Weatherdem's Weblog

Bridging climate science, citizens, and policy


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Australia Giving Up On Relatively Successful Carbon Market

Australia voted last week to scrap their carbon tax and replace it with a much less economically efficient cap-and-trade scheme.  The pro-business Reuters article acknowledges the only “positive” that results from this decision: businesses will save money.  Well, hallelujah.  I’m sure today’s children will be immensely grateful when they’re adults with all the resultant climate change effects that Australian businesses were able to avoid paying for their actions and saved a few billion dollars in the 2010s.  That’s one way to look at this news.  Let’s flesh the landscape out before throwing Australia under the bus too quickly.

To be fair, Australia simply moved up the date when they joined … the European carbon “market”.  You remember, that’s the market that severely over-supplied carbon credits at its outset and refused earlier this year to remove some of those excess credits for a mere two years.  In essence, the European carbon market doesn’t work.  How can you tell?  Carbon costs €4.2/tCO2 today.  When the European market started, the cost was €31/tCO2.  At one-tenth the original price, the market signal is clear: there are far too many allowances in the European market.  Have greenhouse gas emissions (note: CO2 isn’t the only GHG!) fallen in the EU since the market’s inception?  Yes, but this is a result of the continued economic malaise the Europeans inflict on themselves, as described by the European Environment Agency’s most recent report.

The temporary benefit to the earlier Australian move to the EU’s ETS is this: the flow of carbon credits is one way: from Europe to Australia.  Australia can’t export credits until July 2018.  So in the short-term, Australia could help relieve the over-supply of EU carbon credits.  This might help in raising the carbon price back to more realistic levels, but this won’t happen until 2016 at the earliest because of lower emissions and demand for permits in Australia.

There are two big negative effects of moving from a fixed tax to a floating market.  The first is that carbon will become much cheaper in Australia: from A$25.40 per tonne to A$6 per tonne.  Is carbon really only worth A$6?  In an over-supplied market, perhaps it is.  The fact that not all industries are involved in the carbon market means that we manipulate the true carbon price.  Of course, as much as folks like to talk about “free markets”, most markets are heavily manipulated by vested interests.  The second negative effect remains local: the move removes A$3.8 billion from the Australian federal budget over four years.  Australia’s Prime Minister Kevin Rudd proposed to make up this budget shortfall by “removing a tax concession on the personal use of salary-sacrificed or employer-provided cars.”  Good luck with that, Mr. Rudd.  Everybody is loath to give up a financial benefit once they receive it.  Look – more market manipulation!

Australian coal companies were more than happy to propagate misinformation to Australian energy consumers: electricity price increases were due exclusively to the carbon tax!  This highlights a common problem with any carbon-pricing scheme: special interests can more easily spread misinformation and disinformation (and are often happy to do so!) than market proponents can spread true information.  The reason is often quite simple: the truth is complex and consumers don’t want to invest the time to understand why they pay the prices they pay.  How many consumers demanded energy utilities stop raising prices before carbon market inception?  Then who was responsible for price increases?  “Market forces” is the lame excuse dished out to the masses.  How about the relentless, unquenchable hunger for ever-rising profits?  Somehow, that’s alright, but accurately pricing a commodity is heresy.

An additional piece of context: Australia suffered from record heat waves, droughts, and floods in the past ten years.  The Australian public’s acceptance of climate change related to these disasters is widespread, as is their desire to “take action”.  Well, the government took action and that same public cried uncle with slightly higher utility bills.  This proves the common refrain: people support climate policies … so long as they are absolutely free.  That smacks into reality awfully quick.  It also demonstrates that there is no such thing as a “Climate Pearl Harbor” that leads to unequivocal support for a given climate policy.  The slow-acting nature of climate works strongly against widespread, effective climate policy.

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Recent Carbon Market News – April 2013

I wrote about some carbon market-related items I ran across last month. While I haven’t had time yet to read the RGGI report that Jason Brown linked to (research and family duties leaves very little time for anything else), I have read additional items since that post that I want to collect here for when I do have more time.  Let me state at the outset that I think carbon markets are one piece of a large puzzle.  From what I’ve read to date, I get the impression that most carbon markets are not set up in such a way (yet) that actually addresses what I think they’re supposed to address: a reduction in greenhouse gas emissions, especially CO2.  Part of the reason for this is the way the groups set up and managed markets.  This results from lack of appropriate policy that demands of and allows for organizations to set up and run an efficient market.  To close this introduction, I will observe again that most economists recommend a carbon tax if the true intent of a policy is to reduce emissions.  I was surprised to learn this since I don’t think most economists are bleeding-heart liberals; nor do I think they are part of the vast conspiracy to establish a one-world government that controls every aspect of our lives.  They base their recommendation on fundamental economic principles – a scary thought in today’s reactionary world, I know.

First, some news: “The European Parliament this week voted 334-315 (with 60 abstentions) against a controversial “back-loading” plan that aimed to boost the flagging price of carbon, which since 2008 has fallen from about 31 euros per tonne to about 4 euros (about $5.20). Since the vote, the price has fallen even farther, to 2.80 euros.”

What does “back-loading” mean?  Back-loading would have taken some allowances out of the European market for two years.  Without as many allowances, the price of carbon likely would have increased. How over-allocated is the market?  “The surplus is 1.5 billion-2 billion tonnes, or about a year’s emissions.”  There are varying opinions as to what the appropriate price should be to achieve behavioral change.  Back-loading might have increased the price to ~10 euros (1/3 its original price, which many people think is the minimum necessary).  As I wrote last year, one fundamental problem with the European market was the number of allowances was far too high.  But even if the price was “right”, would carbon markets work?  Probably not right away.  Another problem with them is intense lobbying by fossil fuel entities (to weaken the efficacy of the market; they abandon calls for “free market” support when it comes to carbon taxes/markets) as well as the corruption and non-transparency in the market.

The California cap-and-trade scheme establishes a floor and a ceiling for price, which might alleviate some of the problems the Euro ETS has.  The European scheme, by keeping carbon prices so low, sends the wrong signal.  Thus, power utilities are switching from natural gas to coal, despite the fact that burning coal releases twice as much carbon per unit of energy produced.  In that sense, the US energy market is acting correctly when falling natural gas prices encourage utilities to switch from coal to natural gas.  The European’s situation leads to an interesting dilemma.  They have admonished the US for decades on lack of climate action.  Yet Europe did not achieve the first round of Kyoto Protocol-inspired emissions targets and if they continue the switch from cleaner fuels to dirtier fuels, they will not hit the next round they set for themselves either.

Steffen Böhm’s Guardian article ends with this:

None of these will provide a one-fits-all solution. But we cannot afford to lose another 15 years in our quest to rapidly decarbonise our economies, businesses and societies. Carbon markets have given the appearance of us doing something about climate change, while actually legitimising the constant rise of emissions. We need to go back to the drawing board and come up with solutions that actually work in practice.

One solution could be the implementation of new cap-and-trade schemes in other countries, as this CleanTechnica article discusses.  If other planners examine the European scheme and make efforts to correct as many mistakes as possible, then include mechanisms to trade with other schemes around the world, the Europeans may not abandon their market.  That would also give the Europeans time to see what solutions are implemented around the world and eventually include them in their own program.  The Chinese, as is other energy-climate topics, are very important in this regard, not only because they are currently the largest global emitters.  The Chinese government can put programs in place that are not subject to the same kind of political pressures present in the US or Europe.

The US is also very important for the future of markets, emissions, and concentrations.  The US of course currently does not have a cap-and-trade scheme, thanks to the outsized political influence fossil fuel companies have.  Small schemes exist or are coming on-line however.  The Regional Greenhouse Gas Initiative (RGGI) has been in operation across the Northeast US for six years and has a mechanism to reduce allocations, which was beneficial with the recent coal-to-gas switch.  California’s system came online within the last year.  Given the size of the California economy, if this market is more successful than the European market, we can expect additional good news and participation.  If gruops connect existing these markets, and new ones, the prospect for emissions reductions is better than it looks today.  As Böhm wrote, the time for half-measures is long gone.  The world needs smart, aggressive action to avoid the worst global change effects at the end of the century.  Carbon markets are likely a part of the solution, so long as they’re planned and managed well.


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Recent Carbon Market News

A couple of carbon market-related news items caught my eye recently.  While not an exhaustive list, these items are important to discuss:
EU Cancels Carbon Auction, Prices Drop
RGGI Nets $106 Million For Clean Energy, May Hit $2 Billion By 2020

The EU auction failed because bids didn’t reach a secret reserve price.  “In the past five years, carbon prices on the ETS have plummeted nearly 90 percent.”  The core problem with the ETS is oversupply of credits.  The article points out possible solutions: backloading or long-term structural change.  I’m not an expert on carbon markets, but my understanding leads me to support the long-term structural change course.  The ETS tried to please too many vested interests simultaneously (too complex) and resulted in pleasing too few while not achieving its core objective of emissions reductions resulting from a market signal.

On the other hand, The Regional Greenhouse Gas Initiative had its successful 19th auction of CO2 allowances earlier this month.  I wouldn’t characterize it as bad news, but the clearing price of $2.80 per ton, above the reserve price of $1.98 per ton, is too low to directly impact CO2 emissions; it is also lower than the price in Europe and California.  Utilities in the region are switching to cheaper fuel sources because they’re cheaper, not because they emit fewer CO2 emissions.  According to the article, a significant portion (63%) of the $105.9 million in this quarter’s revenue and the $617 million in historical revenue are earmarked for clean energy technologies like energy efficiency, renewables, and climate change adaptation across RGGI’s nine Northeast US member states.  I would certainly like to read a more in-depth analysis of this claim.  Where specifically have the investments gone and what are the results to date?

The RGGI realizes their reserve and clearing price are too low:

Just over a month ago, the RGGI states decided to reduce the 2014 CO2 budget (the “cap” in cap-and-trade) from 165 million to 91 million tons and retire unsold 2012 and 2013 allowances.  This 45% cut is expected to boost allowance prices to $4 per ton in 2013 and up to $10 per ton in 2020, creating billions of new revenue every year. By comparison, RGGI allowance auction clearing prices have never risen higher than $3.51.

That 2020 price is still too low to have much of a direct impact on carbon emissions.  The obvious benefit is the additional revenue however.  The more revenue we have available to invest in innovation and deploy efficient infrastructure and technologies, the more we will decrease CO2 emissions.  The investment portion of the RGGI policy is a positive feature (I have read less about what the EU does with ETS revenue; I don’t claim with certainty that the RGGI system is “better” than the ETS system).  Any national-level tax-and-dividend system will be complex.  But even$20 per ton today would not, absent subsidies, provide enough incentive for utilities to switch from fossil fuels to zero-carbon sources.