The ETS policy conundrum

eid2grey-02It is now more than a week since the European Parliament voted to reject some changes to the Emissions Trading System (EU ETS) that would have propped up the price of carbon.  The EU ETS has had a difficult time during this current financial crisis.  Does the vote in Parliament mean that people are turning against climate change? What does this mean for sustainable energy?  Obviously during this crisis, priorities are changing, but one feels that climate change still matters from a policy perspective.  Interestingly, at the end of March, the Commission published a Green Paper on a 2030 framework for climate and energy policies and the following excerpt (from page 7) reflects some of the friction within the policy community.

There are obvious synergies but there are also potential trade-offs. For example, more than anticipated energy savings and greater than expected renewable energy production can lower the carbon price by weakening the demand for emission allowances in the ETS. This in turn can weaken the price signal of the ETS for innovation and investments in efficiency and the deployment of low-carbon technologies whilst not affecting attainment of the overall GHG reduction target.

Fortunately, the Commission currently has a consultation on the Green Paper, allowing all interested parties to provide their views on how Europe should move forward.

Last week, Will Hutton wrote an excellent article for the Observer that tries to put the Parliamentary vote and all the related issues in perspective.

Burn our planet or face financial meltdown. Not much of a choice

Last week’s collapse of a European carbon emissions scheme makes an agreed approach to climate change all the more urgent

The world is going to fry – unless there is change soon. There is weakening political will to make national and international targets for carbon reduction stick, no strong business and financial coalition prepared to lead and a weakening groundswell of public opinion prepared to foot the bill.

Instead, the international consensus of 25 years ago –that the world must act to challenge climate change –is dissolving. Individual countries are trying to steal a march on each other in a race to the bottom, dropping whatever scant penalties there have been for burning fossil fuels.

This new political geography has been obvious ever since the Copenhagen talks collapsed in 2009, but last week the speed with which ground is being lost became sickeningly obvious. The European parliament refused to back a stop-gap measure to save the European carbon emissions trading scheme. This allows EU companies economising on carbon to sell an allowance to those who are less efficient.

The theory is that the higher the price, the greater the incentive to economise on carbon use and the greater the value in being carbon efficient. But overloaded with sellers and too few buyers, because policing the use of carbon is completely ineffective, the European carbon price has collapsed. The European Commission proposed to clear away the backlog of sellers with a one-off buyout of the overhang of carbon permits and so support the price, but parliament was not prepared to back the cost. The scheme is as good as dead.

What’s more, a new report, Unburnable Carbon 2013, showed that stock markets worldwide are cumulatively valuing coal, oil and energy companies’ huge reserves of fossil fuels as if they will all be burned, even though, at best, only 40% could ever be used if the world is to cap the increase in global temperatures by 2C this century. Further, in 2012, the top 200 energy companies spent $674 bn on finding new reserves, reinforcing the collective absurdity. In other words, there is either a carbon bubble with investors and companies wildly over-speculating on the value of owning fuel reserves that can never be burned, or nobody believes there is the remotest chance that the world will stick to the limits on fossil fuel use congruent with containing global warming.

The report’s authors, the Carbon Tracker Initiative and the LSE’s Grantham Research Institute, gamely assume the former and thus warn that the world stands on the verge of another financial crisis. The world’s top 200 fossil fuel companies are currently valued at $4trn, with $1.5trn of debt. But that implies they would burn all their carbon reserves, increasing global temperatures by at least 6C, with untold consequences for life on Earth. As that is too awful to contemplate, there is a rapidly approaching moment of reckoning for world stock markets as the realisation grows that valuations and business strategies are self-defeatingly irrational – and $4trn of value could be suddenly halved.

The markets are only reflecting the political and cultural reality. A decade-long fierce fight-back by the conservative right, especially in the Anglo-Saxon world against what it sees as environmental socialism, has struck a near-fatal blow to the climate change case. Climate change deniers insist that the volatility in world weather patterns and the rise in temperatures evident in the rapidly melting Arctic are most likely natural phenomena and the science is wrong. Or, even if it is right, the better option is to adapt to climate change rather than give in to “socialism” to prevent it.

It is a case history of how today’s political economy works, with the US the heartland of a dysfunctionality that has spread across the west. It is impossible to muster a congressional majority for what the right depicts as policies that are anti-American, anti-liberty and – given the shale gas revolution – unnecessary. It took some bravery from President Obama, in the land of free expression, even to mention that climate change was a challenge in his victory speech last November.

The long-contained depression, coupled with rising energy prices and squeezed living standards, makes matters harder still. Consumers don’t want to pay even higher energy prices for either renewables or nuclear fuel, or taxes to subsidise their production. They just want cheap energy. Companies resent any kind of levy that makes their energy costs higher and point out that any levy’s impact would result in production being relocated to countries that don’t penalise excessive carbon use – China and almost all of Asia. There is growing awe of the US shale gas revolution and a keenness to copy it and there are fewer and fewer voices in business who make the case for green technologies. Of course, world stock markets think that the 200 top companies will burn all the fossil fuel they own and encourage them to find more: who is going to stop them? For the time being, nobody.

But keep faith with democracy, science and the power of argument. One of the reasons Obama won the election was the devastation wreaked by hurricane Sandy in the days before the election, following a drought in the Midwest. It was obvious to most Americans that weather patterns are changing. This spring in Britain is one more piece of evidence. The links to the exponential growth of carbon in the atmosphere are indisputable. Galileo had to take on the Catholic church to prove the world was round, today’s scientists have to take on the right to prove that climate change is man-made.

Contemporary capitalism faces both a crisis of legitimacy and effectiveness. We have been told for a generation that self-organising markets and business, with minimal public intervention and oversight, are the route to wealth generation, prosperity and jobs – justifying the self-serving extravagant rewards for those at the top. Bankers claimed that their actions as debt levels reached irrational levels were sound. We know differently. Now fossil fuel companies and business are saying the same about burning oil, coal and gas.

Western people will sooner or later agitate for change, as will China’s millions as pollution makes its cities unbearable. Nobody wants a return to the command and control economies that failed. What is needed is a new vision of how to do capitalism in which enlightened self-interest is hard-wired into its operation, saving us from decades of austerity and environmental disaster. There are instruments at hand – the Unburnable Carbon report sets some of them out – and they mesh with larger arguments for stakeholder capitalism. The political task is to bind them together to underpin a new consensus and a new narrative. There is no time to lose.

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