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Market Oracle FREE Newsletter


Low Carbon - High Political Price

Politics / Climate Change Jul 13, 2012 - 09:52 AM GMT

By: Andrew_McKillop


Best Financial Markets Analysis ArticleSpeaking on July 7, Poland's environment minister Marcin Korolec used a roundabout way to say how strongly his government feels about moves to save the European mandatory greenhouse gas emissions trading scheme, the ETS. He said: " The ETS is delivering on its target to reduce greenhouse gas emissions at the lowest possible cost and there’s no need to “manipulate” the market after a slump in industrial output drove carbon prices to a record low".

He then said the real reason why Poland intends to boycott any further raising of carbon prices in Europe - because proposed European Commission measures to prop up flagging carbon market prices would lead to much higher energy costs and could aggravate Europe's always growing economic crisis. The Polish argument is that Europe needs low energy prices and the supposedly "dangerous" shrinkage of carbon prices in the ETS system only shows the system works and is adjusting to the economic situation. Europe already is emitting less CO2.

Since its recent lowest-ever market price for a permit to emit 1 ton of CO2, of 5.99 euros ($7.36) in April, the ETS has basically tracked equities and oil prices, to the chagrin not only of Commission mandarins committed to "making carbon markets work", but also several member state governments like the UK government. In this case the Energy Technologies Institute (ETI), created by the UK government and six leading energy sector corporations with the goal of "accelerating the development of affordable, clean energy technologies", has gone to the outermost reaches of fantasy.

The basic forecasting tool used by the UK ETI is its Energy System Modelling Environment (ESME), claimed to be able to model and select "targeted investments in engineering and technology demonstration projects". The carbon price connection is simple: its ESME scenarizes future carbon costs in the UK of 500 GBP per ton, about $750 per ton. (page 7).

This ESME fantasy price is easy to relate to regular everyday energy costs. On a standardised basis of 1 ton oil equivalent (7.3 barrels) of liquid hydrocarbon fuel producing about 3.1 tons of CO2, an emission cost of $750 per ton of CO2 would be equivalent to a tax of 1.33 GBP or 2 USD on every litre of fuel - about $7.70 added to the price of every 1 US gallon.

The simplest question is: who could pay energy taxes like that ?

For Europe in particular, the simple fact that elite mindsets are stuck in these clouds of fantasy should itself be alarming: the 17-nation eurozone economy will shrink 0.3 percent this year, according to the European Commission, unemployment rose to a record 17-nation average of 11.1 percent in May, and economic confidence slumped to the lowest since January 2010 in June. European services and manufacturing output contracted for a fifth straight month. Showing the inability of mandarins to ever change course, until pure and simple disaster strikes, the emission caps set by the ETS since 2005 on more than 12 000 industrial, power generating and other manufacturing and commercial sites and facilities were fixed before the economic slowdown. In the 2004-2007 period the European economy, by its own slow-growth standards, was growing quite rapidly and by its high unemployment standards had relatively low rates of joblessness. Today, that is a receding golden age.

Europe's carbon fantasy economy however now has finance industry support from greedy traders, and corporate cash-gouging support ranging right across the energy sector, from fossil to renewable energy. Solid lobbying action in Brussels, to steel the Commission's nerves and act to push carbon prices higher, has recently included major campaigns from parties including Acciona SA of Spain (a troubled solar power plant operator) and Royal Dutch Shell Plc. Their goal is to force the EU to curb the oversupply of carbon emissions allowances and start talks about longer-term and yet more intense carbon targets for Europe. Climate Commissioner Connie Hedegaard is aiming to present this month (July) a proposal for postponing the auctions of some allowances in the third phase of the ETS that starts in 2013, which in the insiders-only world of European carbon finance and trading was set as becoming a "pure market mechanism" after the 2008-2012 phase ends.

Known as "backloading" the aim is to tighten the amount of permits for the 12 000 affected facilities and activities, from January 2013, producing a fillip for current-generation permit prices, whose ever shrinking trade value has a negative image - for those who profit from them. This new attempt to "save the market" was one step too far, for Poland.

The new Commission proposals will be published alongside a report on the functioning of the carbon market. One almost certain component will be a proposal to permanently set aside a number of permits in the third phase (after 2013) to tackle the rampant oversupply that has built up since 2008, caused by economic slowdown, delocalization, deindustrialization, renewable energy development, energy saving and other factors. In other words, the ETS will need to be at least as manipulated as it is today - despite that being hard to believe as being humanly possible. Its proud claim to be a "pure market mechanism" is simply nonsense.

The first problem is that a permanent set-aside of allowances would mean tightening the EU's carbon emissions reduction targets and the Commission does not have a political mandate to do that. Any further tightening of the current EU goal (a 20% reduction in CO2 emissions by 2020) would surely and certainly result in more industries delocalizing out of Europe. While this would be of almost no interest to cash-grubbing ETS traders, it would also mean that oversupply of credits, and low market prices would likely continue - affecting their trading operations, profits and annual bonuses. In other words a real crisis !

Showing its mandarin-style "technocratic" management style, Commission employees charged with solving the ETS problem are said to be arguing for an increase in the "1.74 percent linear factor", jargon for the already-incorporated annual shrinkage rate of emissions allowances, which in fact is vastly too low, and distanced by the rate of industrial collapse and growth of non-fossil energy output in Europe, cutting CO2 emissions.

Some scenarios for a higher "linear factor" go as high as a 40%-plus cut in EU27 CO2 emissions on a 1990 basis, by the 2020-2025 period. By of before 2040, the cut could attain 65%.

To be sure, the CO2 emissions cutting numbers are simply a surrogate for the percentage share of renewable energy in Europe's energy mix needed by certain forward dates. Just as certainly, the ETS is not the right tool to stimulate a shift toward renewable energy sources, for a host of factors. These especially include national politics, with Germany's Energiewende and its link to the May 2011 nuclear exit decision of Germany providing all the proof that is needed.  EU countries which still utilise large amounts of coal for power production (which include Germany) can for example move to coalseam gas extraction, and use of that cleaner gas to produce electricity, but doing this at the forced pace needed to prop up the "vanity finance circus" of ETS is almost certainly doomed to failure.

The former one-size-fits-all ETS solution and already divergent national interpretations of the December 2008 EU climate-energy package are both harbingers of changing energy futures for Europe. Soon, as Poland's Environment minister also said on July 7, "all countries in the EU (will) have their own renewable energy goals,”, in a major political change running exactly in the opposite direction to the federalizing and centralizing goals of Commission mandarins and a few national leaderships. Claiming that Europe's ETS was created as "a tool to cap emissions", and not a plaything for the dysfunctional and corrupt financial industry is disproven by the one-way track of ETS towards oblivion, and its near-zero role in incentivizing modern energy technology.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2012 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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