Thursday, November 02, 2006

Carbon trading: can market mechanisms save the planet?

According to the Stern report on climate change, market mechanisms can save the planet. There is no need for nasty nasty regulatory controls on carbon emissions, we are told.

Instead, we should establish a price for the ‘right’ to generate a tonne of carbon, and then issue companies with a set number of permits and give them the right to buy or sell the permits like shares on a stock market.

Too little, too late, as this analysis of the existing EU emissions trading scheme in today’s Financial Times makes clear:

‘The scheme has not forced utilities to change their behaviour by switching from coal to cleaner fuels such as natural gas.

‘In fact, the EU is projected to burn 10m tonnes of coal more this year than it did last year, and the UK will import the largest amount of coal in its history.

‘Gerard McCloskey, chairman of McCloskey Group, a coal research and publishing company, said the UK was projected to import 42m-43m tonnes of coal this year, up from a record 35m last year …

‘It is still cheaper to buy coal, and additionally pay for the credit to be able to emit more greenhouse gases, than it is to buy natural gas.

‘One London coal and gas trader said that in Germany - the largest energy market in Europe - utilities were making near record profit margins of €26.5 ($34) per megawatt hour (MWH) on the coal they used in spite of the cost of purchasing the necessary credits.

‘"If utilities are making money like that, there is no incentive for them to switch from burning coal," he said.

‘In any case, the trading scheme suffered a severe blow to its credibility in April and May when it was revealed that European governments issued more permits than their companies needed to cover their emissions in the first phase of the scheme which started in January last year and ends on December 31 next year.

‘The price of EU carbon permits dropped from more than €30 per tonne to about €8.5 within three weeks from the end of April to mid-May, although it has since partially recovered to about €11. The drop led many hedge funds to leave the market …

‘"There are too many permits, so in reality they should be worthless," says Francisco Blanch, head of commodities research at Merrill Lynch.’

Is such a patently ineffective pseudo-market really the best idea the finest economic brains on the collective payroll of Europe’s government can come up with? If so, the case for direct regulatory intervention becomes even stronger.


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