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Europe’s Carbon Market Is Sputtering as Prices Dive

April 21, 2013 by Leave a Comment

That is pretty small change — $3.90, or only about 10 percent of what the price was in 2008. But to the traders it came as a relief after the market had gone into free fall to record lows two days earlier, after the European Parliament spurned an effort to shore up prices by shrinking the number of allowances.

“The market still stands,” said Thomas Rassmuson, a native of Sweden who founded the company with Jonathan Navon, a Briton, in 2006.

Still, Europe’s carbon market, a pioneering effort to use markets to regulate greenhouse gases, is having a hard time staying upright. This year has been stomach-churning for the people who make their living in the arcane world of trading emissions permits. The most recent volatility comes on top of years of uncertainty during which prices have fluctuated from $40 to nearly zero for the right to emit one ton of carbon dioxide.

More important, though, than lost jobs and diminished payouts for traders and bankers, the penny ante price of carbon credits means the market is not doing its job: pushing polluters to reduce carbon emissions, which most climate scientists believe contribute to global warming.

The market for these credits, officially called European Union Allowances, or E.U.A.’s, has been both unstable and under sharp downward pressure this year because of a huge oversupply and a stream of bad political and economic news. On April 16, for instance, after the European Parliament voted down the proposed reduction in the number of credits, prices dropped about 50 percent, to 2.63 euros from nearly 5, in 10 minutes.

“No one was going to buy” on the way down, said Fred Payne, a trader with CF Partners.

Europe’s troubled experience with carbon trading has also discouraged efforts to establish large-scale carbon trading systems in other countries, including the United States, although California and a group of Northeastern states have set up smaller regional markets.

Traders do not mind big price swings in any market — in fact, they can make a lot of money if they play them right.

But over time, the declining prices for the credits have sapped the European market of value, legitimacy and liquidity — the ease with which the allowances can be traded — making it less attractive for financial professionals.

A few years ago, analysts thought world carbon markets were heading for the $2 trillion mark by the end of this decade.

Today, the reality looks much more modest. Total trading last year was 62 billion euros, down from 96 billion in 2011, according to Thomson Reuters Point Carbon, a market research firm based in Oslo. Close to 90 percent of that activity was in Europe, while North American trading represented less than 1 percent of worldwide market value.

Financial institutions that had rushed to increase staff have shrunk their carbon desks. Companies have also laid off other professionals who helped set up greenhouse gas reduction projects in developing countries like China and India.

When the emissions trading system was started in 2005, the goal was to create a global model for raising the costs of emitting greenhouse gases and for prodding industrial polluters to switch from burning fossil fuels to using clean-energy alternatives like wind and solar.

When carbon prices hit their highs of more than 30 euros in 2008 and companies spent billions to invest in renewables, policy makers hailed the market as a success. But then prices began to fall. And at current levels, they are far too low to change companies’ behaviors, analysts say. Emitting a ton of carbon dioxide costs about the same as a hamburger.

“At the moment, the carbon price does not give any signal for investment,” said Hans Bünting, chief executive of RWE, one of the largest utilities in Germany and Europe.

This cap-and-trade system in Europe places a ceiling on emissions. At the end of each year, companies like electric utilities or steel manufacturers must hand over to the national authorities the permits equivalent to the amount gases emitted.

Article source: http://www.nytimes.com/2013/04/22/business/energy-environment/europes-carbon-market-is-sputtering-as-prices-dive.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Green Column: In European Union, Emissions Trade Is Sputtering

February 20, 2013 by Leave a Comment

The Union set up the E.T.S. in 2005 to send a clear signal to electric utilities and other polluters that over time they needed to switch to cleaner energy sources and adopt innovative anti-pollution technology. But current prices, the equivalent of less than $7 a ton, are too low to encourage much of anything.

“The European Union’s energy and climate policy is in disarray and risks losing credibility,” said Kash Burchett, an analyst at IHS, an energy consulting firm in London.

Some hope for shoring up the system came Tuesday, when the environmental committee of the European Parliament voted to allow the European Commission to reduce the number of permits it auctions in the next three years.

“This was a lifeline for the carbon market and for emissions trading as a policy tool for curbing emissions,” said Stig Schjoelset, head of carbon analysis at Reuters Point Carbon, a market research firm in Oslo.

Under the E.T.S., polluters like utilities and steel companies are allocated some carbon allowances. They buy more permits at auction if they need them. If, at the end of the year, they do not have enough permits to cover their emissions, they face heavy fines. The total number of permits is scheduled to tighten each year, and the proportion of credits that companies must pay for, rather than receive free, is also supposed to rise. The intended result of this system is that carbon will be progressively squeezed out of the economy.

But amid Europe’s economic malaise, many companies have chopped back production, leaving them with excess allowances. Demand for steel in Europe, for instance, is down about 30 percent since 2007, leaving steel makers like ArcelorMittal with allowances to sell. Last year, ArcelorMittal sold 21.8 million tons of its credits for $220 million. The company says it applied the receipts to energy-saving projects.

Low carbon prices do provide some relief to industry in grim economic times, but they do not provide much incentive to switch to cleaner fuels or invest in expensive technologies like carbon capture and storage, a process for removing CO2 from a plant’s emissions and pumping it underground.

In fact, current low carbon prices allow utilities to mothball power plants fired by natural gas, which is expensive in Europe, and instead burn coal, which is now cheap but produces far more pollution.

Mr. Schjoelset, of Reuters Point Carbon, figures that a carbon price of €30 to €40 per ton is needed to encourage utilities to switch from coal back to gas, while €60 to €150 per ton may be required to promote the adoption of carbon-capture technology.

“We need a higher carbon price today for a long-term fundamental shift toward greener production in Europe,” he says.

But industrialists and others warn that higher costs and uncertainty could further reduce the level of investment, which has already dropped in recent years, according to the European Union.

“We are not able to plan because we do not have a stable legal environment,” said Wolfgang Eder, chief executive of Voestalpine, an Austrian steel maker. “On the CO2 issue you have new intentions every year.”

Given industry’s desire for predictability in carbon policy, perhaps the most important lesson the Obama administration can learn from the Union’s experience is that a cap-and-trade system cannot be as volatile as Europe’s has been.

“You can see now one glaring issue we failed to address is to design a mechanism to adjust to external shock,” said Anthony Hobley, global head of the climate change practice at Norton Rose, an international law firm.

Against the sobering backdrop of a recession, a debate is beginning on the paths Europe has taken to reduce greenhouse gas emissions. Even Germany, which wrote blank checks to build Europe’s most aggressive renewable-energy program, is having second thoughts.

The country’s environment and energy ministers recently came to an agreement for reducing the ballooning costs of the renewable-energy program by close to €2 billion a year.

The trouble with subsidizing clean energy sources like wind and solar is that the cost rises as the programs become more successful. Renewables now account for almost one-quarter of German electricity generation, but they are also adding a similar amount to residential electric bills, according to energy consultants IHS.

In Britain, the government is conducting a very public debate with EDF, the utility controlled by the French government, over what price it will pay for electricity from a nuclear plant planned for Hinkley Point in southwest England. London had been counting on nuclear power to help it achieve its greenhouse gas reduction targets as well as meet rising power demands, but soaring cost estimates are putting that plan in doubt.

The government seems to hope that it will be let off the hook by a shale gas miracle like the one that has occurred in the United States. But Britain’s shale gas reserves are unproven, and the gas is controversial, after earth tremors set off by test drilling in 2011.

The adoption of a serious cap-and-trade program in the United States would be good news for Europe, Australia and any other government that wants to do something about climate change.

But without a global effort, the risk for Europe is that putting a high price on carbon and energy will just lead to a migration of industry and jobs to cheaper destinations.

Connie Hedegaard, the European commissioner for climate action, said in an interview that to blame environmental policies for job losses and economic malaise is “a false diagnosis.”

In fact, she said, the European renewables industry was one of the few areas where jobs had increased in the last few years.

The real challenges for European competitiveness, she said, were areas like wages and taxation levels. “It is important to get the diagnosis right in order to give the right medicine.”

Article source: http://www.nytimes.com/2013/02/21/business/energy-environment/21iht-green21.html?partner=rss&emc=rss

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Green Column: The Battle Over Aviation Emissions

December 19, 2011 by Leave a Comment

Much is at stake for Europe, which has sought to burnish its identity as a significant international actor partly by leading the world on climate protection.

Airlines would have to account for the emissions for the entirety of any flight that takes off from, or that lands at, any airport in Europe — even if that flight begins or ends in faraway cities like Beijing and San Francisco.

The initiative involves folding aviation into the Union’s six-year-old Emissions Trading System, in which polluters can buy and sell a limited quantity of permits, each representing a ton of carbon dioxide.

The goal is to speed up the adoption of greener technologies at a time when air traffic, which represents about 3 percent of global carbon dioxide emissions, is growing much faster than gains in efficiency.

Airlines should be able to pass on the costs of permits — most of which they will receive for free — in the form of higher ticket prices, which could rise by as much as €12, or nearly $16, on some long-haul flights.

Even so, many airlines are furious, partly because the cost of compliance could rise sharply in coming years if governments decide airlines must buy a larger proportion of their permits and if demand for the permits and their value rises.

Some of the sternest opposition has come from Europe’s most important trading partners. They have accused Europe of riding roughshod over their national sovereignty.

China and the United States were among two dozen countries calling on Europe to modify or scrap its plans with just weeks to go before the system goes into force.

A judgment at the European Court of Justice expected Wednesday in a case brought by major U.S. airlines against the measures seems unlikely to ease the tensions.

The litigation began when the industry group Air Transport Association of America (since renamed Airlines for America) and three major airlines — United and Continental, which merged last year, and American — complained at the High Court in London in 2009.

The parties argued that the law conflicted with existing aviation treaties and a swath of other agreements and principles. The British court then referred the case to the European court, the Union’s highest tribunal, for a preliminary ruling.

If the Europeans win — which seems likely after a senior adviser to the court in October dismissed most of the arguments put forward by the U.S. airlines — they will feel more confident about moving ahead with the policy.

But the matter would be unlikely to rest there, and there would be more diplomatic tussling and possibly more litigation.

A group of Chinese airlines could follow through on an earlier threat to bring a lawsuit, possibly in Germany, where the authorities will oversee the application of the system to a number of carriers from China.

The Chinese could argue that the European law violates the Kyoto climate agreement by requiring airlines from developing nations, which are exempt from emissions cuts under the Kyoto climate treaty, to bear the same burdens as airlines from wealthier nations.

The ruling on Wednesday could clarify whether a case can be brought on those grounds.

Algeria has already begun a case in France contesting the system, according to the Arab Air Carriers Organization, an industry group that includes the country’s main carrier, Air Algérie.

A spokeswoman for the organization gave no further details. The Algerian embassies in Paris and in Brussels did not return telephone and e-mail messages. A spokeswoman for Air Algérie had no immediate comment.

In the United States, the House of Representatives approved a bill this year that would ban U.S. airlines from participating in the system. A similar bill was introduced this month in the Senate.

The Europeans have offered to exempt incoming flights from the rules if those airlines come from a country with requirements comparable to its own.

Article source: http://www.nytimes.com/2011/12/19/business/energy-environment/the-battle-over-aviation-emissions.html?partner=rss&emc=rss

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Australia Proposes Carbon Trading Plan, Again

July 10, 2011 by Leave a Comment

SYDNEY — Prime Minister Julia Gillard of Australia announced a plan on Sunday that would tax the carbon dioxide emissions of the country’s 500 worst polluters and create the second-biggest emissions trading program in the world, after the European Union’s.

The plan is projected to cut 159 million tons of carbon dioxide from the atmosphere by 2020, the government said. In 2010, Australia produced 577 million tons of carbon emissions, according to the Department of Climate Change.

For the 500 companies — which would include mining giants with operations in Australia like BHP Billiton, Rio Tinto and Xstrata — the government has set a price of 23 Australian dollars, or $24.70, for each ton of carbon dioxide emitted starting July 1 of next year, rising 2.5 percent annually before shifting in 2015 to a market-driven trading program.

A similar proposal by Ms. Gillard’s predecessor, Kevin Rudd, was largely blamed for having led to his political downfall. Ms. Gillard argued, however, that Australia — one of the world’s largest polluters, per capita — could no longer ignore its global responsibilities.

“Scientific evidence has confirmed our planet is warming,” she said. “And after years of debate and deliberation, most Australians agree the time to act is now.

“Australians want to do the right thing by the environment. We are a confident, creative nation that’s up to the challenges of tackling climate change.”

Australia has been able to weather the global financial crisis better than most developed economies primarily because of Chinese demand for its natural resources, particularly coal and iron ore.

Critics of the emissions reduction plan have argued that putting a price on pollution would cripple Australia’s manufacturing and export industries, a point they were quick to make Sunday.

The opposition Liberal Party, which has opposed an emissions trading program under its leader, Tony Abbott, criticized the announcement on its Web site, arguing that the cost would be passed on to Australian families.

“Julia Gillard has betrayed the Australian people,” the Liberals said. “The carbon tax is not revenue neutral — another Labor broken promise. This means a bigger deficit this year, higher debt, more taxes, smaller forecast surpluses in the future and greater pressure on interest rates.”

The Minerals Council of Australia, an influential mining industry group, also criticized the plan. “With no other nation implementing an economywide carbon tax, this is a dangerous experiment with the Australian economy,” it said.

Qantas, the Australian national airline, joined the criticism, saying ticket prices would have to rise because of the plan. “While we are still modeling the cost impact, at 23 Australian dollars per ton, there will be some effect on passengers through higher domestic fares,” it said.

But Tim Jordan, a senior analyst at Deutsche Bank in Sydney, dismissed the bulk of those concerns as driven by political, not financial, orthodoxy.

He called the program a “solid start to reducing emissions,” but said the tremendous concessions given under the plan proved that, if anything, the government listened to businesses’ complaints.

“There’s a lot of extra spending in the form of targeted grant programs and specific funding for particular industries,” he said. “Almost every sector that’s complained about the impact of a carbon price has received some kind of new fund.”

The government’s Jobs and Competitiveness Program has set aside 9.2 billion dollars to shield high-polluting industries during the first three years of the plan.

The most emissions-intensive industries — aluminum smelting, flat-glass making, steel manufacturing, zinc smelting and most pulp and paper manufacturing — would initially receive free permits representing 94.5 percent of each industry’s average carbon costs. The permits will not be tradable for the first three years.

Industries that pollute less, including some plastics and chemical manufacturing, would be eligible for free permits to cover 66 percent of the industry average, while liquefied natural gas would receive an effective assistance rate of 50 percent.

John Connor, chief executive of the Climate Institute, an independent research group, praised the proposal and said he hoped it would lead not only to a brighter environmental future, but also to a break in the increasing acrimony surrounding Australian politics.

Article source: http://feeds.nytimes.com/click.phdo?i=6867d8be582ae9ce51175c2fd0f7c944

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