Tag Archives: carbon markets

Hellishly Complex: taxing foreign carbon

steel cable
THE European Union wants to slash greenhouse-gas emissions to 80% below 1990 levels by 2050. It is on course to cut just half that amount. To get back on track, on February 15th, 2017 the European Parliament voted for a plan to raise the cost for firms to produce carbon. It has prompted growing calls for the bloc to tax the carbon emissions embodied in the EU’s imports. At best, such a levy will barely curb emissions. At worst, it could cause a trade war.

The EU’s latest reforms try to put up the price of carbon by cutting the emissions allowances firms are granted. They include the EU’s first border tax on carbon, levied on cement imports.

Under the EU’s reforms, steelmakers in Europe would pay up to €30 ($32) to emit a tonne of carbon, but foreign producers selling in the EU would not have to pay a cent. Putting an equivalent tax on these imports is a neat solution to this problem. “It’s wonderful in theory,” says Jean Chateau, an economist at the OECD, a club of rich countries. But “in reality it’s very problematic.”
One big problem is how to calculate the carbon in imports. This is not easy even for simple steel sheets; for items made of several bits of metal from different sources, it is hellishly complex. Some countries might even refuse to provide the information. And any method brought in for foreign firms, if not applied to local ones, could fall foul of WTO rules,..

A global carbon price would produce far greater economic benefits than border taxes, but would require closer international co-operation. A trade war is not the way to get there.

Excerpts from Steely defences: Carbon tariffs and the EU’s steel industry, Economist,  Feb. 18, at 62

Unburnable Carbon and the Panic Run

CarbonBubble

“You can argue that Big Oil is becoming Big Gas,” says Occo Roelofsen of McKinsey, a consulting firm. Others are going in for renewables. Total of France has a majority stake in SunPower, one of the world’s biggest solar-power firms. Eldar Saetre, the boss of Statoil, Norway’s state-run oil company, says that in 15 years there may be more opportunities outside oil and gas than within.,,,,

Plenty of oil firms (Exxon among them) are also calling for governments to enact a “carbon tax” on emitters of greenhouse gases. Their critics argue that this is less altruistic than it appears. For one thing, such a tax would hurt the coal industry especially, thereby boosting the oil firms’ gas businesses. And governments, especially in the developing world, where fossil-fuel demand is still surging, may find such a tax politically impossible anyway; the oilmen are calling for it, opponents say, in the knowledge that such countries will never introduce it….

On November 4th New York’s attorney-general, Eric Schneiderman, subpoenaed documents from Exxon to investigate how much it has known since the 1970s about the effects of fossil fuels on the climate. Exxon is reportedly being investigated under the Martin Act, dating back to 1921, which gives prosecutors wide-ranging powers to investigate securities fraud. Exxon says it has long disclosed information about the risks to its business from climate change, and from action to prevent it, in reports to its shareholders. But the firm’s run-in with the New York justice department may be a portent of what is to come.

Another worry for oil executives is pressure from investors spooked by the financial risks of climate change. Policymakers, such as Mark Carney, governor of the Bank of England, talk about the possibility of many oilfields turning into “stranded assets”, or “unburnable carbon”, if governments get serious about climate-change action. Anthony Hobley of Carbon Tracker, a climate-advisory firm, says that if the Paris pledges are taken at all seriously, the oil and gas industry may become “ex-growth”. Oil executives dispute that. But shareholders, if motivated, could force the industry to shrink just by limiting the funds they provide for new oil discoveries.

Curiously, the present situation may provide a foretaste of this—though cyclically, because of falling oil prices, rather than structurally, because of rising temperatures. Faced with a world awash in crude, oil majors are abandoning high-cost reserves in the Arctic, Canada, North Sea and Gulf of Mexico. One oil executive ruefully calls it a “practice run” for the day in the distant future when fears of global warming, or the emergence of cheap, clean alternative technologies, mean that demand for fossil fuels starts to wane.

Excerpt from Oil Companies and Climate Change: Nodding Donkeys, Economist, Nov. 14, 2015, at 61

Natural Resources Markets in China: upcoming

fish ponds near Daye, Hubei, China, Image from wikipedia

A nationwide  carbon-trading scheme, to be set up in 2017, is the most visible example of a broader trend in China towards using market mechanisms in environmental matters…[A] reform plan issued by the government on September 21st, 2015  laying out the basis of future policy, talks about developing “a market system which allows economic levers to play a greater role in environmental governance”. If the plan is to be believed, China will go further than any other country in developing environmental market mechanisms.

The plan talks of selling “green” bonds, ie, those financing projects certified as environmentally sound. The government will improve financial guarantees for low-carbon projects. But those are becoming common. More fundamentally, the reform says China will separate the ownership of all natural resources from the rights to use them—and sell the usage rights at market.

This is much more radical. The idea is rooted in communist dogma, which says all natural resources—land, rivers, minerals and so on—are collectively owned. The reform plan begins by calling for a massive Domesday-like inventory of who owns what, whether central government, provincial governments or lower tiers. It then says, with utter insouciance, that “with the exception of natural resources which are ecologically important [eg, national parks], the ownership rights and use rights for all other natural resources can be separated”. And, having separated them, the usage rights can be bought and sold, rented out, used as collateral or as the basis of loan guarantees, and so on.  

The carbon-trading scheme suggests what this could mean in practice. It is like a market in energy-usage rights, with the carbon treated as part of the cost of using fossil fuels. A market in water rights will also be set up. Trials will be held in Gansu and Ningxia, two north-western provinces. The plan talks cryptically of setting up a “natural resource asset exchange”.

Excerpts from Markets and the environment: Domesday scenario, Economist, Oct. 3, 2015, at 46

Madagascar Sells Polluting Rights to Microsoft

madagascar

Madagascar’s government has agreed to sell forest-related carbon credits to Microsoft and Zurich’s zoo, which will help protect the Makira National Park, in the first sale of state-owned REDD+ credits in Africa, according to the group that manages the park.  The Wildlife Conservation Society (WCS), an international charity headquartered in New York City, said the revenues from selling carbon credits generated by avoided deforestation in Makira will finance the conservation of one of Madagascar’s most pristine rainforest ecosystems, while supporting the livelihoods of local people.

The funds will be used by the government for activities under its Reducing Emissions from Deforestation and Forest Degradation “plus” conservation (REDD+) programme, and by WCS to manage Makira park. But the largest share – half of the proceeds – will go to support local communities in areas around Makira for education, health and other projects, WCS said.

The Makira forest, which spans nearly 400,000 hectares (over 1,500 square miles), is home to an estimated 1 percent of the world’s biodiversity, including 20 lemur species, hundreds of species of birds, and thousands of plant varieties, some unique to the location. The forests also provide clean water to over 250,000 people in the surrounding landscape.

Jonathan Shopley, managing director of The CarbonNeutral Company, which handled the purchase for Microsoft, said its clients are increasingly looking for opportunities to manage the entire environmental impact of their organisation, driven by the need to make their supply chains more resilient…In Madagascar, burning for agricultural land and extraction of wood for household energy leads to around 36,000 hectares (139 square miles) of natural forest being lost each year, WCS said.

BY MEGAN ROWLIN, Madagascar: Microsoft Buys Carbon Credits From Madagascar Rainforest, AllAfrica.com, Feb. 13, 2014

Seeking No Net Biodiversity Loss; the offsets standards

“Companies are increasingly seeking to demonstrate ‘no net loss of biodiversity’ as a result of their activities, stimulated by new regulations, recent requirements from investors and a more sophisticated approach to handling social and environmental risk”, said Kerry ten Kate, UK-based director of-

The Mess of Carbon Markets

It is, according to enthusiasts for carbon markets, a sort of backhanded compliment. Scoffers may think the trading of carbon emissions cannot be taken seriously as a proper commodity market. But hard-nosed criminals have seen that it involves enough real money to be worth casing.

Unfortunately, the criminals also spotted that the people who were not taking the market seriously enough included the European Commission and the EU’s member states, which oversee the Emissions Trading Scheme (ETS), the world’s biggest market in carbon emissions. In early January thieves took advantage of lax security to steal over 3m carbon credits (about 2 billion are issued each year). They managed to take 1m from Holcim, a cement maker, half a million from the Austrian government, a bunch more from various accounts held in the Czech Republic and some from the Greek registry. The market value of the haul is about €45m ($62m).

Within the ETS the carbon credits which large emitters need to surrender to governments in order to keep emitting are held in electronic form in national registries. The thieves managed to break into the accounts in which companies keep their credits on some of these registries and transfer the credits to other accounts, from which they could quickly be sold on. Europe’s registries were closed down on January 19th, to reopen only when better security standards are in place. Some registries were expected to reopen by February 4th but as long as they remain closed spot-market trading is impossible, since no one can get at their credits.

This is not in itself disastrous. Most carbon trading is in derivative contracts, not on the spot market, and the largest registries will surely be reopened in fairly short order. But the thefts have an insidious knock-on effect, in that anyone in the market might now feel at risk of receiving stolen goods. The legal implications of this differ across countries. In Britain stolen credits could be confiscated from people who have bought them in good faith. The care necessary to avoid such risks, which might involve buying credits only from governments, could reduce liquidity.

The response so far has focused on making it harder for a malefactor to get into someone else’s account. A more thoroughgoing approach would be to make it harder for him to set up an account of his own. Unlike oil, gold and other commodities, carbon credits have no existence outside the registries’ databanks. Without a registry account there is nowhere to steal the credit away to. And at the moment it is extremely easy to open an account.

The mischief that can be done with a registry account is not limited to theft. VAT fraud, in which tax is charged as part of a transaction but not surrendered to any government, has long been a problem in the market. In December, for instance, Italian police announced they were investigating a €500m VAT fraud on a carbon exchange. Some countries have changed their rules to clamp down on this, others have not. A lot of money-laundering is also thought to be going on.

There are good reasons to want markets to be as open to participants as possible. But the ETS seems to go too far. Restricting the right to open an account to large carbon emitters—which have to have them for compliance purposes—and financial companies regulated through Europe’s Market in Financial Instruments Directive (MiFID) would be a promising way to cut theft, fraud and money laundering all at once, says Trevor Sikorski of Barclays Capital. The International Emissions Trading Association, an industry body, called for “know your customers” rules, a step in this direction, in a letter to the EU that was sent a year ago. It is time to start catching up with the felons.

Carbon trading,Green Fleeces,Red Faces, Economist, Feb. 5, 2011, at 88