated the potential scope of regulation, the agency earlier this month proposed a national system for reporting carbon-dioxide and other greenhouse-gas emissions by major emitters. The EPA has said about 13,000 facilities, accounting for about 85% to 90% of greenhouse gases emitted in the U.S., would be covered under the proposal.

Industry officials say it will still take months, possibly even years, for the administration to finalize rules for regulating greenhouse-gas emissions.

According to an internal document presented by the EPA to White House officials earlier this month, the EPA believes the health effects of elevated greenhouse-gas levels could cause "severe heat waves...with likely increases in mortality and morbidity, especially among the elderly, young and frail." The agency also said climate change caused by higher greenhouse-gas levels could result in more severe storms and more suffering related to "floods, storms, droughts and fires."

Business groups such as the U.S. Chamber of Commerce and the National Association of Manufacturers warn that if the EPA moves forward on regulation of CO2 under the Clean Air Act -- instead of a measured legislative approach -- it could hobble the already weak economy.

Coal-fired power plants, oil refineries and domestic industries, such as energy-intensive paper, cement, fertilizer, steel, and glass manufacturers, worry that increased cost burdens imposed by climate-change laws will put them at a severe competitive disadvantage to their international peers that aren't bound by similar environmental rules.

Environmentalists have called for the endangerment finding, and say action by Congress or the Obama administration to curb greenhouse gases is necessary to halt the ill effects of climate change.

.

Roll up, roll up, CO2 credits going cheap, 3-5 Euros a tonne

Related to the previous plea by Stiglitz and Stern for a stable and strong carbon price comes news on what the market really thinks the price of carbon should be and who is buying.

Governments Keep Hunting For Cheap CO2 Credits [PlanetArk]

LONDON - The market for government-level emissions rights under the Kyoto Protocol is alive and well, mostly unfazed by the global economic downturn. Through the most opaque of the emissions trading schemes under the Kyoto climate change pact, nations comfortably below greenhouse gas targets can sell excess emissions rights to other countries in the form of credits called Assigned Amount Units (AAUs).

Critics call them "hot air", arguing that most were generated through restructuring in eastern Europe in the 1990s, when polluting industries in ex-communist countries were shutting anyway, rather than by new investment in clean energy.

Countries such as Austria and Japan are still hunting for these cheap AAU credits, despite the criticisms and the fact that United Nations clean energy project-based offsets, seen as having more environmental integrity, have also fallen in price.

"We started before the recession and we continue to negotiate with potential AAU sellers," said Sascha Eichberger of Kommunalkredit, which manages Austria's CO2 credit purchasing.

He said Austria plans to buy 5-10 million AAUs by 2012 but added that the dropping AAU price has prompted some countries to rethink sales. "The current price development is not what sellers expect to get for AAUs," he said.

The Czech Republic said earlier this month that it had again postponed an auction for 10 million AAUs as it needed to re-draw its sale strategy due to the drop in prices.

One broker told Reuters in January he had heard of AAU negotiations for as low as 3-5 euros a tonne (US$3.81-$6.36), or around half the value of the largest deals signed in 2008.

December AAU deals between seller Poland and buyers Ireland and the World Bank were reportedly done at around 10 euros a tonne, although no parties will confirm this.

Governments remain extremely guarded over AAU prices, despite the fact that the rights are bought with taxpayer money.

Eichberger would not comment on prices but said Austria is in talks with the Czech Republic, Poland, Latvia and Hungary.

A Romanian government official told Reuters he expects Romania to sell 10 million AAUs in the first half of 2009, but also would not comment on current talks or their asking price.

Buyers insist that AAU deals are "greened", meaning their proceeds are earmarked for investment in clean energy or energy efficiency.

Eichberger said Austria had no plans to speak with countries lacking clear greening plans. "Russian and Ukrainian markets at the moment are not interesting for us," he said.

Hungary, which has already sold AAUs to Spain and Belgium, said it may now use revenues to ease its national budget deficit, analysts Point Carbon reported on Tuesday.

JAPANESE BUYERS SCOUR MARKET

../

PROJECT-BASED OFFSETS FAVOURED

Critics argue that increased scrutiny surrounding the environmental integrity of the projects, built in countries like China and India, makes project-based offsets, called Certified Emissions Reductions (CERs), a better alternative than AAUs.

The option for governments to use either CERs or AAUs to meet Kyoto targets has caused a correlation in their prices.

Cheap CER prices, concerns over the integrity of AAUs and the lack of accountability and transparency over where proceeds are spent may see governments opt to buy CERs over AAUs.

But the economic downturn may see an erosion in rich nations' emissions and their subsequent emission offset demand.

.

Does carbon trading risk becoming the new sub-prime?

This is a largely irrelevant question but one that the Guardian considers anyway. There is something inherently distasteful about speculators piling into or indeed selling short the price of carbon as the implications for the climate are very real.

This is an issue worth keeping an eye on.

Carbon trading may be the new sub-prime, says energy boss [Guardian]

The row over the working of the European Union's emissions trading scheme intensified last night when EDF Energy warned that speculators risked turning carbon into a new category of sub-prime investment.

Vincent de Rivaz, the chief executive of the UK arm of the French-owned gas and electricity group, said politicians and regulators needed to revisit the way the ETS was working and whether it was bringing the results they wanted. "We like certainty about a carbon price," he said. "[But] the carbon price has to become simple and not become a new type of sub-prime tool which will be diverted from what is its initial purpose: to encourage real investment in real low-carbon technology."

Green campaigners have long been critical of the way the emissions trading scheme was set up, but it is unusual for a leading industry figure to cast doubt on it, as power companies lobbied hard for a market mechanism to deal with global warming.

"We are at the tipping point where we ... should wonder if we have in place the right balance between government policy, regulator responsibility and the market mechanism which will deliver the carbon price," said de Rivaz.

De Rivaz's comments came as Tony Hayward, chief executive of BP, emphasised that a predictable global carbon price was important because it would make "vast numbers of alternative energy sources competitive". He told the World Economic Forum in Davos that certainty over carbon emissions would help "solve the world's energy problems".

Their comments came days after the Guardian revealed that steelmakers and hedge funds were cashing in ETS carbon credits obtained for free, causing the price of carbon to plunge. The price of carbon has slumped from €30 a tonne to below €12, leading to a tail-off in clean-technology offset projects in the developing world.

../

De Rivaz said an over-reliance on markets without tougher safeguards was responsible for the financial turmoil that has sent banks into administration or forced sale. He believed there had been a "lost sense of values" and he was anxious that this should not extend into the energy sector, but was not prepared yet to call for a carbon tax to replace the ETS.

Point Carbon, an information provider and consultancy, claims the sell-offs are only one of a number of factors influencing carbon prices and argues it is "rational" for them to be selling off credits.

"Recession in Europe is bringing a slowdown in manufacturing, meaning less production and less emissions," said Henrik Hasselknippe, global head of carbon at Point Carbon. "Companies are doing exactly the rational thing in these circumstances, which is to sell if they are long on credits. If they are emitting less then they do not need the credits so much and the price of carbon will fall."

However, Bryony Worthington, an expert on climate change and founder of sandbag.org.uk, said: "What should have been a way to kick-start investment in much needed low-carbon, efficient technologies is now a cash redistribution exercise." A study commissioned by the WWF environmental organisation from Point Carbon, published in March last year, estimated that "windfall profits" of between €23bn and €71bn (£20.9bn-£64.4bn) would be made under the ETS between 2008 and 2012, on the basis that the price of carbon would be between €21 and €32. Up to €15bn could be made by British companies that were given credits they did not need.

.

Carbon crash, the downturn and windfalls

There is no doubt that a global slow down has benefits for the environment - less production equals less waste and less pollution.

Another benefit to EU firms that are part of the ETS is that they may have a large surplus of permits to sell on the open market. The problem is that this oversupply will lead to a fall in the price of permits.

Whilst power generation will also benefit, the big winners will be cement and steel manufacturers.

Shorting the permit price would surely be a profitable trade. The price of carbon is sure to fall further. Another hit for the banks.

Ultimately this is another example of the failure of the ETS. The ETS was NOT designed to subsidise heavy industry during recessions. These windfalls are not coming from increased efficiency but a simple fall in output.

EU Climate Cash Windfall For Industry In Downturn [PlanetArk]

LONDON - European factories are cashing in on an unexpected benefit from wilting output, selling surplus carbon emissions permits worth about 1 billion euros ($1.29 billion) to raise funds on the carbon market.

A recession in Europe will dent industrial output this year and this will sap energy demand and carbon emissions, leading to a surplus of permits among big polluters including steel and cement makers.

Companies from some of the European Union's most polluting industries are now raising funds on the carbon market to help them weather the credit crisis.

That has raised some uncomfortable questions about a scheme meant to fight climate change rather than subsidize companies during a downturn.

"This was not designed as a scheme to give corporates cheap short-term funding options in the face of a credit crunch meltdown where banks are not lending," said Mark Lewis, Deutsche Bank carbon analyst. "But that appears to be what's happening."

The EU trading scheme is meant to limit greenhouse gases by giving industry a fixed quota of carbon permits that can be traded.

The sell-off has sparked a collapse in carbon prices, which have fallen by up to a third this month and could drop as low as 5 euros from a peak of 31 euros last summer, analysts say.

The carbon price adds to the cost of burning high-carbon fossil fuels and a lower price undermines incentives for companies to cut emissions.

The price falls do not yet match a rout in 2006, when it emerged that EU states had given industry too many carbon permits, creating a glut that made them worthless.

The present surplus has arisen from recession and companies have been able to raise cash because they get their quota for free rather than have to buy these through state-run auctions.

EU leaders last month agreed emissions quotas through 2020 based on assumptions of economic growth, and backed concessions to industry that could allow companies to continue to get free allowances for a decade or more.

SELL

The present sell-off started in December and the main winners are cement makers, steel, paper mills and glass factories, carbon traders say.

"It's between 75-80 million to 150 million euros a day," said Jean-Francois Cauvet, a trader at Sagacarbon, subsidiary of French bank Caisse des Depots, referring to buying and selling in return for immediate cash on spot markets.

"I don't know why industrials would miss this opportunity," he added. "They're using it to compensate for the tightening of credit and the slowdown, to pay for redundancies."

A global carbon market has been growing fast, nearly doubling in value last year to about $120 billion.

Now the economic slump is doing the market's job, by limiting economic growth and emissions. Analysts say that the EU emissions cap will bite when economies grow again from 2010 or 2011, and stress that a lower carbon price has not changed the effectiveness of the carbon cap.

For some, however, the price collapse demonstrates that the EU scheme was too soft all along.

"It demonstrates that the targets after 2012 (to 2020) are too lax, especially in combination with a large use of carbon offsets," said Cambridge University's Karsten Neuhoff, referring to an option for companies to offset their emissions by investing in green projects in the developing world.

The potential for raising cash now is large.

The steel and cement sectors have a quota of EU allowances (EUAs) approximately matching their forecast output and emissions.

But West European iron and steel output will fall by about 14 percent this year compared to 2008 and EU cement production by 20-25 percent, analysts estimate.

That implies an EUA surplus this year of 66 million tons for those two sectors alone, worth about 750 million euros at Wednesday's carbon prices.

The EU executive Commission rejected the idea that selling surpluses hurt the integrity of the scheme.

"We are sure at the end of the day the price will ... provoke emissions reductions," said Barbara Helfferich, EU Commission environment spokeswoman. "If those companies were smart they would take those profits ... and invest them into greener technology."

While industrial companies are cashing in, some banks and carbon specialists are hurting.

EUAs are one of the worst investments so far in 2009, falling more than almost any other energy commodity or index of global stocks, compressing margins for companies which generate carbon offsets in the South for sale to companies and countries facing emissions limits in the North.

.

The great carbon crash

My environmental economics students will now be acutely aware of the price of carbon after writing a term paper on the European Trading Scheme.

The inevitable decline in the price of carbon will come as no surprise. I for one would not be happy going long on carbon.

Updated: Sell-off forces EU carbon to record lows [Business Green]

The price of carbon credits in the EU's emissions trading scheme reached a record low for the current phase of the scheme of just €11.60 as many of the large scale emitters covered by the scheme continued to offload their EUA carbon credits.

The price of EUAs has been on a steady slide since the start of the year when they stood just shy of €16 a tonne and market watchers are concerned that the price of carbon is no longer tracking oil prices.

Rising oil prices typically lead to an increase in the price of carbon, as they tend to result in energy producers switching from gas to more carbon intensive coal – a scenario that leads to increased demand for carbon credits.

However, the price of carbon has failed to track recent fluctuations in the oil price, prompting fears that any increase in demand for credits from energy companies arising from changes in the oil price is being outweighed by the on-going sell off of credits amongst heavy industries fearful that the recession will lead to reduced production levels.

"The carbon and oil price has become to some extent detached, just because of the sheer scale of the selling pressure," said Henrik Hasselknippe, head of carbon analysis at research firm Point Carbon. "Companies used to sell off credits if they saw that production levels had been down in the previous quarter, but now they are selling based on predictions that production levels will be down for the coming quarters."

He added that there were also early signs that the low price of EUAs was impacting investment in the UN-backed Clean Development Mechanism offsetting scheme.

"If you want to buy CDM credits [CERs] from a good emission reduction project in China it can now cost more than EUAs," he explained. "As a result we are already seeing reduced demands for CERs and are hearing rumours of people renegotiating prices with CDM projects."

The bearish market will undermine recent predictions that the outlook for the carbon market during 2009 remains largely positive.

However, Hasselknippe insisted that the long term outlook for the market remained good and predicted that prices of both EUAs and CERs could recover very rapidly once production levels amongst heavy industries begin to rise again.

"If we see people begin to hold off of CDM projects then once production levels rise the increase in demand for credits will be far quicker than the rise in the supply of credits, as you can't just turn these projects on and off overnight" he explained. "Prices could well triple by the end of the 2008 to 2012 [ETS] period."

The net result is that with the supply of CERs likely to remain constrained and carbon caps within the ETS to be lowered from 2013 there are opportunities for investors to buy credits at the currently low price and make good returns over the next two to five years.

However, Hasselknippe said that while all traders were aware that the three to five year outlook for the market remained bullish there were relatively few with the "deep pockets" necessary to make long term bets.

.

Global Carbon Trading Index

This post on ETF Innovators, LLP gives a good summary of the performance of various carbon trading companies. The picture is not pretty.

Check out the RED.

A New Index for Carbon Credit Trading

The accompanying table [click to enlarge] includes 19 companies in the ETF Innovators [ETFI] Global Carbon Trading Index along with the prices of seven benchmark commodities and funds. Most of the pure plays on carbon credits are very small, with 12 of the 19 companies having market caps below $100M.

../

Along with the major declines in oil and natural gas, alternative energy companies have also suffered – with the Market Vectors Global Alternative Energy ETF (GEX) down by 62.2% in the past six months. Companies in the renewable energy and carbon credit industry face the dual headwinds of major energy commodity price declines and the global economic slowdown, which threatens both the funding and viability of many companies which do not generate operating profits and are dependent on external funding from distressed credit and equity markets.

.

"carbon leakage" in action

What is carbon leakage and is the threat real? Industry certainly like to posture but is the highly capital intensive steel industry really that mobile?

This is an interesting area. It turns out that most "industry" will given help in obtaining permits so the impact will be lessened. Companies always want to play the "jobs" card as it pulls at voters and politicians heart strings.

The article includes some interesting facts and figures.

Corus: 'We will quit EU to avoid carbon regime' [Independent]

Philippe Varin, the chief executive of Corus, is threatening to shift the steelmaker's European operations to China unless regulations governing carbon emissions are overhauled.

Mr Varin warned that politicians had to help fund new clean-energy technologies or face the prospect of Corus quitting the UK and Europe.

Corus employs around 25,000 workers in the UK and is in negotiations with unions over pay in an effort to curb large redundancies.

"If we are forced to buy CO2 credits on the market without a system to improve our production process, then we will not produce steel in Europe," said Mr Varin, who is also chairman of the World Steel Association's Climate Change Policy Group. "To cut carbon emissions of steel production, we need breakthrough technology, but this is extremely expensive, costing €200m to €300m to upgrade a one million ton production plant."

Varin, who spoke exclusively to the 'IoS' at the UN Climate Change conference in Poznan, said: "There is no way for us to fund this and pay penalties for our CO2 emissions. This would wipe out all of our profits and put us at a competitive disadvantage with manufacturers in nations which are not subject to carbon caps.

"The only way forward is through improved technology, but this costs money and a carbon tax is not the answer, because manufacturers will just move the growth to other countries. Not only will that kill European industry, but we will produce twice as much CO2."

Estimates suggest that every ton of steel produced in China, where factories are older and less efficient, creates twice as many emissions as in Europe. "Our customers will still need steel, so they will have to import from China or another developing nation and then you have the added CO2 associated with shipping," Mr Varin said.

The steel industry, which accounts for 4 per cent of global emissions, was seeking to replace current carbon abatement schemes established under the 1997 Kyoto Protocol, with a "sectoral agreement", he said. Such a system would give manufacturers free carbon allowances up to an industry-set benchmark and encourage technology transfer between East and West.

Steelmakers also want emissions reduction credits for deploying new technologies such as carbon capture and storage, which is currently excluded from the Carbon Development Mechanism.

Mr Varin's suggestion of a sectoral agreement process for carbon credits was criticised by environmental campaigners. A Greenpeace spokesman said: "Replacing emissions caps with a sectoral approach would mean the end of the Kyoto principles and would be disastrous for the price of carbon."

EU leaders meeting in Poznan agreed to reduce greenhouse gas emissions by 20 per cent by 2020.

In a statement issued by Corus on Sunday a spokesman said: "It is not the case that European carbon regulations are leading Corus to consider physically transferring any of its European production plants assets to locations outside Europe."

.