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Gold And Carbon - Overpriced Assets Hit The Dust

Commodities / Gold and Silver 2013 Apr 15, 2013 - 10:28 AM GMT

By: Andrew_McKillop


The US Federal Reserve, at the behest of the Obama administration and exactly like the central banks of other states and nations, at the behest of their political elites, traditionally plays a constant seesaw game of first seeking a higher value of the national money, then a lower value. Today however, this ritual for the US Fed and other central banks now extends to a badly hidden desire to reduce the US dollar's world value to nothing - more than simply easing the repayment of debt to foreign creditors payable in dollars! Unfortunately, this would also destroy the US economy. Obama like his lookalikes in other de-industrialized "advanced industrial countries", still has domestic industries that need to import raw materals, and like a strong dollar or national money, but also need to export their finished products, and like a weak dollar or national money. Squaring that circle simply isn't possible.

Claims that the US Fed is not merely rigging bond prices and interest rates, but also the gold bullion market, and commodities in general to artificially strengthen the dollar face serious problems of credibility. The Fed wallows in permanent schizophrenia, like its political masters and the lookalike political master who play the same game in other countries.

To be sure and certain gold prices are manipulated - at present downwards - by supposedly "shadowy" persons and institutions, but finding out who can always start with Goldman Sachs, not forgetting George Soros before we come on to the central banks themselves. For some other tradable assets the problem is much bigger - because these assets have no value at all, to start with.

Overpriced assets exert a "certain fascination" not only for traders and hedge fund managers. The elites also like them because they symbolize and deliver "value" for the tight knit bunch of crony corporate players who hover around the elite. The European Union’s 54 billion- euro ($71 billion) cap-and-trade system is now clinically dead or very close to that state, for one reason because this worthless hot-air "asset" was vastly overpriced for far too long.  Climate Commissioner Connie Hedegaard will this week unveil her temporary rescue plan.

The strategy, known as backloading, would delay the issuing of some classes and  types of new CO2 emission permits monetized and traded under the EU emissions trading system, or ETS. This affects about 12 000 power plants, cement factories and other "designated emitters" in Europe (and Australia). The simple problem is that Eurozone economic meltdown has slashed the need for emission permits as power demand falls alongside the demand for other product output from the designated emitters. The result has been a glut of permits chasing too few emissions. Prices have collapsed.

Hedegaard, playing the "ecological" card to its frayed limits says the low cost of the permits erodes the incentive for polluters to invest in "climate protection" technology, with the bill loaded onto what final consumers pay. Opponents include several EU27 governments starting with mainly coal-fired generator Poland, which is Europe’s third-biggest carbon emitter, and some major corporations which have not profited out of ETS like Germany's BASF, the world’s largest chemicals maker. In both these cases, official spokespersons clearly talk about artificial hikes to energy prices and carbon permit price manipulation. Hedegaard counters this with the claim that "you can be serious about global warming and have a healthy economy". In a March 27 interview she said: “I would have told you half a year ago (that) backloading is a no-brainer, everybody will understand that you can’t continue to overflood a market that is already overflooded. Now this has become extremely political.”

Hedegaard was a former Danish TV journalist and plays breathless and newsworthy. She never misses an opportunity to assume everybody is perfectly brainwashed about the existence of "global warming crisis". Scientists such as Freeman Dyson and Ivar Giaever do not agree with her - but of course they are "only scientists", of untouchable world renown, so what would they know about climate crisis comparred with a TV journalist?

Under any hypothesis today, Europe's carbon market is in deep trouble and the price of its emission permits could go even further south than the price of gold. In the case of "climate paper" this paper asset's value can fall to its true intrinsic value - of zero.

The European Commission’s emergency plan consists of changing some provisions of the ETS emissions-trading law with a hoped-for automatic vote by the European Parliament, followed by measures detailing the backloading process - which have not yet been decided. The vote may well not be automatically favourable to the changes, because EU member states and the Parliament are split on the proposal. The current "overhang" of permits is roughly 1 billion tons of emissions or a half of the average annual pollution limit set by ETS.

The European Commission’s draft fix involves delaying the sale of 0.9 bn tons-worth of permits and spreading their sales over the next three years, then adding 0.9 bn tons of permits to sales made in years 2019 and 2020. Inside the Parliament, both interest in, and support to Europe's 2008 "climate energy" package, and the 2005-era ETS is visibly waning, and this week's vote on backloading permits could well be the "test moment" when resistance against climate policies takes the political high ground.

EU member state governments may be prompted to start implementing their own climate measures, marginalizing the common emissions market, and sending a no-signal to similar initiatives and proposals - notably by Barack Obama in his attempts at "reviving carbon consciousness" in the US. By "consciousness" the business community wants tradable paper value, at the most-inflated possible level, with all the risks that entails - shown by what has happened to ETS emission permit prices since their all-time peak value of 31 euros per tonne in April 2006. In January 2013 they reached their most-recent record low of 2.8 euros per tonne.

Even the hopeful promoters of "climate boom and doom", like Hedegaard's political allies inside the Commission and Parliament only hope for a price recovery to about 8 euros per tonne - if all goes well for her "backloading" fix and fumble. Backloading, at best, is an attempt to buy time before a "deeper overhaul" of the system can be cobbled together - notably including a possible flat tax on carbon.

The European talk circuit for politicians and technocrats, splendidly and totally disconnected from the realities of Europe's terminal economic crisis, will continue to hear the gushing talk about the horrors of carbon from the dwindling band of climate crazies, but Europe has already achieved, and over-achieved its own carbon reduction commitments - due to recession, delocalization and mass unemployment. As BASF has officially said, the backloading circus show now clearly "undermines the trust in the market when we need investment certainty". Put another way, if Europe wants to further accelerate its de-industrialization and decline, all it has to do is play carbon-correct.

Poland’s Environment minister has specifically opposed claims made by other EU Environment ministers, including those of Germany, France and UK, that "eight years of climate action will be lost without backloading". Nice trading opportunities for carbon brokers and traders will be lost, perhaps, but not eight years of so-called "climate action". In particular, Polish minister Korolec says that naked political manipulation of European emission permit prices is "a serious threat for the existence of (ETS) by precisely undermining its market character by political intervention".

Europe’s politicians and technocrats, living their easy expense-account existence a million miles from reality, have continue to set unreal pollution-reduction caps, for the years 2013-2020, as if the European economy was still growing at 2.5% - 3.5% per year. Their metrics were set before the economic crisis, automatically creating "phantom demand" for emissions permits - which the technocrats then blindly and smugly issued, with their "carbon market maker banks" led by Barclays, Soc Gen and Deutsche Bank. The collapse of permit prices is a big surprise - to the technocrats - but not to the carbon market maker banks and related brokers and traders. The collapse was waiting to happen!

Today, rather like gold prices, the market is one of "no price floor or ceiling". Manipulating the emissions price up to say 50 or 100 euros per tonne CO2 equivalent would almost surely and certainly not bring the hoped-for results. Claims still made by Hedegaard that "high permit prices will create jobs" are patent rubbish. What high permit prices would cause is simple - an accelerated stampeded away from coal-fired (and even gas-fired) power generation in Europe, a collapse in baseload power capacity, ever higher electricity prices, and sure and certain brownouts and blackouts across Europe

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.

© 2013 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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