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Trading Lessons

Clean Energy Mercantilism And The Low Carb World

Commodities / Renewable Energy Nov 29, 2012 - 10:09 AM GMT

By: Andrew_McKillop

Commodities

CLIMATE CHANGE MOVES ON
Until late 2012 the climate change policy line of OECD leaderships was stuck in the rut of claiming that global warming from human CO2 emissions was a crisis, mitigating this needed urgent measures to "monetize carbon", and this financing would help fund the also-urgent energy transition to clean energy. The policy line was market liberal; the policy goals only focused energy, the environment and climate. The concept of "the sustainable economy" was left for conference speakers and academics to play around with. Using clean energy to bolster state revenues and attack the fiscal crisis at home, or change global trade relations and the economy worldwide, was off the menu.


China's fantastic dominance of world trade and its massive trade surpluses are able to be explained with one word: coal. China, itself and alone, consumes close to 3 billion tons of coal each year, about 45% of world total coal consumption. For China, coal-fired mercantilism is a proven success: its foreign exchange reserves are the world's biggest because it runs a constant, massive trade surplus.

This however is a 19th century model. Coal has few or no friends today, even in China and India, due to saturation consumption, infrastructure and transport costs, and to its massive pollution when used "as is", as physical coal, 19th century-style. Clean coal is a technological possibility, but its costs are high. The de luxe additional concept of global-scale CO2 capture sequestration (CCS) is out of reach: at minimum, using IEA estimates, full CCS in the 28 IEA-menber OECD countries, if it was technically feasible, would probably cost more than $5 trillion. Despite coal's global energy role now being neck-and-neck with oil (about 31% for coal and 33% for oil), both are unrelated to the global energy revolution shifting energy supply away from oil and coal, to abundant and clean-burning gas and the zero emission renewables, and a constant shift to energy conservation and energy efficiency.

The future is Low carbon. This is now a global consensus, extending out and away from the OECD countries, to the G20 group and Low income developing countries.

CLEAN ENERGY MERCANTILISM
The rise of clean energy mercantilism has already begun, and includes Germany as its first poster child with its Energiewende - and Germany's massive trade surplus. The supposed claim that clean energy is a guarantee of economic failure, for outdated politicians with nostalgic ecological ideas no longer washes. In Europe, Germany's economic success and large trade surplus creates the urge to emulate Germany's policy set, including its energy-environment policies. The USA of Obama has heard the clean energy message and is set to follow suit, as are Japan, Thailand, South Korea, Singapore and other non-Chinese, non-Indian Asian economic success stories of the recent past or present.

For this to happen, the level playing field has to be created, even if it means dumping the 19th century Ricardian free trade notions of the World Trade Organization, arguably a 19th century-minded entity happy to see King Coal wreaking massive damage to the planet.

In the current economic crisis context in the majority of OECD countries, moving ahead rapidly is no longer a "nice idea" but obligatory. The fiscal cliff draws nearer, not only for the US but for a long list of countries. This has triggered the realization that raising carbon taxes in an intelligent way, which favours reindustrialisation, creates jobs, and pushes down the trade deficit is a major new step along the clean energy path. New carbon taxes as already proposed by the Obama administration are set to avoid the failed, discredited and over-complex "cap and trade" concepts of the past decade. When the fiscal energy transition is backed by the very rapid growth of renewable energy supplies, and explosive growth of world gas reserves and gas supply capability, the writing is on the wall for "physical" coal and for oil.

Flexing its muscles, the State can move ahead with the Low carbon energy quest using an integrated set of policies that seek to resolve the fiscal deficit, trade deficit, deindustrialization and unemployment crises that are the bane of nearly all OECD countries, today.

We can expect major developments in this field, in 2013, as the previous model for climate change mitigation - only focused on carbon producers - shifts to carbon consumers, and carbon exporters. For the OECD group of countries, where the carbon obsession has radically increased final user prices for energy in the past decade, this new policy bundle with new goals will be unlikely to futher raise energy prices, if only because of their present extreme highs. At one and the same time the end of the line for tried-and-failed low carbon fiscal policies, and the start of clean energy mercantilism, the outlook is more positive than it has been for a straight decade.

THE OLD MODEL
Low carb previously meant High cost. The real world energy situation in the OECD group is High cost, especially for energy consumers, but the US shale gas revolution and growing overcapacity of solar and windpower production capacities, and fast-declining prices for solar PV in particular, signal the way forward. In almost "another time" and certainly another context, at the Davos Forum in January 2010, Dominique Strauss-Kahn, then Managing Director of the IMF said the world must adopt a low-carbon model as it rebuilds from the global economic crisis.

To do this, he added, the IMF was working on a set of proposals for the “Green Fund” that would help fund the huge sums needed by selected small island states and low income developing countries to confront the challenges posed by climate change. Through actions like producing new and additional SDRs (Special Drawing Rights), selling gold of participating OECD and Emerging countries held by the IMF, applying a turnover tax on financial transactions (the "Tobin tax"), extending carbon taxes and emissions trading to the global level, or by other methods this Green Fund, Strauss-Kahn thought, could raise its operations to $100 billion a year "in a few years".

At the time, as today the rationale of the IMF was that fighting global warming (AKA climate change) was extremely urgent. The rationale continued that the most-exposed victim countries of possibly or probably "cataclysmic global warming" are a number of small island states, and mostly African low income countries. These global warming victims, Strauss-Kahn and the IMF said in 2010, were obviously unable to finance the measures they needed right now to tackle climate change, but "traditional" developed country donors could not help them because they were (and are) mired with enormous debts from their recent styles of government spending, from new spending to combat the global economic crisis in major part due to their flaccid, deindustrialized economic structures.

At the time institutions like the IMF and the related World Bank (IBRD) estimate that fighting global warming will need epic spending, certainly trillions of dollars per year. Yhey saw this as only a Developing country need, and their policies were near exclusively spending-oriented..

In 2010 and even more certainly today, the potential for the IMF to "print new SDRs" to fund the fight against global warming is almost zero. The SDR reserve asset was created by the IMF in 1969 on the back of the London gold pool crisis of 1968, "to supplement member country official reserves". As of 2010 SDR allocations totaled about SDR 204 billion (about US$ 320 billion) and have failed to grow in any significant way since 2010. The IMF's global warming finance gambit, which Strauss-Kahn said in 2010 would or could need a total of up to $750 billion of allocations, can be seen as a failed attempt to increase its SDR pool, possibly or probably for "non-climate uses".

ONE WORLD OR NONE
Both internal and published documents from the IMF show some kind of "carbon tax" is in its view basic and unavoidable, for the fight against global warming, but the economics is that the collective costs of reducing emissions will be lower when more countries participate. This is the inconvenient truth — emission reductions solely by those countries historically responsible for the accumulated stock of emissions (AKA as western developed OECD countries) will not come close to solving the climate problem as it is presented and promoted by institutions like the IMF and IBRD, and by global political leaderships.

This is fine on paper and in flowing speeches, but the reality is otherwise. Recent IMF Climate Policy blog material (in November 2012) includes this summary:  "Efforts to negotiate a successor to the Kyoto Protocol, and to form domestic climate policies (in Emerging economies) have intensified in recent months and are now at a critical and difficult point. At the same time, policymakers are searching for new sources of sustainable growth to recover from the deepest economic crisis in decades, and in many cases also the means to cope with severe fiscal pressures exacerbated by the crisis".

It has taken several years (nearly 3, since 2010) for institutions like the IMF to admit that carbon taxation, trading and pricing cannot solve the OECD's fiscal problems. The long-proposed US emissions trading system for example, which is now clinically dead, was targeted at raising about $870 billion over the 8 years 2011–19 — roughly 15% of the then-forecast cumulative US fiscal deficit and about 0.5% of cumulative GDP. Much more likely, and already aired as several trial balloons by freshly re-elected Obama's Administration, a straight carbon tax can raise the same amount of Federal taxes, without a single carbon trader placing his hot bets and losing other peoples' cash.

Operated upstream, on major industrial and commercial energy consumers,  levies of this type are less distortionary than other taxes, such as corporate income tax, value added taxes, and social security contributions paid by lower-income workers.

Carbon trade measures and especially border tariffs — which place the burden of emission pricing on the exporters who consume carbon emitting fuels to make their export products -- are a sure and certain additional or alternative measure, especially in any country running a major trade deficit. The counter arguments that these tariffs are "anti free trade", are "non Ricardian" and the slippery slope towards protectionism, and will need a change of World Trade Organization rules, are losing their hold on policy makers and political deciders as the OECD's economic crisis drags on. The new keywords are repatriating industry and creating jobs with clean energy at home. Anticipating the response from Asian exporters, OECD policy makers now retort: When or if China and India decide to cut their coal consumption, they can give us lessons on protecting climate stability.

POLLUTER PAYS
At its simplest, this is Polluter Pays. Until recently, the conceptual basis of moving us into the Low carb world was to hit the producers of hgh carbon-emitting energy, restricted in fact and above all in Europe, to coal-fired electricity producers, iron and steel makers, and cement producers. These consumers of high carbon energy, producing electricity and energy-intensive basic materials, upstream of final energy consumers, were shielded by the so-called "grandfathering principle". In other words the allocation free of charge, by European governments of allowable carbon emission limits, with emissions and carbon trading to penalize over-consumers and high emitters, forced to buy additional allocations. These of course "passed on" their higher costs, as higher priced energy and energy-intensive materials while spawning an opaque, corrupt and inefficient emissions market whose credibility is now close to zero.

This had no impact on offshored manufacturing of high carbon goods imported and consumed at home, with the jobs exported and the inevitable trade deficit to finance, or the offshored services also supplied from high carbon countries - a shorthand term for coal-fired China and India. For at least the last 7 years since the 2005 start of the world's only and probably unique mandatory carbon emissions trading system (the ETS) in Europe, this has offshored manufacturing and services out of Europe, to Asia, to such an extent that since 2008, European carbon emssions are falling at an annual average rate of 2.5%. EU27 trade deficits with China and India have grown at about the same rate.

For the US, and for Japan, the same offshoring process operated, but without a formal and mandatory carbon trading-based emissions control system. The economic, employment and trade deficit impacts were and are totally predictable. Raising taxes on domestic energy users, not foreign energy producers, in the developed countries to supposedly "protect the climate" has almost certainly not protected the climate, but very certainly has severely damaged the economy of the OECD developed countries.

Barack Obama's re-election and his very first press conferences since re-election underline the new policy line that is emerging. In the US, today there is wide cross-party support in Congress for rapidly applying a carbon tax, initially without the frills of emissions limits, credits and trading. The cross-border issue is also no longer taboo: repatriating industry, and reindustrialising the hollowed-out economies of the US, most EU27 countries and even Japan makes it increasingly allowable to apply carbon taxes where they will really have impact: on high carbon manufactured goods, and services offshored to China and India for more than a decade, and recently with the additional "nice image" of fighting climate change.

By Andrew McKillop

Contact: xtran9@gmail.com

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 advisor.


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