Carbon Emission Trading

There have been a few interesting pieces around recently on the subject of carbon emissions trading. The first is The Economist (subscription only) noting some of the failures of the European carbon trading market, which has seen prices of CO2 emissions collapse due to the issuing of too many free permits.

In order to get industry to swallow this scheme, allowances were handed out free to companies, rather than being (as economists wanted) auctioned. In power-generation (Europe’s most-polluting industry) companies passed the price of carbon credits on to customers and pocketed the value of the allowances. According to a report by IPA Energy Consulting, Britain’s power-generators alone made a profit of around £800m ($1.5 billion) from the scheme in its first year.

As the article notes, this failure is not a reason to rubbish the idea of emission markets altogether, but it is a good lesson in the mistakes that can be made and the need to either slash the number of permits or auction them off if the scheme is going to be worthwhile.

Another interesting piece is in this report from the World Bank(warning: large pdf file) where they note the fact that while in Europe people are paying $20 a tonne for the right to emit CO2, in the developing world land clearing releases CO2 to generate land worth far far less than the value of its implied carbon credits.

Throughout the developing world, farmers fell trees for sometimes small and ephemeral gains, creating croplands and pastures worth perhaps a couple hundred dollars a hectare. As those trees burn and rot, they release carbon dioxide
(CO2) to the atmosphere—perhaps 500 tons a hectare in dense rainforests. Meanwhile, the European Union (EU) market values CO2 abatement at $20 a ton. In other words, farmers are destroying a $10,000 asset to create one worth $200.

In what would be a straightforward application of Coase Theorem, Europeans could pay farmers in the developing world not to clear land as a more cost effective way of reducing emissions. It has the added benefit of pushing the costs of the reductions onto the people who can better afford it in the first world while supplying income for those in the third world who would otherwise been able to profit from the resource. Not to mention other environmental benefits in preserving the forests.

As the report notes there are many problems with doing this, not least the fact that the reduction is more temporary than say replacing a diesel engine with a wind turbine. Another problem is with “leakage”, where farmers just move on to new land to clear. These can be dealt with different classes of emission reductions and with cooperation from governments to assist in enforcing the agreements.

Its still early days in the emissions trading scheme and time will tell if it can be implemented effectively to reduce greenhouse emissions, particularly without the US on board. Hopefully it can, as it promises to allow a degree of innovation in approaches like the one outlined by the World Bank, that a regulation based approach would not allow.

Update: I have editted the last line which previously said just “allow” to “not allow” which was my original intention…proof read Steve, proof read. Thanks to Danial Butler for bringing this to my attention.

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5 Responses to Carbon Emission Trading

  1. Rod says:

    Human caused global warming is a myth and its this volanco that has been continuously erupting since 1972 that is the culprit and the cause of the hole in the ozone layer

    http://en.wikipedia.org/wiki/Mount_Erebus

  2. Steve says:

    Not its not. HCL doesn’t survive long enough to reach the stratosphere unless its from a very powerful and therefore rare volcanic blast. Even when it does its effect is short lived.

    Second, there is no historical record that shows significant increases in stratospheric chlorine following even the most major volcanic eruptions. Although El Chichon, in 1982, did increase concentrations of HCl in the stratosphere by 10%, that extra chlorine disappeared in about a year. When Mt. Pinatubo erupted in 1991, measurements found no increase in stratospheric chlorine. The dramatic increase in chlorine concentrations simply cannot be explained by a concurrent increase in volcanic activity.

    See here

    http://www.epa.gov/ozone/science/volcano.html

  3. I find it interesting that the idea of emissions trading – when taken from what the MSM puts out – always receives the initial negative response. The system is not perfect, I grant you, but it is really the first global effort that has some sort of organizing umbrella organization (the UN [link] ) that has the galvanizing support of one very important group behind it: financial market types.

    Sure you may laugh at my comment, but if you consider other suggestions as put forth by the environmental types (um, basically shut down everything) or the individual “taxation” routes adopted by governments, you might begin to see why the idea of bringing into the realm of financial markets trading has some street cred.

    I am, you should be aware, a financial markets type and a cynical one at that. My first salvo of cynicism is this: it would not ever have the chance of succeeding from the get-go unless bankers saw a profit in it. Sure, greed plays a major part in the success of the emissions trading scheme.

    Next I will say that when people begin to understand emissions trading, they will see that the issue of ‘too many credits’ could very well be considered (in my opinion) a carrot rather than the stick, approach. Later on these carrot addicts will be facing the stick but entirely too far along to get out the carrot-stick world. I mean, basically, that the credits given out will be less and less over time.

    Next, and this is very important, is that while there is emissions trading in the 25 nations of the EU (and 27 next year when Romania and Bulgaria join), credit can be incubated and harvested from around the world. For example, an energy user in China which burns coal, may be converted to gas, a cleaner fuel. They are enticed to do this because they can sell the future credits to willing buyers (to be used by the EU25 companies who must pay with these credits at the end of each year).

    It may surprise you that there are huge amounts of money being invested into such funds now and a financial markets type like me begins to see the value of it (and begins drooling).

    Ok, so now I am appearing to be a self=serving greedy trade. Well I am. But it proves to you one thing, capitalism, the pursuit of profit, has done what a bunch of greenies could not do: bring real action into the equation.

    Yes, yes, there are problems. There are inequalities of access, far from transparent markets, perhaps too many credits to begin with. But it is a start!

    Another criticism is that it is not so easy to understand is the economists’ wish of an auction.Well, I hate to say it, but I have now experience first hand the threat of a financial markets boycott. How? Well if the bankers are involved, they see ways that they can subvert the system to trade as they do Bonds or Equities. This is very cynical, but in my opinion, very accurate.

    Lets say that the EU 25 companies were all given their credits, EUAs (European Union Allowances), all on one day, and told to trade them all on one exchange, via one electronic platform. A system like this would have been ideal, free from the issues of credit line relationships, payment worries, price transparency, and unequal access, as well as being cheaper to set up. But it wasn’t to be. In my opinion it would never have enlisted the support of banking and energy trading organizations that dominate the market (but represented through their governmental representatives).

    Ok. Cynicism aside. I am in it because I enjoy new markets, found a niche for my company (as an intermediary between sellers from Eastern Europe to buyers in Western Europe). But also, I must say that even if one does not believe in global warming, the overall efforts of the Kyoto borne emissions trading scheme gives me succor on two fronts : 1) I do believe lower emissions is better from a general environmental view. I.e.., cleaner skies, cleaner neighborhoods, cleaner rivers. (oops, do NOT call me a greenie, please). 2) It really helps to promote energy efficiency by virtue of the huge R&D money thrown at the search for renewable energy. I don’t know if you have heard, there might be an energy shortage soon.

    Ok back to cynicism. Windmills? Not in favour of them. I do not care of the blight on the landscape, but since wind does not come with an on/off switch, its hard to figure into the electricity trading grid. Storing it?: this means using the windmill power, converted to electricity, to pump water up a hill to a reservoir, to be let down the hill, to be converted into electricity. I cringe when I think of this waste.

    Other backyard solutions? Solar panels, friction magnets in the oceans, even, if you believe the latest commercial on CNN, small generators under dance floors??? They do have some home applications such as heating the bath water, but the only real hope in my opinion is Nuclear. This is because it is the only big, big, BIG source that can begin to make a dent in the coming energy deficit.

    Sorry I have run on a bit, but there are many things people need to understand about the emissions trading schemes. It is driven by the high-minded efforts to help the environment, stop global warming, save us from and energy deficit, etc etc. But only after some greed is thrown into the equation.

  4. Rod says:

    Its just another tax (on modern life) by stealth dreampt up buy faceless unelected treasury hacks who must see it as a massive potential windfall

    You have only to read the scientific assessments made by the ecological holy of holies itself, the International Panel on Climate Change, to see that the science that is used to support the theory actually stresses over and over again the uncertainties surrounding it, and the extreme unreliability of the computer models that produce the apocalyptic forecasts of huge rises in global temperature.

    Such models bear about as much relation to reality as astrology. As the distinguished American meteorologist Professor Richard Lindzen observed last weekend, the computer modelling performed at the Hadley Centre, one of Britain’s most vociferous proponents of man-made climate change, was seriously at odds with the actual warming that was taking place.

    The facts are that the rise in temperature over the past century, 0.6C (plus or minus 0.2C), is unexceptional; and that clouds and water vapour are far more significant presences in the atmosphere than carbon dioxide.

  5. Steve says:

    Sorry Rod, but you need to read the real stuff on this. A single distinguisged scientist denying Global warming is not exactly convincing, when the overwhelming majority of others concur that it is occuring and the models are accurate.

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