Carbon prices in Europe have crashed. Again. The most recent fall is a result of falling greenhouse gas emissions in Europe. In 2011, emissions fell by 2.45%. When the European Commission announced the reduction in emissions, the EU carbon price fell by 14%.
A total of 1.88 billion tonnes were emitted in 2011, down from 1.94 billion tonnes in 2010. The 2011 emissions level was 144 million tonnes below the EU Emissions Trading Scheme cap. That’s the sixth time in the last seven years that there has been an oversupply of carbon allowances.
With such an oversupply of pollution permits, it’s impossible to attribute the fall in emissions to carbon trading. It’s worth taking a look at what some of the experts are saying about reasons for the reduced emissions in Europe. UK-based NGO Sandbag explained that,
“This reduction is is unlikely to be a result of the ETS … and is most likely a reflection of lower than expected economic output and other climate policies.”
Ingo Tschach, managing director of Tschach Solutions, a carbon market analyst firm, said that:
“[T]here are two possible explanations: the weather in the last quarter and there might have been an increase in energy efficiency.”
Trevor Sikorski at Barclays Capital told the Financial Times that 50 gigawatts of renewable energy capacity has been added in the last two years. “That’s an enormous amount,” he said.
And Bjorn Inge Vik, a senior analyst at Point Carbon, said that,
“The main reason that emissions are down is the mild winter and the deteriorating economy towards the end of last year.”
So a combination of a mild winter, the economic crisis, an increase of renewable energy is behind the reduction in emissions. Together with the huge oversupply of pollution permits, this lead to crash in the price of carbon. There are plans to remove allowances from the market, to increase the price of carbon. But not everyone thinks that this is going to happen. Per Lekander, an analyst at UBS, predicts that the EU will not change the rules of the ETS. He told Bloomberg that “It’s not that I’m skeptical on the set-aside, it’s just not going to happen. It’s going to get blocked.” And he predicts that the price of carbon will fall still further:
“We believe that it will become increasingly clear over the next months that the ETS rules won’t change, and with this we see 3 euros/tonne as a likely price floor.”
Earlier this week, EcoSecurities, one of the world’s biggest carbon trading companies, laid off 25% of its staff. Other carbon traders and brokers including Cargill, Jefferies Group, Mercuria and Barclays have also scaled down their carbon desks in recent months.
The crash in the price of carbon makes REDD as a carbon trading mechanism less attractive than, say, clearing the forest to make money from oil palm plantations, coal mines or cattle ranches.
Another reason that REDD as a carbon trading mechanism does not make sense is highlighted in a recent memo from the EU. The memo confirms that forest carbon will not be considered for inclusion in the ETS before 2020:
Could the emerging international REDD+ mechanism qualify as a sectoral mechanism?
Answer: No, for reasons of liability, non-permanence and capacity to monitor emissions with sufficient level of accuracy credits from a possible REDD+ mechanism will not be considered for compliance use in the EU ETS before the end of phase 3.
In a similar vein, Kevin Anderson, the deputy director of the Tyndall Centre for Climate Change Research at the University of Manchester, explains why he is opposed to carbon offsets in an article this week in Nature magazine. Anderson was invited to last week’s Planet Under Pressure conference in London. He declined to go because the organisers set a compulsory £35 fee, for all delegates, which was to pay for carbon offsets that were supposed to make the conference “carbon neutral”. Anderson writes that,
“Offsetting is worse than doing nothing. It is without scientific legitimacy, is dangerously misleading and almost certainly contributes to a net increase in the absolute rate of global emissions growth.”
One of the reasons Anderson opposes carbon offsetting is that it involves predictions of the future over a time-scale that makes such predictions impossible:
“For an offset project to be genuinely low-carbon, it must guarantee that it does not stimulate further emissions over the subsequent century. Although standards and legislation around offsetting and the CDM sometimes consider ‘carbon leakage’ in the projects’ early years, it is impossible to quantify with any meaningful level of certainty over the timeframes that matter. To do so would presume powers of prediction that could have foreseen the Internet and low-cost airlines following from Marconi’s 1901 telegraph and the Wright brothers’ 1903 maiden flight.”
When it comes to predictions about the price of carbon, things go haywire well before we get into the sort of futurology that Anderson is talking about. Here’s the head of Deutsche Asset Management, Kevin Parker, writing in the Financial Times less than four years ago:
“The price of European carbon allowances … has risen only modestly this year… But market pressures are building that could take the price to €100 a tonne or higher…
“The markets have an uncanny ability to find the weak hand. Those emitters with too few allowances to cover their carbon output are going to get squeezed by the lack of supply, and a rise to at least €100 looks inevitable.”
PHOTO Credit: An illustration of a teacher and her class by Alistair Anderson from Geoffrey Hoyle’s book, 2010. Written in 1972, Hoyle predicted that in 2010, we’d wear jumpsuits, work a three day week, use “vision phones”, buy groceries online and get electric cars delivered via pipes full of liquid.
“The EU-ETS: Fix it or shut it down, please” – interesting article from a carbon trader’s perspective. There is an excellent summary of the structural flaws in the EU ETS, which concludes as follows:
What’s missing from the article (available here) is any mention of reducing the cap (which is the part of cap and trade that actually reduces emissions). But perhaps we shouldn’t be too surprised since the article is written by someone looking to profit from the carbon trade (the author, Assaad Razzouk is Group CEO of Sindicatum Sustainable Resources, a global sustainable resources company headquartered in Singapore).
The article ends as follows:
Regardless of why emissions might fall, when they do, carbon prices do too.
Therefore, if REDD is to be financed by carbon trade, its finance necessarily relies on the failure of the world to reduce emissions, and contrastingly, if emissions are successfully reduced, REDD cannot be sufficiently financed.
This model of REDD as an emissions reduction tool financed by the failure to reduce emissions – is an oxymoronic proposition. Like a crime prevention program funded by fines levied against criminals. Like a chicken fed on its own eggs.
If REDD becomes the main approach to forest conservation, as has been happening, forest conservation itself is to be financed by the failure to reduce emissions, and, if emissions do fall, there will be no forest conservation.
Oh dear.