EU carbon: a zero-sum game?
Just as the federal government prepares to announce details of its carbon pricing regime in the next week or two, the European emissions trading scheme is lurching through another crisis. Or should that be crises?
The European carbon price has plunged dramatically in the past month, with an 11 per cent slump on Friday to €12, extending a 30 per cent slump in previous sessions. It is now at its lowest levels in more than two years.
It’s been caused by a confusion of seemingly separate but ultimately interrelated factors: The Greek debt crisis and the threat of another European-wide recession; the failure to agree on more ambitious emissions reductions targets; a massive overhang of free permits; a major spat between Europe, China and the US over the inclusion of non-EU airlines in the European ETS; and the proposed introduction of new energy efficiency targets.
Views differ on the import of the various factors, but there is no doubt that without corrective action they could combine to create a massive overhang of pollution permits by 2020 and a carbon price that ultimately falls to zero. The European Commission has canvassed this very scenario in a recent assessment.
It is one of the conundrums of emissions trading schemes that – as nearly any economist will tell you – while they are effective at finding the least cost of abatement, when low-cost abatement is combined with modest targets, or over-generous compensation, the carbon price can slump dramatically, unhinging the business plans of those relying on it going up. The EU experience in the past six years has been akin to a dog chasing its tail.
In Europe, there are fears of another recession. This means that abatement targets will be likely met through a reduction in production rather than any serious abatement measures or technology switches, adding to the considerable overhang of permits caused by overly-generous handouts to industries such as the steel and cement sectors.
According to the European Commission, the GFC and other energy-saving incentives have already reduced the business-as-usual projections out to 2020 by around 14 per cent. It fears that new energy efficiency obligations, which require energy utilities to achieve annual savings equivalent to 1.5 per cent of their sales, and other measures, could ultimately push emissions some 35 per cent below 1990 levels by 2020.
Of course, this would be a good outcome as far as the environment is concerned – but it's way more than the current 20 per cent emission reduction target and, combined with the 20 per cent renewable energy target, could create an overhang of another 2.5 billion permits, HSBC noted in a report.
The EC has outlined two scenarios: one where the carbon price remains stuck at around €14 a tonne by 2020 (compared to forecasts of at least €30, and possibly more than €50); and another where it is effectively zero. The European industrial giants trying to compete with Asian counterparts in seizing a share of the so-called “green economy” say they will be hamstrung if this is the case. They want a carbon price of €30 or more by 2020.
As HSBC economist Nick Robins noted, this has created the bizarre situation where some have argued against further efforts to save energy, arguing that it overlaps with sectors covered by the ETS. “These energy efficiency improvements, the argument goes, will reduce power demand, thereby cutting emissions from the power sector, resulting in excess ETS allowances, and pushing down carbon prices,” he wrote.
The obvious solution to this, notes Robins, is to create a higher abatement target, which is what those industrial groups, as well as the UK, France and Germany, have been pushing for. It is why the UK has proposed a supplementary carbon tax.
But a steeper emissions reduction target requires agreement, and Poland earlier this week effectively vetoed a push agreed by other European countries to lift the emissions reduction target to 30 per cent by 2020. And as Poland will soon inherit the presidency of the EU for the next year, there is little hope this will be achieved anytime soon. The other option – recalibrating the ETS to set aside allowances – also requires political agreement.
Deutsche Bank analysts Isabelle Curien and Mark Lewis says the apparent lack of agreement between the various EU bodies on the primacy of the ETS as the cornerstone of its long-term climate change policy is damaging market confidence. “There is little or no incentive for buyers to step in, and ...there is therefore now a clear risk of prices falling further still over the coming days and weeks,” they wrote in a report on Friday. “Fear will dominate (trading) in the near term.
The experience in the European ETS, both past and present, underline why it was that the Australian Greens wanted to impose a relatively high fixed price on emissions – because without one it does not necessarily spark the transformation to new technologies that is hoped for.
How to manage the transformation from a fixed carbon price to a market-based system is one of the key measures to be resolved by the Greens and the Gillard government in their negotiations. Ultimately this, and the long-term governance structures, will be more important than the starting price, or even the amount of compensation handed out to coal-fired utilities and coal mines in the short term.
It also explains the sudden skittishness of Australian energy retailers about the proposed inclusion of an energy efficiency scheme in Australia as part of the package of measures. All three major retailers – Origin, TRUenergy and AGL – are heavily invested in at least the idea that gas will replace coal. They may fear that a robust energy efficiency target, without a higher emissions target, would not provide the price incentive via a carbon price to make that coal-to-gas transition.
Deutsche Bank’s Lewis says the slump in the price of EUAs comes despite the emergence of other factors that would normally push carbon prices higher. This includes the decision by Germany to scrap its nuclear power stations, the recent anti-nuclear vote in Italy, and the introduction of a stricter Phase 3 for the EU ETS from 2013.
But, he says, the price slump points to a spiralling crisis of confidence in the “will and the wherewithal” of the EU authorities to achieve their stated policy aims – economic as well as environmental.
“In other words, we think that the sharp fall in EUA prices is down to fear: fear that the Eurozone and broader EU economy might now be on the verge of another severe slowdown, and fear that under such a scenario the Commission would not be able to take the necessary measures to re-establish price tension in the EU-ETS. “
Comments on this article
EU carbon; a zero game
Surely the only fault in the scheme is giving away too many free permits: which is why a tax may be better to start with as long as we don't make the same mistake of over compensating (especially not locking it in)
Mike Borgelt, read my first posting.
Mike Borgelt, a revenue-neutral fossil carbon GST surcharge avoids all the problems that you list. It is simple to administer, there is NO gaming in the system, no bs accounting.
In future, direct your criticisms toward the emission trading scheme by which the ALP remains Hell-bent on buying some support from the major financial institutions.
Tax me!
Good analysis of somewhat saddening development in Europe. Taxation seems to give most certainty, at least for industry if not for the achievement of emission targets.
Please tax me.
Zero sum game
A carbon tax isn't a zero sum game. It is a negative sum game. Lots of human effort in administering any such scheme, heaps of effort in gaming the system, lots of bs accounting etc etc. all for no good result. Nice to see a bunch of adults here telling it like it is.
Maybe this scam is finally going to end along with the "renewable energy" scam and everything connected with it including hopefully Labor governments for at least 20 years. Hey, I'll take 30 before these corrupt, incompetent perverts and scammers ever get their hands on the levers of power again.
CREATING CERTAINITY
In the case of cleaning up electricity the smart thing to do would be to forget about the carbon price and use competitive tendering to set up long term contracts for the supply of cleaner electricity. Contracts that are backed by regulations that ensure that purchase of contracted clean power normally takes precedence over the purchase of dirty electricity.
This approach gives potential investors both price and sales certainty. It gives the government the power to control issues such as technical and geographic distribution. It gives consumers the benefit of the lower prices that can be achieved with competitive tendering.
Best of all the price increases required are a fraction of of those reuired under a carbon tax or CPRS style ETS. This is because the price increases would not have to cover the cost of the tax or permits.
EU Carbon: a zero sum game ?
Good.
Some MORE good news !
Let us NOT commit to the follies of our EU counterparts , AVOID IMPOSING A CARBON TAX HERE , continue to build our economy , take our "coal" (carbon) to markets where "they" absorb any tax (if they were stupid enough to go along with the idea & impose one in the first place ! ) and resume business as usual with our (generally appreciative ) customers..
What we need is a 'REALITY CHECK" to sort out the good ideas and ideals which are realisable & beneficial from those that are purely ego & politically driven (which usually confer "pain" and little or no benefit to the recipients ! ) Once that is done , we can concentrate on improving our infrastructure and excellence in society which are sorely lacking at present. We already enjoy a wonderful standard of living but there is a lot we could improve with very little effort & almost no risk of electrocuting someone or setting fire to their house !!!
Certainty?
Imposing a Carbon Tax does not provide any certainty. The level of taxation is completely at the whim of the controlling party. Labor can raise it as high as they want, whenever they want, and the Liberals could reduce it to zero, should they win control.
We thought we had certainty going into the last election, where 144 out of 150 members of parliament were elected from parties that promised they would not impose a Carbon Tax. On that basis, a Carbon Tax was nigh-on impossible, and business had all the certaintly it could reasonably expect.
By selling out to the Greens, Labor single-handedly returned the massive uncertainty, and I think it will be a long time before business confidence returns. (Although, based on current polling, it could be 20 years before we see another federal Labor Government)
ETS cannot give pricing certainty
The fundamental flaw of emission trading is that it cannot give pricing certainty. As with every other traded commodity, emissions permit trading will only compound the price instability that gave us the GFC. Forget about emission trading as a way of pricing carbon.
The economically efficient way to price carbon is via a fossil carbon consumption tax, implemented as a surcharge on the GST.
* Efficient: implemented via a surcharge on the GST on fossil fuels, based on their carbon content.
* Minimal requirement for regulation, no need for administration of emission permits: after introducing the tax, increase the rate of tax over a few years until the desired amount of emission reduction is effected.
* No need to 'compensate' trade-exposed industries:
** Carbon taxation of imports: Border Adjustment Tax can include the fossil fuel used to ship imported goods (and foodstuffs) to Australia.
** ZERO RATE EXPORTS, including coal.
* Targetted: would not be imposed on biofuels because they are not fossil fuels.
* Revenue-neutrality: using the revenue from this GST surcharge to cut other taxes allows each carbon emitter to choose what investment to make in low/zero emission technology and equipment, and when. DENIALISTS WOULD HAVE NOTHING TO WHINGE ABOUT.
With this tax, we wouldn't even need an 'expert' committee to set each year's aggregate emission cap - just keep increasing the tax rate until the emissions decrease to where we want them. If new science tells us to cut emissions further, just increase the tax rate.
It now seems real science (As
It now seems real science (As opposed to th fake stuff put out by th IPCC) has determined that carbon dioxide coupled with water vapour/low cloud provides an increase in the low cloud net reflectivity...that is to say, produces a negative feed back effect.
Seeing all the "Climate Models" that have caused the "Global Warming" Hysteria promulgated by th Green movement all assume a positive feedback link...and therefore produce a wildly exagerated forecast of "Warming"..we are seeing the feet and indeed legs of jelly upon which the whole "Global Warming" hoax is based.
Why is it that the Alarmists deny or prevarcate every time it is pointed out that "Warming" ceased about 1998, and global temperatures have declined slightly since then...but the atmospheric carbon dioxide concentration has continued to rise inexorably? What happened to their "Causal Link"...?
Fun to Watch
Forget about better design, etc, these artificial structures are always open to manipulation, corruption, etc. they are the "Days of Our Lives" for business people. Accept them for what they are and enjoy the stories as they unfold.
Reality Bites!
A 'valuable lesson' indeed Dominic Adams (Comment below) for the EU who, I suggest, are slowly but surely coming to the realisation of the folly of their ways.
Is it not time we learned some hard lessons BEFORE we stick our heads into the same oven & commit hari-kari in favour of a ridiculous, wealth destroying tax on CO2 that's achieved absolutely nothing where this experiement's been tried & failed?
At best it's wasted billions of $'s on a problem that doesn't exist; invested public funds in dubious renewable energy schemes (wind, solar etc) most, if not all, with no proper Business Case to manage/monitor their effectiveness that repeatedly fail the acid test in providing BASELOAD power generation.
With flagging public support, this is a lost cause that sadly continues to be driven by a beleagured Labour Govt whose policies are being driven by the Greens to a distrustful & disenting public.
Before anything else we need real evidence that proves CO2's a pollutant & is the PRIMARY driver of global warming - Huh! What global warming?.. the only impirical evidence nowadays points to global cooling as a more likely outcome in coming decades in accord with normal solar cycles!
Time to get back to the science rather than this nonsense about a tax on carbon. It will achieve nothing other than impose a huge imposition upon the competitiveness of our industries & cost jobs.
This tax is dead in the water! Give it a rest. We've heard & seen enough.
It's not that easy
Taking a long view, there would not be price certainty on carbon if Australia did not put a price on carbon. And there are a number of reasons for this, 1) whenever pricing carbon is shelved, the uncertainty does not go away because it is always front and centre of the policy debate as the cheapest way to reduce emissions. Indeed most think it is a matter of "when and how much", not "if" we will price carbon; 2) if Australia does not price carbon internally, other countries will price our commodities and products at their borders. This phenomenon is already starting, with aviation coming within the EU ETS, and with India already pricing the carbon content of our coal that enters their economy. As some countries move and others don't, we will see more of these "carbon tariffs" popping up, and as far as Australia is concerned, perhaps it would be better if the tax is paid here, rather than at the border of our competitors?; 3) lastly, pricing carbon, if done right, can send a strong and relatively price stable long-term signal. It is most important to send the signals to developers of and investors in projects that will be around for 10, 20 or 30 plus years. If we do nothing this year on pricing carbon, there will still be uncertianty for such projects around what their carbon liabilities will look like in 15 years time. If we price carbon responsibly, there'll be some level of uncertainty, but not as much.
It's not that easy
Taking a long view, there would not be price certainty on carbon if Australia did not put a price on carbon. And there are a number of reasons for this, 1) whenever pricing carbon is shelved, the uncertainty does not go away because it is always front and centre of the policy debate as the cheapest way to reduce emissions. Indeed most think it is a matter of "when and how much", not "if" we will price carbon; 2) if Australia does not price carbon internally, other countries will price our commodities and products at their borders. This phenomenon is already starting, with aviation coming within the EU ETS, and with India already pricing the carbon content of our coal that enters their economy. As some countries move and others don't, we will see more of these "carbon tariffs" popping up, and as far as Australia is concerned, perhaps it would be better if the tax is paid here, rather than at the border of our competitors?; 3) lastly, pricing carbon, if done right, can send a strong and relatively price stable long-term signal. It is most important to send the signals to developers of and investors in projects that will be around for 10, 20 or 30 plus years. If we do nothing this year on pricing carbon, there will still be uncertianty for such projects around what their carbon liabilities will look like in 15 years time. If we price carbon responsibly, there'll be some level of uncertainty, but not as much.
Re: Certainty
Not having a price on carbon is not certainty, the power industry has repeatedly noted that power prices will defer investment decisions until we have a clear way forward pricing carbon.
Quite frankly, building new emissions intensive power stations, with the associated risk of carbon liability is not stupid.. its utterly reckless.
Do you think investors in James Hardie would have liked that corporation opening a new asbestos mine, or DuPont a new CFC production facility when the side-effects of those products became widely acceped.. along with the measures required to limit these effects.
We WILL have a price on carbon. Deal with a lighter transition now with some positive environmental spin-offs, or a heavy, costlier transition in the future.
What the EU experience demonstrates, is the failure to contain commercial interests from the political agenda. Concessions to steel, cement and power industry, along with lack of a credible independent arbitrator. Yet those that criticize AU proposal by referring to the EU, often seek the same conditions that have cannibalized the EU market.
Need for policy responsiveness
I think it's a valuable lesson in policy design and implementation. The EU Commission has a tough time getting everyone on the same page in terms of deciding what to do about key aspects of the EU ETS (excess allowances, levels of ambition, industry compensation etc). We have in Australia the opportunity to learn from these lessons and build a more successful ETS.
I think that much of the administrative structure that Garnaut lays out might just be what is needed to achieve that. Indeed, having an independent body advising on target setting and an independent agency advising on industry compensation, both operating within clear legislated parameters concerning the ambit of their tasks and the matters that they may take into account (such as the Reserve Bank board does), then policy could be set outside of the world of vested interests, and in a way that rapidly responds to the conditions affecting the market.
There is a good chance we could get this right, and in doing so become more competitive in the process by reducing our emissions more cheaply than our competitors.
Certainty
So this is price certainty we are told that business and investors require to "move forward". Wouldn't the most certain pricing signal be just not to have one? Then business and investors could just get on with life.
Deflation
How sensible,price carbon at zero and food prices,fuel prices and electricity prices ,not to mention airtravel can all drop.
Brilliant,billions have been spent on the structure that has been built all over the world to raise taxes,now it can all be wound back???
EU carbon: a zero-sum game?
a refreshingly frank assessmet from Mr Parkinson - I hope Julia and Bob read and take note before plunging headlong into this difficult and dangerous territory
carbon solution
If our govenment and industry had enough brain they could buy about 20-30 years worth of carbon emissions and forget about this farce that we are conducting at the moment