Monday, February 23, 2009

Carbon market now turning sub-prime: Al Gore & billionaire pals another case of 'too big to fail'

(Guardian UK, Glover, 2/23/09): "That there exists something called carbon trading is about all that most people know. A few know, too, that Europe has created carbon exchanges, and traders who buy and sell. Few but the professionals, however, know that

The theory sounded fine in the boom years, back when Nicholas Stern described climate change as "the biggest market failure in history" - a market failure to which carbon trading was meant to be a market solution. Instead, it's bolstering the business case for fossil fuels....

  • A year ago European governments allocated a limited number of carbon emission permits to their big polluters.

Businesses that reduce pollution are allowed to sell spare permits to ones that need more. As demand outstrips this capped supply, and the price of permits rises, an incentive grows to invest in green energy. Why buy costly permits to keep a coal plant running when you can put the cash into clean power instead?

All this only works as the carbon price lifts. As with 1924 Château Lafite or Damian Hirst's diamond skulls, scarcity and speculation create the value. If permits are cheap, and everyone has lots, the green incentive crashes into reverse.

  • As recession slashes output, companies pile up permits they don't need and sell them on. The price falls,

The result is a system that does nothing at all for climate change but a lot for the bottom lines of mega-polluters such as the steelmaker Corus: industrial assistance in camouflage.

"I don't know why industrials would miss this opportunity," said one trader last week. "They are using it to compensate for the tightening of credit and the slowdown, to pay for redundancies."

A lot of the blame lies with governments that signed up to carbon trading as a neat idea,

  • but then indulged polluters with luxurious quantities of permits.
  • The excuse was that growth would soon see them bumping against the ceiling.

Instead, exchanges are in meltdown: a tonne of carbon has dropped to about €8, down from last year's summer peak of €31 and

The lesson of the carbon slump, like the credit crunch, is that markets can be a conduit, but not a substitute,

They only work when properly primed and regulated.

  • and that if growth stops, demand drops too.

There is not much time to rescue the system.

  • Obama backs what Americans call cap and trade. Australia wants to try the same thing.

It should be at the heart of a deal at the Copenhagen summit this winter. But both are hesitating, given Europe's mess.

  • The market must be unashamedly rigged to force supply below demand. The obvious way would be to cut the number of permits in circulation, but in a recession no government will be brave enough to do that. And private initiatives such as Sandbag, which encourages individuals to buy and lock away permits, can exert little pressure on price in a market awash with them.

Europe can choke off tomorrow's supply, however, without hitting business today. First the EU must stop importing permits from countries such as Russia - a bonus for a paper transaction. No one really believes that 15m tonnes of imported permits will not still be emitted by a steelworks somewhere east of Novosibirsk.

Second, it must publish plans to crack down on the surplus of permits when the recession is over.

  • Warnings of famine ahead, when the scheme enters its third stage in 2012,
  • would raise prices now, if believed.
Like medieval pardoners handing out unlimited indulgences, governments have created a glut. Reformation must follow. Wanted - a modern Martin Luther to nail a shaming truth to industry's door: Europe's whizz-bang carbon market is turning sub-prime." via


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