The decision to dole out free pollution permits to certain segments of European industry in the EU carbon market continues to look like a critical misstep.
The cause of the most recent collapse in the price of carbon in the European market is not just blatant over-allocation—as it was in 2006— the precipitous drop is a direct result of the global economic downturn that has European manufacturers down as much as fifteen percent. The problem is that the this creates another windfall for the parts of European industry that receive free permits.
The flood of credits into the carbon trading market has caused the European carbon price to drop rather precipitously from its summer peak of €31 to its current levels of around €11. Some analysts believe the price will fall to as low as €5 or €6.
Giles Parkinson explained today at the Business Spectator how this new windfall in the EU carbon market is playing out:
“According to market analysts, these industries have been selling excess credits at the rate of some €150 million per week over the last two months. Some in the EU might like to think the companies are reinvesting these windfalls into clean energy or energy efficiency projects, but that seems unlikely in the current market.”
Parkinson makes three critical points about these developments. First, he calls into question the wisdom of handing out carbon permits in terms of driving down the value of the permits bought and sold on the market. Second, he notes that the unfortunate implication of these artificially low carbon prices is that they have dropped so low, they are not stimulating new investments in clean energy – the very purpose of their creation.
>>See: First Carbon Auction in U.S. Hailed as Big Success
Finally, Parkinson rightly suggests that this sudden drop in the price of carbon permits helps build the case that other policy mechanisms (tax credits, feed-in tariffs, renewable energy portfolios, etc.) can and should be used in tandem with the emissions permit trading model to reduce carbon emissions.
Image: © Neotakezo | Dreamstime.com
About Timothy B. Hurst
Those are all fine points, BUT….
1. EU industrials were given emissions allowances roughly equivalent to their business-as-usual emissions, to ensure they didn’t have to buy allowances which would hit their international competitiveness.
Whether you agree with this or not, EU companies are not in the business of being charitable to their non-carbon constrained competitors around the world. So in order for them to stay competitive, they have to have as similar a cost base as their Chinese, Indian or whatever competition. Hence the free allocation of allowances. You can bet your bottom dollar that the day India and China start auctioning allowances to their own companies, the EU will be doing the same.
Let’s overlook the fact that there’s going to be a lot of auctioning anyway from 2012 onwards in the EU.
2. EU industrial output is collapsing. Therefore, so are emissions. (And I know this isn’t HOW emissions were supposed to fall, but they are.)
So EU industrial companies have surplus allowances – they won’t need them AT ALL.
They also can’t get loans because banks aren’t lending to anyone without a gold-plated credit rating, they’re running low on cash because their sales have plummeted, and they have bills to pay.
So what’s a company to do? They have these allowances floating around, they don’t need them, but they’re worth €10 a tonne on the market.
It’s not hard to figure out, is it? It makes Good Sense to sell these allowances. They’d be idiots not to.
3. Now, if these allowances had been auctioned rather than given out for free, then sure, these companies would be selling them just the same as they are now, to stay alive. But they’d ALSO be lobbying the government to give them back the money they spent on these allowances (in the form of govt. handouts) so they can stay afloat.
The revenue from the sale of these free allowances has essentially replaced government handouts. So we, taxpayers, aren’t subsidising another failing part of the economy. Hey! Free allocation helped you and me out!
Now, what Giles hasn’t found out yet is that industrial companies are selling MORE than just their surplus. Because allowances for calendar 2009 are going to be handed out on Feb 28, and because companies only have to surrender allowances to cover their 2008 emissions by March 31, they’re able to effectively “borrow” 2009 allowances and put them towards their 2008 compliance.
What this means is that a company can sell ALL its 2008 allowances to raise short-term cash, and then use ALL its 2009 allowances to cover its 2008 emissions.
And that is what’s more important than just the sale of surpluses. Companies in the EU are so scared of going bankrupt in 2009 that they’re basically doing whatever they can to survive, even if that means mortgaging their future compliance with the emissions trading scheme.
You make some good points, but also some that I don't accept on face value. You are right, in terms of business decisions, these manufacturing/industrial companies are selling their carbon credits because they can, I don't blame them for trying to generate some extra revenue in this down economy.
However, your argument that "they have to have as similar a cost base as their Chinese, Indian or whatever competition," assumes that they do. Using that argument, why doesn't the EU allow/encourage European manufacturers to pay their employees a Euro or two per day? Why? Because it's wrong. Why don't European manufacturers dump their manufacturing waste in rivers? There are lots of things Chinese and Indian companies do to gain a competitive advantage that European companies do not.
The competition argument will only go so far, my friend.
"…they are not stimulating new investments in clean energy – the very purpose of their creation."
The plan wasn't to reduce CO2, or to manage the environment, or to reduce pollution (assuming you'd consider CO2 as pollution)?
The goal was specifically to direct funding of corporation's money into one specific sector of the economy; the "clean energy" and "green" companies?
So, now with the downturn; your "chosen winners" aren't making out like bandits as expected; sure CO2 production is down, the cap is still in place, and CO2 emissions are under the expected level… none of that matters.
The problem is the "greening" companies aren't getting paid the fat cash. It makes my heart break to think that they're not getting their Government policy decided funding.
Thanks for the honesty declaring what the real goal and intent of the cap & trade policy was. Nothing to do with CO2 emissions, environment, warming, or anything else… just lining the pockets of the "green" companies.
Maybe next time you'll just rob the taxpayers and give their money directly to avoid this sort of complication.