Why the carbon crash is good
Of all the equity and commodity prices that plunged last week in the global market carnage, the most dramatic falls came in the European and international carbon price. And, curiously, it all occurred to the sound of wide applause.
The European carbon price, known as EUAs, or European Union Emission Allowances, closed the week at 10.70, their lowest in almost three years, as fears intensified of a renewed debt crisis and an extended recession. They have fallen 38 per cent since March, when traders were confidently predicting a bull run for the carbon market before sovereign credit risk fears took hold again.
The international carbon price, known as CERs, or Certified Emission Reductions, closed near a record low of 7.6, and are now around 40 per cent below their March levels. Even the New Zealand carbon unit, known as an NZU, slumped to a record low of $NZ13.20, a slump of more than 20 per cent in a week. Ironically, all three units traded broadly steady or slightly up overnight on Monday as the European and US equity and oil markets extended their falls after the S&P downgrade of US debt. It appeared European utilities had decided that the carbon price was proving an excellent buying opportunity.
These are the commodities to which Australia will seek to link its carbon price when its fixed price period ends in 2015 and there were two main groups applauding the gyrations from the sidelines. The first and loudest were those opposing a carbon price, in any form or at any time. They have seized upon the political opportunity of slumping markets to ram home their message that the plan should be ditched. “Given the global economic uncertainty, the Australian dollar and the slump in retail trade, this is the worst time possible for a new tax to be imposed on Australian families and businesses,” said the Opposition’s spokesman on climate change Greg Hunt, who gives the impression of someone who has forgotten more about carbon pricing than most people will ever learn.
The second source of applause, albeit in a more discreet manner, were those who argue that a carbon price set by a market mechanism is the most efficient means to achieve the required abatement. It may be “ugly”, as Nigel Brunel, from New Zealand-based carbon trading firm OMF Financial described it in a report late last week, but a plunge in the carbon price is exactly what is supposed to happen in such circumstances – it’s what occurred in 2008/09, when the market last feared a slowdown in European economic growth. If industrial production is slowed, and less electricity consumed, there are less emissions and the abatement task is reduced. The number of buyers decreases and the price falls.
“Broadly, you could argue that the carbon price has responded precisely how it was supposed to,” says Emme Herd, from Westpac. “(A lower carbon price) means lower costs for business,” says Deutsche Bank’s Tim Jordan. “It acts as an automatic stabiliser.”
An apparent embarrassment for the Australian government is that all the international carbon prices are below the proposed starting fixed price of $23 a tonne, which will rise to $29/t by 2015 when the fixed price ends and is replaced with a market mechanism linked to international prices. If international prices remain subdued for a long period of time, it could lift the political pressure, but while some European analysts have cut their price forecasts for 2012, 2015 and the average price for the period out to 2020, their forecasts are still above the Australian government’s best guess of where the prices would be in 2015.
The key factors playing on the these forecasts are the start of the third phase of the EU ETS, which covers more sectors, such as aviation, and will issue less allowances. There is also expected to be greater demand caused by Germany’s decision to close its nuclear fleet. Deutsche Bank and Barclays Capital still forecast a 2012 close price of €17-19/t, and around €24/t for 2015. Barclays still expects the 2013-20 average price to be €30/t, albeit down from a previous forecast of €40/t.
The more volatile market is the CER, the market that Australian businesses will tap for international offsets. Its slump has been exacerbated by a sudden rush of new credits approve by the UN approvals body, just at a time when there has been little demand. The slump below 8 is considered to be a key barrier, because below this level Chinese developers don't consider it worth investing in abatement projects. The CER market is also awash with so called “industrial gas” credits, but Europe is no longer interested in these, and Australian firms are unlikely to be able to buy them either. So the market is expected to see self-correcting, a shortage of supply, and a sudden increase in demand – from the likes of Australia and other countries, but even Australia alone – would likely push CER prices up significantly by 2015 and beyond. Analysts believe it is highly improbable that the international carbon price would be below Australia’s proposed floor rice of $15. If it was, then the rush to buy credits would quickly fix that problem.
But while the market response to slowing economies eases the pressure on companies with significant carbon liabilities, it has a flip side for those wanting to invest in low carbon assets. The $23 a tonne price for Australia was a product of political compromise, but was considered to the bare minimum required to make the private sector shift funds to low-carbon investments.
The pricing concern is echoed in the UK, which wants a floor price for the electricity sector to guarantee investments in clean energy will remain attractive; and is now the subject of considerable debate in the EU, where some suggest that abatement targets should be adjusted when the economy slows, to maintain the impetus towards the green economy – which is still considered, despite all the fiscal problems, to be the most promising industrial growth sector in the European economy.
The subject of variable targets is also raised by the ClimateWorks think tank, which takes a much more optimistic view of the abatement potential in the Australian economy than federal Treasury. While Treasury believes that two thirds of Australia’s 5 per cent abatement target would likely be sourced from international markets, and thus slow rather than reverse the country’s domestic emissions growth, ClimateWorks believes that the introduction of a carbon price, along with various complimentary measures such as energy efficiency, will effectively remove barriers to much greater domestic abatement.
ClimateWorks director Anna Skarbek argues Australia could and should push to a 25 per cent reduction target – which would be about 272 million tonnes. She argues that one quarter of this abatement was already profitable before the government’s clean energy package, but was not being done because of regulatory barriers and split incentives. She says that 76 per cent of the abatement target would be profitable with the package, although some barriers still remain.
All in all, she concludes that around 133 million tonnes, or around 50 per cent of a 25 per cent abatement target, could be unlocked by the government’s package, and more would follow if the government introduced other measures, such as more ambitious energy efficiency and fuel efficiency targets.
This is broadly consistent with a whole range of international studies, including by the International Energy Agency. It’s not simply a matter of setting a market price that allows the private sector to find the cheaper cost of abatement.
Comments on this article
What will be the effect of a CO2 Tax?
“The very point of Australia’s carbon tax is to reduce global warming. How much will reducing 5% of Australia’s around 1.5% contribution of global CO2 emissions reduce global temperature by? If the amount is negligible (which it is), then given the present economic turbulence, what is the probability of Australia’s carbon tax inspiring major emitters like USA, China and India to make ACTUAL cuts to their C02 emissions (as opposed to mere carbon intensity) and economic growth? “
CO2 tax= bovine excreta
For starters it's not carbon pollution, it's carbon dioxide pollution except that CO2 is not a pollutant, look it up.
Was it Soros or Sandor who said many years ago " Air and water have been free commodities for too long. We must find a way to allocate them." And they have are doing just that.
Once CO2 has become a tradable commodity globally, the next step will be a global currency based on carbon.
Where once upon a time currency was based on the price of gold, in the future currency will be based on the price of CO2.
It all has nothing whatsoever to do with the environment, it's just a way of taxing the air we breathe.
Your simplifications have completely biased the results
Hi Peter,
I've had a further look at your emission cut realities analysis.
The simplification you mention has completely biased the results away from renewables. For example, in Example 4 (Wind + Gas), your assumption requires that wind must be supplemented by gas to make base-load equivalent has resulted in a requirement that every 1GWh of energy produced by wind be matched by an extra 1GWh of OCGT and another 1 GWh of CCGT.
Let us compare this with actual data from South Australia http://www.aemo.com.au/planning/0400-0031.pdf
In the last 5 years, South Australia has gone from 5.6% of its energy supplied by wind to having 20.6%. In 2010/11, that was almost 3,000MWh of wind energy. In that same time, the amount of energy from OCGT has actually reduced from 501 to 325 MWh, while the CCGT has increased from 2,800 to to 3,900MWh.
As a result of this increased penetration of wind, the emission intensity of South Australia has dropped from 0.72 to 0.56 Mt CO2-e over those 5 years.
Most of your conclusions on the poor economics of intermittant renewables rely on this assumption that renewables require a large amount of gas back-up, with a particular emphasis on the less efficient OCGT. The data from Sth Australia completely invalidates your assumptions and conclusions.
comment from Craig Bel
Are you making this up? I'd prefer you were honest about being a climate denier rather than hiding behind your 'market' mumbo jumbo - as if that postage stamp analysis tells us anything at all. I think this morning's stockmarket reports pretty much blow your 'argument' out of the water.
Joel Dodd - many questions
Joel,
You ask many questions. They cannot be answered in single posts here with a word limit of 250 words. If you are genuinely interested all these questions are answered on the web site where you've been reading "Emission Cuts Realities". For others just google it. Click on the "Renewable Limits" tab. You'll find the answers to all the questions you've been asking. Happy learning. :)
Joel Dodd, Solar costs
Joel, I suggest you google "Solar Power Realities".
In the mean time just think. The average wholesale price of electricity is about 4 c/kWh. State governments are paying feed in tariffs of around 42 c/kWh. Plus we have direct subsidies and Renewable Energy Certificates subsidising the upfront costs. That is well over ten times the cost of conventional generation. There are also very high additional transmission costs caused by intermoittent output of renewable energy generators.
Windora solar power station in Queensland costs 33 c/kWh and the CO2 avoidance cost is $6000 per tonne avoided. That's 240 times the starting carbon price.
Free electricity is 10 times more expensive?
Peter, can you explain how electricity from photovoltaics on the roof of a house is ten times more expensive than conventional power supply, when it is free after the initial capital outlay? PVs pay off their carbon footprint in 1.6 years depending on what city you're in, and pay off their capital cost in quite a few more years. As the price of electricity rises the pay off time decreases.
I'm not convinced that the government even needs to block nuclear anymore. Where will you put it? If its on the coast and close enough to the grid to not need excessive transmission lines, it will be in someone's back yard. Who is going to finance it? Who is going to insure it and how much will that cost? Where will the technology and expertise come from as other countries lose interest in nuclear? What environmental laws will we have to brush aside to allow a nuclear plant to get through impact assessment requirements successfully. Is a technology that requires access to a vast water supply (in our case on the coast) really viable when there is uncertainty about future sea levels?
What if we could get cheaper carbon abatement in the short to medium term, through carbon capture in vegetation and soil, simultaneously improving biodiversity and providing an income source in rural areas? Combined with gas and energy efficiency initiatives this could be the bridge we need to eventually get to zero/low emissions energy production.
Joel Dodd, re your questions
Joel Dodd,
Thank you for your comment. You pose many questions and I can’t answer them in posts of 250 word maximum. However, if you are interested you will find the answers on the “Renewable Limits” tab of the web site where you’ve been reading. (I can’t post the name of the web site or my comment will be deleted). Start with the TCASE series to get the necessary background.
You mention full life cycle costs. That is the correct way to compare technologies. But it is not what this paper was about. It is not relevant for that analysis. It is a different subject. The best comparison of externalities is ExternE (google it).
Regarding carbon pricing and energy efficiency these are also different issues. Please see this comment http://www.climatespectator.com.au/commentary/australia-can-cut-more-carbon#comment-32786
Also google “CO2 avoidance cost with wind energy in Australia and carbon price implications”
Regarding demand assumptions, the demand used is as per ABARE projections. If you are thinking about proposed changes in demand profile this will help:
‘Zero Carbon Australia – Stationary Energy Plan’ – Critique
Regarding solar panels: they are an enormous waste of money. The electricity costs about ten times the cost of conventional generation. We should stop mandating and subsidising renewable energy. The government is irresponsible and incompetent to be funding such schemes. And all the time blocking the one technology that can reduce emissions substantially and economically – nuclear.
Its all in the assumptions
Peter I enjoyed your article but don't agree with your assumptions. I think you have to include the full life cycle costs to make a fair comparison. Also the analysis would be more thorough if it examined the potential impact of a carbon price in different scenarios. Then the cost per emission reduction becomes irrelevant and you can just compare the costs under different scenarios.
I also don't agree with teh assumption that you can ignore energy efficiency and assume that the demand will remain the same and that the power generated must be base load plus back up. The low carbon economy will be or has to be more complex and adaptive than that. What if more households install solar panels? What about cogeneration?
I also didn't see the underlying capital costs and running costs for the different technologies on which your analysis is based. I must have skimmed over that but I have to assume you got them right. Have you included the insurance costs on nuclear for example.
Finally, it is quite a big assumption that nuclear is even on the table. If countries like Japan and Germany are committing to phasing out nuclear, what makes us think we could do a better job?
David Osmond, Clarification
David,
Assumption 3 is correct. And yes, the analysis (intentionally simplified) looks at replacing the coal component of the generation mix.
I’ll expand my answer to your first question to clarify. You asked asked:
Peter, I've had a brief look at your Emission Cuts Realities work. The main issue I have with it is you've changed the relevant question from "how much does it cost to build generation capacity with a variety of energy mixes that will reliably meet demand" to a question of "how much does it cost to build a generation capacity that will behave like a base load power station using a variety of energy mixes".
The paper addresses the question first stated. The analysis is intentionally simple. The coal power stations are replaced by other alternatives. The generators that provide peak and intermediate load are not changed. They are as per the ABARE projections. So only the coal power stations are replaced with alternatives. Coal provides about 80% of our electricity, so although simple, the analysis is considered to be educational. More sophisticated analyses do better, of course, but lose the generalist audience for which this paper was intended.
Can I urge you to read the paper first. I’d suggest you download the pdf version because it contains footnotes in the text and appendices.
These other two papers further address your questions:
‘Zero Carbon Australia – Stationary Energy Plan’ – Critique
Replacing Hazelwood coal fired power station
Please clarify for me
Peter, your assumption # 3 states:
"The energy deficit caused by decommissioning the coal fired power stations is supplied by replacement generating capacity. Five options for replacement generating capacity are considered. Each option comprises a mix of a few technologies that in combination are capable, theoretically, of providing the energy and the power that would have been provided by the coal power stations. That is, the mixes of replacement technologies must be capable of providing the same power quality, and of supplying it on demand, at all times".
Does that not imply that you are making your replacements for the coal power station have the same characteristics as a base load coal power station? Haven't you ignored all the intermediate and peaking power plants that helped the original coal power station meet demand? These same plants could help the replacements also meet demand, whereas you're analysis seems to assume completely new gas plants will be required to be built as back-up.
Re: Trading in Hot Air
Geoff Sinclair,
You says: " Having a trading scheme allows us to achieve a certain level of emissions reduction at the minimum economic cost and in a way that adjusts with the economy. "
That would be theoretically true if it was a market mechanism. However, it does not apply when:
1. We implement many market distortions such as renewable energy targets, renewable energy certificates, feed in tariffs, direct subsidies for renewable energy, pink bats home insulation programs, green car schemes, green loans, cash for clunkers, tax breaks for fossil fuels, and on top of all that we ban the one technology that could make a real difference to cutting emissions - nuclear.
2. we are going to buy 66% of the permits internationally but there is not established international scheme that is economically efficent
3. The administraion costs, not just for the bureaucracy bu also for industry, will be very high
4. The underlying purpose of the scheme is wealth redistribution, pork barelling and implementing political agendas
5. It is not a market mechanism at all. It is a government intervention to implement a government policy.
Re: Trading in Hot Air
Graham
Emissions of greenhouse gases does, in fact, respond "on the basis of markets". For example, Portugal is in the middle of an economic slump at the moment and their emissions are down 17% from 1990 levels. Regulators, therefore, need to impose less change to meet a given level of emissions reduction and, as a result it is entirely appropriate that the price should fall. Similarly, when an economy is booming and emissions are increasing as a result, the price should rise.
Those who say it's about money might be right, but in the wrong way. Having a trading scheme allows us to achieve a certain level of emissions reduction at the minimum economic cost and in a way that adjusts with the economy. If you think that's bad, well, move to North Korea. Presumably you would also believe in nationalisation of mines, because that would be consistent with your argument (i.e. that people shouldn't profit from doing something useful).
David Osmond - Correct, and that is what we do
David,
Thank you for your comment. However, your “brief look” has misunderstood. The question asked and answered is as you stated it first “how much does it cost to build generation capacity with a variety of energy mixes that will reliably meet demand”
The analysis is for alternatives to provide the same demand profile as we have now. It is not an analysis of baseload generation options.
The least cost way to provide low emissions electricity generation to meet the actual demand profile, in the absence of vast hydro resources which Australia does not have, is with the mix France uses: about 75% to 80% nuclear, plus 20 to 25% hydro (or in Australia’s case pumped hydro), gas, coal and renewables. This excellent page http://www.rte-france.com/fr/developpement-durable/maitriser-sa-consommation-electrique/eco2mix-consommation-production-et-contenu-co2-de-l-electricite-francaise shows how France’s electricity is being generated now, today. (scroll mouse over area chart and notice how the other charts change). France’s emissions from electricity generation are about 15% of Denmark’s, the pinup country for the renewable advocates.
France has about the lowest cost electricity in Europe and exports electricity to neighbouring countries.
Australia could have low emission electricity with a similar mix of generators.
For pumped hydro capability and cost for Australia google: “Pumped-hydro energy storage – cost estimates for a feasible system”
We need to match supply with demand, not make baseload
Peter, I've had a brief look at your Emission Cuts Realities work. The main issue I have with it is you've changed the relevant question from "how much does it cost to build generation capacity with a variety of energy mixes that will reliably meet demand" to a question of "how much does it cost to build a generation capacity that will behave like a base load power station using a variety of energy mixes".
In doing so, you've ignored the fact that demand is highly variable, and therefore ignored the cost of all the additional peaking plant that is required to help baseload power stations match supply. You've only added this cost to intermitent suppliers, and only to the extent of making them behave like a baseload power station.
The end result is that you've proved it is cheaper to make a baseload power station behave like a baseload power station than it is to make an intermittant power supply behave like a baseload power station. The question of what is the cheapest way of matching supply with demand remains unanswered.
Joel Dodd, good questions
Joel Dodd,
I posted a reply and posted links, but its been deleted. I suspect the Moderator does not approve of the links. I'll post my reply again. You'll have to google the references.
You asked the right questions. The answers are here:
1. Emission Cuts Realities
2. Alternative to Carbon Pricing
Scroll down to the comment "Nuclear cheaper than coal in Australia. How?" It was posted on 19 Dec 2010 at 3:57 pm.
Apples with apples
Peter if you want to make a case for nuclear against renewables then make your case in terms of:
1. Startup cost per megawatt
2. Running cost per megawatt hour
And compare the different technologies based on that alone. With an ETS we eliminate the question of how "green" the technology is. We can just look at the real cost. That's why we can compare apples with apples.
I'm interested in what the current figures would be.
I'm also interested in how much coal was subsidised or effectively subsidised when it was "starting up". It would be irresponsible of government to implement an incentive to reduce emissions without encouraging the development of the technolgies that have the potential to provide low emission competition. If that has to be through low interest loans and subsidies then so be it.
There is an alternative, but its blocked
Thank you for your response. But more issues:
Renewables are not economically viable and never likely to be. Without being mandated they would not be built. The carbon price can never be high enough to support them. We’d be broke with a carbon price high enough to support renewables. GDP per capita growth would have to be cut to -1.7% pa for 8 years to achieve the 2020 emissions target without international trade in emissions. [this is a limit assuming energy intensity is inelastic to carbon price; there is some elastricity so the GDP per capita growth would not be as bad as the limit figure qouted here]
If we want to make substantial emission cuts fastest we should stop wasting our wealth on the renewable dream and remove the impediments to low cost nuclear. Until the population is ready to do embrace nuclear we are better off to stick with coal.
emissions targets versus intensity targets
The collapse of permit prices during economic slowdown is still bad. The boom-and-bust it creates for the renewables industry delays its maturity. And when the economy recovers, since little progress will have been made in reducing emissions intensity, the carbon price will skyrocket - potentially triggering price cap rules.
China's intensity reduction target might actually work better as the global policy, though it's less clear how to represent that as a market mechanism. But the combination of growing economies using an intensity target with shrinking ones using an emissions target is the feeblest limit overall.
Koozzoo News
Koozzoo News... Who is going to take that seriously?
Global Finance
Quite right Craig. In spite of all the spin by our esteemed Treasurer, Australia lies third in the list of the global top ten basket cases behind Ireland and either Iceland or Greece depending on to whom you listen.
Only if there isn't an alternative
Peter, I'd agree with you only if there wasn't an alternative, and one that could be the driver for a new kind of economy. But there are alternatives to fossil fuels. They're just more expensive, have technological issues and/or capital investment hurdles. With an ETS fossil fuels compete on an equal playing field with renewables, because the emission permit proxies as a legacy cost. So at first with a low price, coal will continue to be more compettive than the rest, and as the price increases it will make good business sense for coal users to look at energy efficiency measures, buying carbon capture credits, or building their own carbon capture, that they currently have no incentive to pay for. Meanwhile the costs are passed on to the consumers who will have a similar incentive to be more efficient.
Then as the price increases further due to governments going for stronger targets, or the market, coal and oil will find itself with some real competition from alternatives, which would have made inroads due to more investment interest, government loans etc allowing the startups to get technological breakthroughs and economies of scale. True competition in the energy market would then stabilise energy prices and drive innovation even further.
I don't think it matters whether our reductions will make a difference (which they will). This is an opportunity for Australia. If the world's economy of the future revolves around trading in carbon and low carbon technology, Australia had better be getting ready.
What a crock
I suppose that the true believers will be in denial when they check this out
http://vidcall.com/index.php/videos/show/2090/#chooseVidcallMailWin-coming-soon
Joel Dodd
Joel Dodd,
The problem with your idea is this bit:
" The government may set this cap based on international agreements and/or internal decisions about what is best for the country."
While the government is controlled by Climate Alarmists and people who have not a clue about the economic consequences of their proposed polices and don't care a hoot about people's welfare, we are in big trouble.
Cap and trade
Graham, how a cap and trade ETS works:
The government sets a cap on the amount of emissions the country's most carbon emitting companies are allowed per year. The government may set this cap based on international agreements and/or internal decisions about what is best for the country. The cap is represented by a number of permits to emit CO2 that will be up for sale. So for every tonne of carbon dioxide equivalent a company emits, it can either try to eliminate that by being more efficient, or offset it by buying a carbon credit from an accredited carbon capturer, or buy a permit. Credits and permits can be traded so the price depends on the market. How many permits are available versus how many are needed.
When the economy takes a downturn then less energy is required and less permits are needed so the price goes down. When more carbon capturers come on line to make money from the new green economy, providing jobs and income in rural areas, then the price goes down.
When government gets really serious about cutting global emissions to levels that can sustain our way of life then they must put far fewer permits up for sale. Then the price will increase. I suspect the price needed to make a real difference will increase to levels that will make the proposed "tax" seem miniscule. In other words, we don't pay enough for our energy. The third world and future generations pay our bills.
Why the carbon crash is good?
I agree with Giles. His article shows the folly of trying to introduce a carbon tax in the present economic climate. Indeed now is the time for the Government to start subsidising genuine alternative ( to coal generated energy replacement initiatives, create local employment and value added exports. The solar panel industry amongst others, could be developed further here instead of importing from Europe or China. Anything they can do we can with some direct action. The carbon tax can be put on the backburner for now.
g
Trading in Hot Air
I thought the carbon tax was supposed to finance climate preservation measures.
Since when did the climate respond on the basis of markets ?
A carbon tax is nothing but a whole new industry/bandwagon stackmarket trading in an intangible commodity (that no-one can properly value) in a way that people have worked out how to make money.
This has absolutely nothing to do with climate at all!
I am suspicious of anyone who says they support the TAX because only those who have worked out how to make money out of it would sensibly support it.
Why the Carbon crash is Good
Gavin I think in a rational world your position would b correct and the CO2 tax in Australia would be delayed but we live in Australia where the Greens hold all the bargining chips so a delay is most unlikely. The Greens have no regard for external events and really don't care if they trash the economy so stock market collapse is no indicator to a change in policy or speedof implementation. The one thing that the market crash ensures is that the ALP have no chance to return the budget to surplus in 2012/13.
The market collapse and almost guaranteed rising unemployment and faling house prices will sweep the inept Libs to power in a landslide as the ALP will be seen to have been very poor economic managers (they do need to taksome blame). The Carbon tax will be scrapped and Australia will then wait for an international agreement on an ETS and then join no matter who is in power.
Direct Action would be better than this.
As I said in my comment to "Carbon offsets near record low, worst performing commodity" on climatespectator yesterday; Direct Action would be better than this!
Climate Spectators should read that news item from Reuters. Why would Australia participate in these failing and corrupt carbon off-set schemes, managed by an incompetent UN panel? This story makes the liberal party's "direct action" policy look good!
Re: Further to "Very Good Article" by Simon Trumble
See comments regarding Peter Lang's credibility in every article...