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Crash Of The Carbon Market

  • April 19th, 2013
  • Posted by EUEditor

eu-industry-scape11.jpgThe European Parliament voted on Tuesday (16.4.13), by 334 to 315, against putting a limit on permits in the Emissions Trading Scheme (ETS).

It caused the market to crash; raised the possibility of no recovery for seven years, and in Australia promised further budget shortfalls in 2015, when the country’s own carbon trading system is set to be linked to Europe’s.

ECONOMIC DOWN-TURN

Falling economic activity has brought on a drop in prices paid for permits under the ETS, operated by the European Commission; a problem made unsustainable by the universally conceded circumstance that too many permits were given out free at the start of the scheme, by member governments of the European Union.

See EUAustralia Online, “Carbon Trading: steps backward and forward”, 1.3.11.

The EC wanted to “backload” the system by postponing the issue of new permits, to enable the scheme to go into a new phase, 2013-2020, on a viable footing.

THE OPPOSITION

In opposition, a combination of  lobbies representing a wide range of business interests applied intense pressure for a no vote.

eu-parlt-strasbourg.jpegTwo sets of arguments came up in the parliament: no governmental intervention in a functioning  market; the system itself stands to generate  more costs, against competition from countries with cheaper energy, including the United States.

The no voters generally were from the centre-right; European Liberals from Germany (for radical free-market strategies), some from the extreme left, and some of the British Conservative delegation (which includes “Euro-sceptics”, in it to handicap it).

COLLAPSE

Immediately after the vote the already-depressed price on carbon allocations collapsed, falling over 40% to €2.63 (A$3.33; xe.com, 19.4.13) per tonne, the lowest level ever, subsequent recovery very slow and small.

Specialist commentary in the European press was that without the backloading, and with too many permits for expected levels of production, the problems with the ETS would become intractable.

EU RESPONSE

hedegaard-connie2.jpgThe  European Commissioner for Climate Connie Hedegaard (picture), spoke otherwise, saying there would be an impact assessment after the new developments; and  foreshadowing measures to restrict rights to obtain permits, and access to free permits.

In Australia the prospect of the price staying at or near €3 (A$3.80) compounded growing concern over steep  short-falls on prospective revenue, (through lower export commodity process, and together with those, receipts from a prosperity tax on mining, now well below projections).

AUSTRALIA’S BUDGET IMPACT

The vote in the European Parliament stirred up awareness that the Australian trading scheme has set the carbon price at A$23, for three years to 2015 – a plan meant to get the scheme onto a stable price footing.

Access to the European ETS is to be provided from that date, ahead of full inter-changeability in 2018; meaning that if the EU price stays very low, estimated state revenue from the trade will fall steeply in 2015.

The matching of the prices is not an unexpected problem; the Australian Financial Review commented late last year on the fixing of the A$23 price, as “a policy designed to hit heavy emitters such as power stations and aluminium producers. (The government) is also sticking by Treasury projections the price of carbon will reach A$29 a tonne in 2015 and raise A$9.4-billion of revenue. Independent forecasts estimate the European price will then be about A$12.”

COMMENTARIES

The Guardian, Manchester: “For carbon traders and campaigners, the MEPs’ rejection of ‘backloading’ – the postponement, not cancellation, of permit auctions – was a disaster.”

European Voice, Brussels: “MEPs voted to reject a proposal from the European Commission to delay auctioning of carbon allowances in the European Union’s emissions trading scheme (ETS) …  The proposal would have delayed the auctioning of some allowances in order to increase the deflated price of carbon, which was meant to be around €30 (A$37.97) at this point. But heavy industry warned that this type of intervention in a market mechanism would erode confidence in the system. The vote is itself being seen as a crisis of confidence in the system…”

Energy Collective – industry supported research site (Shell, Siemens):  “The EU ETS not only supports the emissions reduction targets of European countries and corporations, but also the trading of the UN flexible mechanisms under the Kyoto Protocol, including Certified Emissions Reductions for Clean Development Mechanism projects. The future of the EU ETS and other market-based mechanisms is unclear; however, hopefully confidence will be restored in the emissions trading schemes around the world through effective and economically efficient policy structures. Market mechanisms offer strong potential for driving meaningful emissions reductions despite rapid urbanisation. We do not have the luxury to wait for a robust price on carbon that includes all externalities.”

The Economist, London. “(The EU ETS) is a cap-and-trade scheme in which permits to emit carbon—about 16 billion tonnes-worth in 2013-20, or roughly half the European Union’s total carbon emissions—are allocated to firms and can then be traded between them. Partly because recession has reduced industrial demand for the permits, and partly because the EU gave away too many allowances in the first place, there is massive overcapacity in the carbon market. The surplus is 1.5 billion-2 billion tonnes, or about a year’s emissions. Prices had already fallen from €20 (A$29.65) a tonne in 2011 to €5 (A$7.41) a tonne in early 2013.”

EC BACKGROUNDER

The EU emissions trading system (EU ETS) is a cornerstone of the European Union’s policy to combat climate change and its key tool for reducing industrial greenhouse gas emissions cost-effectively. The first – and still by far the biggest – international system for trading greenhouse gas emission allowances, the EU ETS covers more than 11,000 power stations and industrial plants in 31 countries, as well as airlines.

The EU ETS works on the ‘cap and trade’ principle. A ‘cap’, or limit, is set on the total amount of certain greenhouse gases that can be emitted by the factories, power plants and other installations in the system. The cap is reduced over time so that total emissions fall. In 2020, emissions from sectors covered by the EU ETS will be 21% lower than in 2005.

Within the cap, companies receive or buy emission allowances which they can trade with one another as needed. They can also buy limited amounts of international credits from emission-saving projects around the world. The limit on the total number of allowances available ensures that they have a value.

Reference


The Economist
, London, “ETS, RIP?”, 19.4.13. http://www.economist.com/news/finance-and-economics/21576388-failure-reform-europes-carbon-market-will-reverberate-round-world-ets, (19.4.13).

The Energy Collective, “EU Parliament rejects carbon market solution”, 18.4.13. http://theenergycollective.com/usgbc/211396/eu-parliament-rejects-carbon-market-solution, (19.4.13).

European Commission, Brussels, The EU Emissions Trading Scheme. EC, The EU Emissions Trading scheme, http://ec.europa.eu/clima/policies/ets/index_en.htm, (19.4.13).

Fiona Harvey, “Europe’s climate chief vows to fight on to save emissions trading scheme”, The Guardian, Manchester, 17.4.13. http://www.guardian.co.uk/environment/2013/apr/17/europe-climate-chief-vow-save-emissions-trading, (19.4.13).

Dave Keating, “EU climate policy in crisis after ETS rejection”, European Voice, Brussels, 16.4.13. http://www.europeanvoice.com/article/2013/april/eu-climate-policy-in-crisis-after-ets-rejection/76969.aspx, (19.4.13).


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