Tag Archives: emissions trading

What is the Cost of Carbon? the price of carbon in 2013

carbon social costs

The market price of carbon is €4.90 ($6.70) per tonne of CO2 in the EU, $11.50 in California. Big oil companies charge $34 or more. That is closer to the “social cost of carbon”—the damage from an extra tonne of CO2—than to the market price. America’s administration recently estimated the social cost at $37 a tonne. These prices change behaviour. A huge amount of attention is paid to government action. But the sort of carbon price some companies are using for planning would, if it became a market price, have a much bigger impact than any of the policies that governments are now talking about.

Companies and Emissions: Carbon Copy, Economist, Dec. 14, 2013, at 70

Exceeding the Carbon Budget:industry bets that climate policies will fail

coal mine china. Image from wikipedia

Several  reports suggest that markets are overlooking the risk of “unburnable carbon”. The share prices of oil, gas and coal companies depend in part on their reserves. The more fossil fuels a firm has underground, the more valuable its shares. But what if some of those reserves can never be dug up and burned?

If governments were determined to implement their climate policies, a lot of that carbon would have to be left in the ground, says Carbon Tracker, a non-profit organisation, and the Grantham Research Institute on Climate Change, part of the London School of Economics. Their analysis starts by estimating the amount of carbon dioxide that could be put into the atmosphere if global temperatures are not to rise by more than 2°C, the most that climate scientists deem prudent. The maximum, says the report, is about 1,000 gigatons (GTCO2) between now and 2050. The report calls this the world’s “carbon budget”.

Existing fossil-fuel reserves already contain far more carbon than that. According to the International Energy Agency (IEA), in its “World Energy Outlook”, total proven international reserves contain 2,860GTCO2—almost three times the carbon budget. The report refers to the excess as “unburnable carbon”.

Most of the reserves are owned by governments or state energy firms; they could be left in the ground by public-policy choice (ie, if governments took the 2°C target seriously). But the reserves of listed oil companies are different. These are assets developed using money raised from investors who expect a return. Proven reserves of listed firms contain 762GTCO2—most of what can prudently be burned before 2050. Listed potential reserves have 1,541GTCO2 embedded in them.

So companies and governments already have far more oil, gas and coal than they need (again, assuming temperatures are not to rise by more than 2°C). Logically, the response to this would be for governments to leave their reserves untouched and for companies to run theirs slowly down, returning more of what they earn to shareholders. Neither of these things is happening. State-owned companies are taking an increasing share of total energy output. And in 2012, says Carbon Tracker, the 200 largest listed oil, gas and coal companies spent five times as much—$674 billion—on developing new reserves as they did returning money to shareholders ($126 billion). ExxonMobil alone plans to spend $37 billion a year on exploration in each of the next three years.

Such behaviour, on the face of it, makes no sense. One possible explanation is that companies are betting that government climate policies will fail; they will be able to burn all their reserves, including new ones, after all. This implies that global temperatures would either soar past the 2°C mark, or be restrained by a technological fix, such as carbon capture and storage, or geo-engineering.Recent events make such a bet seem rational. On April 16th the European Parliament voted against attempts to shore up Europe’s emissions trading system against collapse. The system is the EU’s flagship environmental policy and the world’s largest carbon market.  Putting it at risk suggests that Europeans have lost their will to endure short-term pain for long-term environmental gain. Nor is this the only such sign. Several cash-strapped EU countries are cutting subsidies for renewable energy. And governments around the world have failed to make progress towards a new global climate-change treaty. Betting against tough climate policies seems almost prudent.

The markets are [also] mispricing risk by valuing companies as if all their reserves will be burned. Investors treat reserves as an indicator of future revenues. They therefore require companies to replace reserves depleted by production, even though this runs foul of emission-reduction policies. Fossil-fuel firms live and die by a measure called the reserve replacement ratio, which must remain above 100%. Companies see their shares marked down if the ratio falls, even when they pull the plug on dodgy, expensive projects. This happened to Shell, for example, when it suspended drilling in the Arctic in February….

At the moment neither public policies nor markets reflect the risks of a warmer world.

Energy Firms and Climate Change: Unburnable Fuel, Economist, May 4, 2013, at 68

Regulating Greenhouse Gases; European Schemes, China, WTO and the ICAO

Could a fresh row over airline emissions lead to a global trade war? That is the scariest prospect raised by China’s objections this week to the European Union’s new plan for controlling greenhouse-gas emissions from aeroplanes. The scheme, which came into effect on January 1st, forces airlines flying into the EU to buy tradable carbon credits as part of its broader emissions-trading system.

Many countries are unhappy with the policy, but China’s proclamations this week—official news agencies report that China has “banned” its airlines from participation without specific government approval—appear to be an escalation. Not least because Chinese and European officials are expected to meet for high-level talks in Beijing next week. It also raises the temperature of the row in advance of a meeting of 26 dissenting countries, including India, China, Russia and America, in Moscow on February 21st.

As an effort to make airlines pay for their pollution, the EU’s action is overdue. In global terms, their emissions are modest, about 3% of the total. Yet they are rising fast: between 2005 and 2010 they grew by 11.2%. Meanwhile the UN’s International Civil Aviation Organisation (ICAO), which was charged with taking steps to mitigate them, has done nothing of the sort…The EU decided to push ahead with its plan to make all flights into the EU subject to the emissions-trading scheme (ETS). This is now enshrined in European law. The only ways foreign governments could extricate their airlines from it would be to stop them flying into the EU, or make them subject to an equivalent mitigation regime of their own.

The main objection to the EU’s policy is that it applies to air-miles clocked up outside European airspace. The EU argues that its approach is consistent with ICAO’s own guidelines and that it would be impossible to regulate otherwise. But the dissenters claim this infringes their sovereignty and breaks the terms of the Chicago Convention, which has regulated aviation since 1944. A group of American airlines therefore launched a legal challenge to the policy; but it was dismissed by the European Court of Justice in December. There was a precedent supporting the Europeans: American green laws insist that ships docking locally be double hulled, even though that forces ship owners to pay for unwanted double hulls on international waters en route to American ports.

China also claims that the EU’s policy transgresses UN climate-change agreements which ordain that mitigation costs should be lower for developing countries than rich ones. Yet, even setting aside the difficult issue of how much of a free ride China can expect, the EU’s policy applies to individual companies, not countries, for which there is no such dispensation.

It is a troubling spat. But there is at least time to negotiate a way out. The airlines are not due to be billed for their emissions until April 2013. Even then, they will have to pay for only 15% of them. Under the ETS, they are required to buy tradable permits for a gradually rising portion of their emissions: this year the EU will give the airlines permits to cover 85% of them.  The airlines, naturally, say the cost will be onerous nonetheless. The China Air Transport Association, which represents China’s airlines, estimated the scheme would cost them 800m yuan ($127m) this year, and more than three times as much by 2020. It may well be less. EU officials say the costs of the scheme, if passed on to passengers, would add no more than around €2.50 ($3.30) to the price of a one-way ticket between Europe and China. By slapping ETS surcharges on tickets, as some non-Chinese airlines have done, they may even profit from the scheme.

The best solution would be through the ICAO. In November it resolved to accelerate steps to introduce its own mitigation efforts. It has drawn up a shortlist of options, including a carbon tax or cap-and-trade scheme that would apply to all airlines.

Excerpts, Planes and pollution:Trouble in the air, double on the ground, Economist, Feb. 11, 2012, at 66

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