Discussing Energy Economics on the Internet

More on EU Carbon Prices

Posted in Climate,Emissions Trading by Cheryl Morgan on the January 22nd, 2009

Sandbag has another article up, citing this Reuters article in support of the claim that the Emissions Trading System is proving windfall profits for European generators.

Meanwhile at Knowledge Problem Mike Giberson argues that clean energy projects in the developing world are just another industry and it doesn’t matter whether they get funded or not.

I particularly liked this point from the Sandbag article:

I have long believed that Europe took a wrong turn when it embarked on a unilateral emissions trading scheme that covered industries whose products are priced in a global market. It was always going to result in fierce lobbying and inevitable political compromise. Had they decided to stick with the large sectors like electricity, which cannot move and are not exposed to international competition, they would have been able to proceed with much more ambition and clarity of purpose.

Of course letting some industries off the hook would have infuriated those environmentalists who are are more interested in ensuring that the “bad guys” get punished than in fixing the climate change problem. For the rest of us, however, the issue ought to be “will it work?” If we are going to have masses of new government subsidies and regulations to save the planet, the #1 priority has to be whether those measures will work or not.

The same applies to clean development. Governments in rich countries should be subsidizing such schemes in order to help combat climate change, not just to boost exports. If a collapse in carbon prices means such schemes don’t get off the ground (and developing countries choose to burn coal instead) then we have a problem.

Of course all of this assumes that economies and ecosystems can be “fixed” by government intervention. As Lynne Kiesling points out, that is easier said than done.

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Not Easy Being Green

Posted in Emissions Trading,Europe,USA Federal by Cheryl Morgan on the January 19th, 2009

It seems like it is open season on emissions trading schemes at the moment. Over at the Wall Street Journal they are reporting on the hail of fire descending on the U.S. Climate Action Partnership over their blueprint for government action. Meanwhile Sandbag is having at go at the EU’s scheme in the light of the current rapid collapse of carbon prices in that market.

Much of the USCAP criticism appears to be politics as usual. Business interests will carp over anything that costs them money, consumer advocates will rail against anything that puts up prices, and environmentalists will complain that anything that doesn’t hurt businesses and consumers is an outrage. The fact that it is being shot at by all sides suggests that USCAP might actually have hit the middle ground. But that doesn’t mean that their scheme will work.

Europe’s problem is altogether different. Whatever scheme a government comes up with will be unpopular with someone. However, if a carbon trading scheme ends up with a very low price for carbon then it is very clearly not doing its job, no matter how happy some people might be about that. The objective of a carbon trading scheme is to reduce emissions by making them expensive, and if it doesn’t do that then it is pretty much just creating jobs for consultants and IT people.

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EU Moves Forward On ETS II

Posted in Emissions Trading,Europe by Cheryl Morgan on the October 8th, 2008

Yesterday the European Union took a major decision on the future of its Emissions Trading System (ETS). The big issue has been the question of whether companies would have to pay for their permit allocations in future, or whether they would continue to have them handed out for free. Karsten Neuhoff made a strong case for auctions, and it seems that the EU agreed with him, because broadly speaking that is what they opted for.

Reactions have been mixed. The Times thinks this is a disaster for the UK energy industry and suggests that electricity costs will rise steeply. Sandbag is broadly optimistic. And Deutsche Welle is furious that we have to wait until 2013 for the auctions to take place.

Of course it could all be moot, as the decision has to be ratified by both the European Parliament and member states. Doubtless much lobby will take place between now and then.

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Sources of Pollution

Posted in China,Emissions Trading,Papers by Cheryl Morgan on the October 8th, 2008

The generally accepted wisdom in the West tends to be that China is industrializing on the cheap, and spewing out vast quantities of pollution from poorly built power stations. A new study from MIT takes aim at that idea. New Chinese power stations, they say, are often very modern and efficient. What they lack is not technology, but economic incentives. Because China has no emissions markets, power station owners choose to burn the cheapest coal that they can find, regardless of how much pollution this generates. And although their power stations come with expensive gadgets like smokestack scrubbers, they don’t use them because that costs money. The full paper is available here.

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RWE To Test Carbon Capture

Posted in Coal,Emissions Trading,UK by Cheryl Morgan on the September 23rd, 2008

The great hope of the coal industry is that coal-fired power stations can somehow be modified to prevent them from releasing CO2 into the atmosphere, thereby rendering them climate-friendly. Germany’s RWE owns several coal-fired stations in the UK and Energy Business Review reports that they will soon be testing two new types of carbon capture technology. The first system, due to go live at Didcot this month, tries to remove CO2 from exhaust gases, while the second system, to be installed at Aberthaw next year, is more closely integrated with the combustion process. A lot of people will be very much hoping that these tests give positive results.

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Tightening the EU Carbon Market

Posted in Emissions Trading,Environmental Markets by Cheryl Morgan on the September 17th, 2008

Carbon offsetting has received a lot of bad press of late, in part because there have been some really awful offsetting schemes out there, and in part because crusading journalists hate the idea that the middle classes could actually assuage their guilt without obvious dreadful suffering. To fill the gap, a new means of climate change activism has appeared. Sandbag is a UK-based campaign that aims to reduce the amount of CO2 emissions in the EU buy buying up carbon emissions permits and destroying them. That way the number of emissions permits available on the market will decrease, pushing up the price of the remaining permits, and encouraging companies to do something about their emissions.

Sandbag is currently charging around $50 for its basic level of membership, for which it will buy and destroy a single 1-tonne permit. According to the EU, there are currently 2298.5 million permits in the market, but then there are almost 500 million people in Europe. If everyone bought a permit, that would make a big hole in the market.

There is an interesting interview with Sandbag’s founder, Bryony Worthington, in The Guardian.

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New UCEI Paper on NOx Markets

Posted in Emissions Trading,Papers by Cheryl Morgan on the May 27th, 2008

UCEI has issued a new working paper. “When to Pollute, When to Abate? Intertemporal Permit Use in the Los Angeles NOx Market” is by Stephen P Holland and Michael R Moore, and looks at intertemporal trading in the NOx market in Southern California. The abstract is as follows:

Intertemporal tradability allows an emissions market to reduce abatement costs. We study intertemporal trading of nitrogen oxides permits in the RECLAIM program in Southern California. A theoretical model captures the program’s key intertemporal features: two overlapping permit cycles, two compliance cycles for facilities, and tradable permits. We characterize the competitive equilibrium; show that it is cost effective; and demonstrate the firms’ incentive to delay abatement, i.e., to trade intertemporally. Using model extensions to explore market design issues, an arbitrage condition implies that the equilibrium is invariant to overlapping compliance cycles, but depends crucially on overlapping permit cycles. We empirically investigate intertemporal trading of permits using panel data on RECLAIM facilities for 1994-2006. Facilities undertake trading by using a considerable proportion of permits of the opposite cycle. We econometrically test two theoretical propositions – delayed abatement and trading across cycles – with a difference-in-differences estimator. The results neither contradict nor provide conclusive support of the theory.

A PDF of the paper is available here.

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