Carbon price rises following European backloading vote

Although the bill may not become law, multinationals such as Shell, and energy secretary Ed Davey, are calling for further structural reform of the EU-ETS.

Prices of carbon on the market rose 12% following the European Parliament's vote yesterday in favour of EU Emissions Trading Scheme back-loading proposals.

The bill could determine the amount that industry in Europe will pay for its energy over the next 40 years by increasing the price of carbon allowances in the EU emissions trading scheme (EU-ETS) through a temporary withdrawal of emission permits from the market.

Today, EUAs are trading €.35 higher at €4.68, a rise of around 12%.

Edward Davey, Secretary of State for Energy & Climate Change, welcomed the vote, saying: “This is a good decision by the European Parliament and is an important step forward for climate change policy. We need a stable carbon market so we get a more certainty for investors so emissions reductions can be achieved at the lowest cost possible."

He said that the next challenge was to "focus on securing agreement to the proposals in Council in order to facilitate a deal", referring to the next stage in the passage of the bill, which will see discussions between the European Parliament, the Commission and the Council of Ministers, where most countries support the plan.

However, Poland is opposed, while Germany and Spain are undecided. It therefore remains unclear whether the bill will gain enough support to become law.

“Alongside this," Davey continued, "there should be a parallel focus on the urgent need for structural reform of the European Emissions Trading Scheme, in order to promote growth in low carbon industry in the longer term. We are calling on the European Commission to bring forward legislative proposals by the end of this year, along with 11 other EU Member States”.

The bill is intended to make it cheaper for companies to invest in clean technology such as renewable energy.

Opponents charge that it will make the price of fossil fuel-derived energy more expensive for high energy users such as the paper and steel industries.

Royal Dutch Shell and other multinationals have welcomed the vote, agreeing with Davey's call for structural reform.

Shell’s chief climate change adviser, David Hone, said that: “Backloading sends a political signal about the importance of the EU ETS, but does not address the structural problems. We urge the Commission to come forward as soon as possible with proposals for structural reforms,” he said.

What this lobby group would like to see is permanent cancellation of allowances that have been distributed too liberally, causing a glut on the market and prices to fall to a level that cannot support the amount of investment in low carbon technology required to tackle climate change.

The Renewable Energy Association's Head of Policy, Paul Thompson, while welcoming the vote, also agreed with this point: "Although the UK has already introduced its own ‘Carbon Price Floor’ designed to top up the carbon price, it is clearly preferable for carbon prices to be stable across the EU. Today’s vote goes some way to achieving this, and will reduce the risk of UK energy intensive industries being put at a competitive disadvantage. However, we remain of the view that wider scale reform of the EU ETS is needed to fix the longer term problems with the market.”

Analyst Thomson Reuters Point Carbon issued a statement saying that, should the measure become law, the price of carbon could rise to €8.80 by 2015, but cancellation of issued allowances will be required to let it rise higher.

Disagreements over policy within opponents of the move gave the swing votes to a small number of Green Party MEPs, allowing the passage of the draft law that had only been rejected by the Parliament two months previously, on the grounds of market interference.

The process leading up to the vote was subsequently highly criticised by all parties.

Bas Eickhout, a member of the Green Party, said that "Within the European People's Party it was so politicized, it was a fight between different strands in the party. For a lot of people, they had no idea what they were voting about. The longer the process went on, the more politicized it got and the more complicated it got for MEPs".

Europe must adopt a 30% emissions reduction target

With any luck we are about to see a shift in action on curbing carbon emissions.

It's not just that the annual United Nations climate change talks, COP-18, begin at the end of this month at Doha in Qatar. Nor is it that with the re-election of Barack Obama there will be a renewed impetus in the American Senate to get a climate change bill passed.

Over on the other side of the world, Australia's Climate Change Minister Greg Combet has said his country will sign up to a second round of the Kyoto Protocol, joining the European Union and just a handful of other major greenhouse gas emitters in recommitting to the world's only climate treaty.

The Kyoto Protocol, negotiated in 1997, required wealthy nations to limit their emission of greenhouse gases by 5.2% on average for the period 2008-2012 from 1990 levels. It is due to expire at the end of this year.

Through the UN climate change negotiations, countries are attempting to thrash out a replacement treaty. If successful, it would be agreed by 2015 and take effect in 2020, and it would include emissions targets for developing nations such as China and India as well as developed countries.

To date, only the European Union and a handful of other small developed nations have signed up to Kyoto 2, which is intended to start in 2013 and continue until such time as when a new agreement comes into effect.

Japan, Russia, Canada and, currently, the US are among the countries refusing to sign up to Kyoto 2. They want a non-binding agreement.

New Zealand has already said it will not follow Australia.

But Kyoto 1 and 2 has been widely criticised. The main candidates for alternative action are a carbon tax activated at national levels, and a network of regional emission trading schemes.

Already, a carbon tax is back on the agenda in the US and the UK.

Republicans are not expected to be enthusiastic; they dislike taxes. The main American proponent of a carbon tax is prominent NASA climate scientist James Hansen. His proposal is to tax carbon at source, whether oil, gas or coal, with a 100% dividend returned to citizens in equal shares, under the principle of the “commons", that every citizen has an equal right to a portion of the sky.

It is estimated that citizens would each get $3,000 to spend as compensation for the tax.

A similar tax has been in place in Canada's British Columbia for four years and is currently under review. The income from the tax is spent on public works.

But how high would a carbon tax need to be to make a significant difference in the consumption of fossil fuels? Consider the amount of tax (60%) already on a litre of petrol. Does it deter us from driving?

Would it make a difference if the price of a barrel of oil was doubled with a $100 tax? That would put up the cost of a litre of petrol to almost £2.

You can imagine the public reaction, even with a cash dividend. The thing is, it’s a blunt instrument. It affects some people more than others.

British Columbia's tax has been introduced gradually and reaches about 5% of the price of fuel. The review will tell us whether or not it has made any difference at all to consumption levels. The jury is yet out.

Hansen distrusts "cap and trade" agreements such as the Kyoto Protocol, and says why in chapter 9 of his book Storms of My Grandchildren.

But that isn't stopping Korea and China from going ahead with their own local schemes emissions trading schemes. On November 15 a presidential decree in Korea will see a mandatory ETS introduced from 2015 for 60% of South Korea’s total greenhouse gas emissions.

The purpose of an ETS is to minimise the cost of meeting a set emissions target. The Korean ETS and most of the Chinese pilot schemes have watched the European Union's ETS become swamped with excess credits and the price of carbon bomb to an ineffectual level.

To prevent this happening in their schemes, they plan to include the use of market stabilising checks and balances to enable them to adjust to external factors such as significant and sustained changes in gross domestic product. These are said to include: a strategic reserve, limitations on banking and borrowing and a ceiling and/or floor price.

Japan has its own scheme, as do Switzerland, New Zealand, California and a number of other American and Canadian states linked together in the Regional Greenhouse Gas Initiative and the Western Climate Initiative.

If such schemes become more common and the European scheme can overcome its current problems, international trading in permits is an attractive way of achieving reductions at the lowest possible cost. This is because it is cheaper to abate or eliminate a ton of carbon dioxide in some countries than in others, and the market automatically gravitates towards the cheapest solution.

In other words, is not such a blunt instrument. On the other hand, a huge amount of money gets wasted and goes into the wrong pockets.

The question is, whether any of these proposals will get us where we want to be fast enough. The answer depends upon the level of political ambition for the level at which an overall target for, or cap on carbon emissions is set, which in turn depends on the amount of public concern.

European environment ministers met at the end of October to discuss the European Union negotiating position at Doha, and what to do about the EU ETS' glut of allowances.

It emerged from their talks that Europe has already beaten its target of 20% emission reductions by 2020 with eight years to spare.

A leaked draft of the Commission's report on the EU ETS says that there will be a surplus of at least two billion allowances next year, rising in the following years. Removing just 1.4 billion of these would be sufficient to let Europe reach a 30% target by 2020.

This would align the scheme with Europe's 2050 climate goal of reducing emissions up to 95% below 1990 levels.

It's this kind of ambition, at least, which is necessary.

The British government supports a 30% target. It should do, it is already ahead of the game. Officials have been arguing for it for some time.

Europe should immediately adopt such a position and, in three weeks time, take it to Doha and challenge the world to follow suit.

California's success against Big Oil still faces a hurdle

Californians voted on Tuesday in favour of a low carbon future, but against environmental taxes.

While voting in the American mid-term elections, they also defeated a measure called Proposition 23, a move by oil companies to roll back a piece of progressive legislature - AB 32 - the state passed in recent times in favour of clean energy and climate protection.

Sierra Club Executive Director Michael Brune described the victory as follows: “Despite more than $10 million spent on deceptive advertising campaign funded by out-of-state oil barons — more than $8 Million from Texaco and Valero alone - California voters took a stand for clean energy – not in spite of a major economic downturn, but because of it."

The Proposition was defeated by over 60% to under 40%, in the first public referendum in history on clean energy policy.

It represents a triumph for a coalition that stood up to the oil industry, which involved leaders from environmental, health, labour, business, clean technology and national security sectors, not mentioned community groups and faith-based organisations.

One of the coalition's unlikely members, former US Secretary of State George Schultz, said, “This is the new face of the clean energy economy. This broad coalition will continue to push for California to be on the cutting edge in building the new energy economy”.

The Los Angeles Times said the "oily club" from Texas was sent packing through being outspent and out-organised, campaign-wise by wealthy philanthropists and celebrity backers.

Chief architect of the original global warming law in 2006, and outgoing Californian governor Arnold Schwarzenegger, was jubilant at the result.

However, voters also passed Proposition 26, which makes it harder to enforce global warming laws by undermining the principle that polluters should pay for the harm they cause. It is likely to do this in three ways:

1. by repealing two laws passed this year that fund product stewardship programmes to prevent hazardous chemicals and bulky products from ending up in landfill

2. by decreasing funding for 'green chemistry', which aims to control exposure to hazardous chemicals

3. by making it harder to implement the Global Warming Solutions Act (AB 32), whose goal is to reduce greenhouse gas emissions through carbon trading.

California and carbon trading

Provided that it can get around this limitation, this act would set up a system very similar to the European Emissions Trading Scheme.

It would recognise offset credits originating from sectors in developing countries, including Reducing Emissions from Deforestation and Forest Degradation (REDD) and other sector-based credits, so that the state can join international sector-based carbon trading schemes.

California's economy is the largest of any state in the USA and one of the worlds top 10 economies.

Offset credits allow private companies to meet a portion of their obligation to reduce emissions by buying lower-cost emissions reductions generated elsewhere.

Sector-based offset credits require all actors within a sector, for instance all forest owners or all steel manufacturers, to be included in a developing country’s emissions reduction strategy.

This approach differs from the United Nations Clean Development Mechanism (CDM) that recognises one-off, project-based offset credits.

California’s approach is consistent with key design features in the current international climate negotiations. Its cap-and-trade program would therefore play a huge part globally, and help to define what constitutes environmentally sound emissions reductions efforts in developing countries.

Tea Party and the environment

Elsewhere in the elections, in Florida, Tea Party candidate Mario Rubio made it to the Senate, on a ticket which supports continued drilling for oil offshore, only months after the disaster that was the Deepwater Horizon oil spill in the Gulf of Mexico.

But in Nevada, Tea Party candidate Sharron Angle, who is a climate change denialist, was beaten to the Senate by Democrat incumbent Harry Reid.

The Commons debates personal carbon trading

This took place on 18.6.09: debating the Goernment's response to the Environmental Audit Commission's report. David Fleming was present at this debate.

Many of the objections to PCT put here, simply don't apply to Cap & Share, which is not mentioned in the whole debate... or the AEA report. It seems most parliamentarians are still unaware of Cap and Share despite the Irish Government's interest.

Joan Ruddock says on PCT "a significant number of low-income households would lose out, and we cannot ignore that. More than 2 million low- income households could be doubly disadvantaged. Not only would they pay the cost of the scheme, which could be around £40 to £80 per household per year, but if they lived in a rural area and had to use their car regularly, for example, they would exceed their free allocation and incur the cost of buying additional allowances. We cannot find a way of overcoming that."

The EAC wants to see a pilot. Ruddock wants it funded by the private sector. She puts faith in the 'upstream' ETS (C&S is also upstream - capping emissions where they enter the economy): "With regard to the upstream schemes, we estimate that it would cost about £50 million to cover a few dozen fuel companies, compared with the £1 billion to £2 billion to introduce a trading scheme that would have to involve 50 million participants. So what additional benefit could be gained by the downstream approach?". But as Yeo observes, the ETS doesn't deliver, and is not value for money.

Simon Hughes (North Southwark & Bermondsey, Liberal Democrat) does say: "One of our proposals is to switch from the climate change levy to a carbon tax, which would apply to "primary fuels as they enter the economy, once our energy efficiency measures have become effective in tackling fuel poverty, using revenues to cut other taxes."" Then he says: "I have decided that my party has an obligation to respond formally to the proposition in the report, and that we need to do so quickly, so I have decided that we will have a short period of formal but open consultation, picking up on what has come from the Committee's report and from the Government response, which makes arguments against it. We will complete that process by September, by the time of our conference."

Gregory Barker (Shadow Minister, Energy and Climate Change; Bexhill & Battle, Conservative) is against PCT on the grounds it is too Big Brother.

> http://www.theyworkforyou.com/whall/?id=2009-06-18a.141.0

Emission allowance auction to be held as price crashes

The second auction in Phase II of the European Union's Emissions Trading System will be held on behalf of the government on 24th March.

But the scheme has come under attack again, as the owners of registered installations - large energy generators, cement manufacturers, chemical plants and the like - have been selling off credits which they are not using on account of the recession - to the tune of 75 to 150 million euros a day - to raise funds to balance their books.

Big polluters must purchase allowances corresponding to the tonnes of carbon they expect to emit. 7% of the UK's allowance cap is auctioned - about 86 million allowances over Phase II.

West European iron and steel output is expected to fall by at least 14% this year compared to 2008, and EU cement production by 20-25%, meaning there will be a surplus of carbon allowances of 66 million tons for those two sectors alone. This is worth about 750 million euros. But the sell-off is causing a glut and a price collapse - by up to a third in January. Analysts said it could drop as low as 5 euros from a peak of 31 euros last summer.

"This was not designed as a scheme to give corporates cheap short-term funding options in a credit crunch meltdown," said Mark Lewis, Deutsche Bank carbon analyst. "But that appears to be what's happening."

A low price undermines incentives for companies to cut emissions. "It demonstrates that the targets after 2012 (to 2020) are too lax, especially in combination with a large use of carbon offsets," said Cambridge University's Karsten Neuhoff. But Barbara Helfferich, EU Commission environment spokeswoman brushed off criticism, saying "If those companies were smart they would take those profits and invest them in greener technology". But will they?

The allowances are one of the worst investments so far in 2009, falling more than almost any other energy commodity or index of global stocks. Only the energy guzzlers have benefited - so it looks as if this auction won't raise nearly as much cash for the government as the first one.

This is yet another reason why the ETS needs a complete overhaul - it is just not fit for purpose.

UK and Irish governments told to implement personal carbon trading

The British government should reconsider its decision to put on the backburner the idea of personal carbon trading, especially since the Irish government has now been advised to roll out a pilot for the transport sector.

Britain should consider giving individuals a personal carbon emissions allowance that they can use or trade, in order to help the country meet its CO2 emissions target, the Environmental Audit Committee (EAC) told the government last week. The government had earlier in the month dismissed the idea.

Hilary Benn, the environment minister, told me at a climate change conference (Think 08) that the scheme was too early (meaning that people weren't ready for it), too expensive and too complicated to explain and to administer. Additionally, he argued that there was a danger of inequity in the system, disproportionately affecting the elderly, rural and poor who would have to be compensated.

However, the Irish government has just received a recommendation to trial a form of Cap & Share in the transport sector.

The Defra report deliberately underplayed the carbon benefits and admitted to a low level of research quality citing a "reduction in personal emissions of 0-10% - although these figures have been drawn from research on metering and energy displays rather than trials of personal carbon trading... a low range of 0-5% reduction is assumed. Though [even] a 10% reduction would still not be sufficient to balance the cost-benefit assessment more favourably."

The Environmental Audit Committee disagreed. "Existing initiatives are unlikely to bring about behavioural change on the scale required, with many individuals choosing to disregard the connection between their own emissions and the larger challenge," the EAC said. "Personal carbon trading might be the kind of radical measure needed to bring about behavioural change." It would be more effective and fairer than bringing in "green" taxes.

Hilary Benn said the cost of introducing PCAs would be between £700m and £2bn.

However, Tim Yeo, the Conservative EAC chairman, strongly disagreed, saying difficulties of implementing the scheme could be overcome and calling for more feasibility work. He said that if the private sector were to administer it, it could be done a lot cheaper, along the lines of supermarket loyalty cards. "It engages people at all levels in their decisions, about whether they heat their house to a slightly lower temperature, whether they really need to put air conditioning in their flat, whether they really need to take that flight," he said.

Meanwhile, Ireland forges ahead

But PCAs are not the only such scheme on the table. At the end of May, British consultants AEA Energy and Environment released their interim final report, commissioned by Comhar, the Irish national sustainable development council, into Cap & Share, which the coalition government is seriously considering. Their conclusion was that Cap & Share is much fairer, cheaper, and more cost-effective.

Under Cap & Share, permits for the right to emit carbon are given to the population, who can then choose whether or not to sell them to companies introducing fossil fuels to the national economy. (Currently of course permits are given away under the EU emissions trading scheme, which boosts the energy companies’ profits at consumers’ expense.) As only a small number of firms are importing or producing energy, this makes C&S easy to administer. Each fuel company is required to purchase permits to match the eventual emissions from the fossil fuels they extract or import, with the total number being reduced year on year to promote the transition to a low carbon society.

Of course companies have to add the cost of the permits to their prices and this puts up the cost of everything sold because all goods and services have an energy content. But the Irish environment organization Feasta comments: "it's just as fair as any other scheme. Under the proposal lower income households, on average, would benefit since they have lower than average energy consumption and would receive emissions certificates worth more than the increased fuel costs they incur. "

How much would it cost?

AEA compares 10 different ways of rationing carbon currently being considered around the world, including carbon taxes. Their report is far more detailed than that produced by Hillary Benn’s department.


The AEA report compares the various carbon reducing schemes on offer. The green colour symbolizes the most benefit and the redder shade the least benefit.

They say the cost of "the Cap and Share scheme... would be lower than the more complex personal carbon allocation options but higher than introducing a carbon tax. For the Cap and Share scheme the cost of administering the fuel suppliers is likely to be secondary to the costs associated with issuing certificates to the general public. Our simple bottom up estimate... puts the transaction costs for a system where certificates are cashed in remotely in the range 8-11% of the value of the certificates. This range depends on income and assumes an allowance price of €20/tCO2 and a bank direct transaction charge of 5%. At higher carbon prices the cost effectiveness would be better, with transaction costs around 6-7% for a price of €50/tCO2."

AEA therefore recommends the system to be introduced on a trial basis first of all in the transport sector in the Republic of Ireland "with subsequent consideration to sectoral and geographical expansion" in the North. This would also combat the fuel tourism which currently goes on, as fuel is cheaper south of the border – which I witnessed first hand recently. Measures would be needed to shield the vulnerable from increased costs. AEA suggests not allocating to children, "although again consideration will be needed for increasing support to families".

AEA concludes its comparison thus: "Cap and Share and the Sky Trust currently appear the most favourable [schemes]. The schemes that treat individuals as an emitting entity (Tradable Energy Quotas, Personal Carbon Rationing, Rate All Products and Services and the Ayres Scheme) look the least appealing, because of their complexity and the resulting costs. Furthermore, the lack of public engagement, uncertainty over environmental outcome and no direct compensation for individuals mean non-traded options such as a carbon tax and direct regulation score less well in our analysis than Cap and Share and Sky Trust."

[The Sky Trust is an American idea whereby permits to pollute are auctioned and the revenue generated given to households in order to "lock in public support for emission reductions, no matter how high fuel prices would rise." The dividends could be used by residents to subsidize the price of energy-efficient appliances and/or renewable energy generation.]

The Irish Environmental Protection Agency is currently considering the recommendations. If the Irish government goes ahead it will be another case of the Republic courageously going first where its neighbours in the British Isles later follow – as with banning plastic bags and smoking in pubs. The ‘Celtic Tiger’ can certainly teach us a thing or two about looking after our health and the environment. How surprising is that?

Further illustrations of how the different schemes work:

Earlier in the week I had an email which contained the government's response to a petition asking for "the Prime Minister to Adopt Carbon Rationing and Contraction and Convergence."

The response is detailed. It says - they're looking at it.

"The Government is looking into the potential value of personal carbon trading (PCT). This is just one of a number of possible long-term options being explored for making individuals better informed about, and involved in, tackling climate change. An initial scoping study has been produced for Defra by the Centre for Sustainable Energy. This study concluded that a personal carbon allowance and trading system has the potential to achieve emissions savings in a fairer way than carbon taxes. The Government is now developing a work programme which should provide the information to lead to a decision on whether or not a personal carbon allowance is a realistic and workable policy option ."

The Low Carbon Kid believes a form of PCT or cap-and-share is the ONLY way to force down overall national carbon emissions, sine another route (persuasion) will always fail, due to catch-23, and taxing has a backlash.

You have to remove the choice to engage in energy-expensive activities.

On Friday I'll write about the two systems on offer and how they differ.

The CSE's scoping study can be found on Defra's website

Climate Change is too important to be left to a Committee

Hilary Benn, our Environment Minister, was at Kew Gardens yesterday announcing an independent Climate Change Committee, while the Environment Audit Committee was calling for a Climate Change Minister.

(Of course we already have such a minister, but she is not supra-departmental, she is safely contained within Defra where she can't cause much fuss.)

Benn has responded to a lot of criticism of the Climate Change Bill, which had 17,000 respoonses (that's a lot), and made some changes:

• asking the Committee on Climate Change to report on whether the Government’s target to reduce CO2 emissions by at least 60 percent by 2050 should be strengthened further;
• Asking the Committee to look at the implications of including other greenhouse gases and emissions from international aviation and shipping in the UK’s targets as part of this review;
• Strengthening the role and responsibilities of the Committee on Climate Change, including by requiring the Government to seek the Committee’s advice before amending the 2020 or 2050 targets in the Bill;
• Strengthening the Committee’s independence from Government, by confirming that it will appoint its own chief executive and staff, and increasing its analytical resources;
• Increased transparency, by requiring the Committee to publish its analysis and advice to Government on setting five-yearly carbon budgets, which are designed to provide clarity on the UK’s route towards its reduction targets;
• Strengthening Parliament’s ability to hold Government to account, by requiring the Government to explain its reasons to Parliament if it does not accept the Committee’s advice on the level of the carbon budget, or if it does not meet a budget or target;
• Providing better information and streamlining reporting, including requiring the Government to report annually to Parliament on emissions from international aviation and shipping; and
• Strengthening the country’s preparedness for climate change by requiring the Government regularly to assess the risks of climate change to the UK, and to report to Parliament on its proposals and policies for sustainable adaptation to climate change.

This is all good. But it's not fast enough. The changes should happen now - for example Scotland has just decided to have a 80% reduction by 2050, as a policy matter, because the science now demands it.

A Committee will not help join up Government and prevent different departments (such as Transport and BERR) from committing to projects that are bound to undermine our climate change targets.

Only two policies could do this: individual carbon trading (allowed for in the Bill) and a Minister for Climate Change or Sustainable Development who can make sure all departments keep to the Sustainable Development Plans drawn up two years ago and quietly buried.