Wednesday, June 06, 2012

The EC must urgently tackle the low price for carbon

We're burning more fossil fuels and greenhouse gas emissions are increasing. It's all down to one thing: the low price of carbon.

Here is a statistic we should not be reading at this point in history: the amount of electricity produced from coal in the UK rose by 19.3% in the first quarter of the year, compared with a year earlier.

Coal use hasn't been this high since the winter of 2007, and is attractive to generators due to the record low CO2 prices in the EU-ETS (Emissions Trading Scheme) helping to boost profits from burning coal.

It means that UK greenhouse gas emissions will continue to rise, following an increase in 2010-2011, which was the pattern throughout the EU.

What about renewable energy? Renewables supplied just 4.7% of fuel for Britain's electricity in the first quarter of 2012, compared to 3.3% a year earlier, according to new figures from the Department for Energy and Climate Change (DECC).

Renewables' position did improve, with a 46.8% rise in wind output. Other renewable sources, which include waste and biomass were also up, by 31.5%, partly due to the conversion of Tilbury power station to 100% biomass, despite Tilbury being offline in March due to a fire. This shows the importance of biomass, but since most of the timber is imported, its actual, global effect on carbon-emission reductions is unclear.

Low-carbon nuclear use fell by 11.6%, following a rise of 11.1% in 2011, with gas (which has a lower global warming potential than coal) use down a whopping 30.4%.

Needless to say, none of this is good for the UK's greenhouse gas emissions.

The same is true in Germany. The increase in the burning of coal in that country cannot wholly be attributed to the closure of nuclear plants: it’s partly due to the low price of carbon.

Overall, the amount of fuel used in the UK for generation in the first quarter of 2012 fell by 2.9% on the same period a year earlier, due to a milder winter, which will have slightly reduced emissions, but it does follow a rise of primary electricity output in 2011 of 14.6%.

The contribution of renewable energy is improving, but not fast enough. Between 2010 and 2011, according to the latest energy production figures, there was a rise of 70.5% for hydro and PV, 59.4% for wind and 24.8% for biomass and waste.

However, combined, they still only provided 4% of all fuel for electricity production in 2011, according to the provisional figures. This compares to 37% provided by coal, 35% by gas, 23% by nuclear and 1% by oil in 2011.

What all this means is that there is a long, long way to go for renewables to reach the magic 20% point.

The root of the problem: low carbon prices

If EU carbon allowance prices are low, it makes burning coal cheaper. These permits to pollute have lost 60% of their value over the last year. There is currently a glut of over 900 million of them.

Last month saw yet more calls from business leaders for action in the European Commission to boost their price. Representatives from Spanish company Acciona, Royal Dutch Shell, Unilever, Philips, Deutsche Telekom and Vodafone met European Commission President Jose Manuel Barroso to demand ambitious future targets on renewable energy and carbon emissions reduction, as well as urgent action to bolster carbon prices.

There have been many such calls since the end of last year, but so far the European Commission has done absolutely nothing.

Two days ago, a survey by PwC found that 80% of respondents were in favour of cutting the supply of permits in order to boost carbon prices from their current €7 level. Of these, two thirds called for regulators to cut supply by taking on deeper 2020 emissions targets rather than just by temporarily withdrawing some allowances from the market.

This would mean increasing the target to a 30% emissions cut below 1990 levels rather than the current one of 20%, a move supported by the UK Government.

The European Commission is taking ages to decide whether to delay the sale of allowances from the early years of the EU Emissions Trading Scheme's third phase (2013-2020) to combat the glut. Its dithering is having a dire effect on emissions.

Other options for intervention proposed by those surveyed included setting a target of 50% cut in emissions for 2030, and the creation of a central carbon bank to monitor prices and regulate supply of permits. Neither of these seem likely at the moment.

But if supply were to be cut and Europe's economy were to recover, the report finds that the price of allowances could rise to €38 by 2030, which would provide a much more powerful price signal to generators to cut the use of burning fossil fuels.

Participants in the survey also doubted that the ICAO, the membership organisation for airlines, will launch a global-and-trade market for airlines before 2015 but were more optimistic that the International Maritime Organisation will take action by that year to curb emissions from shipping. Most survey participants thought that airline carriers would, despite protests, comply with the requirements of the EU-ETS.

The Commission is expected to outline what action it will take to improve the situation before it takes a recess in August. The sooner it does so the better.

Noises from inside the Commission say that a legal decision on reform of the trading system is possible by the end of the year. It could be 2013 before the structural reforms necessary to improve the effects of the Emissions Trading Scheme are in place.

With the pace being so slow, it looks very much from the outside as if they are fiddling while Rome burns. Almost literally.

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