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EU Vote Shows Carbon Pricing Not Dead Yet
Yesterday the European Union’s parliament voted in favour of a proposal aimed at reviving the flagging EU carbon market (For: 344, Against: 311), after previously rejecting a similar proposal in April. It led the price of EU carbon allowances to rise in yesterday’s trading by 9 per cent to €4.67 or $A6.67. This was on top of earlier rises in the lead-up to the vote as the market priced-in an expectation of a ‘yes’ vote. This proposal, commonly referred to as ‘backloading’, will involve withholding the sale of 900 million emission allowances over the next few years, and then returning them into the market towards the latter years of 2020. However, for the measure to be implemented, it still needs to receive approval from the European Council (the government ministers for each member country of the EU). The EU’s emissions trading scheme is currently suffering from a very large oversupply of emissions allowances, thanks to Europe’s deep recession. This has led to carbon prices slumping to such low levels that they become almost irrelevant to investment decisions in carbon intensive sectors such as power supply. In a normal physical commodity market like metals or grains, when there is a large oversupply and prices plummet, firms curtail production. However government-designers of the EU carbon market, as well as the Australian scheme, failed to incorporate in-built features that would act to automatically mimic these self-adjusting features of normal commodity markets. The end result is prices can plummet in quite a volatile manner once an oversupply is reached, and then become stuck. This backloading proposal, by reducing the level of new allowance supply in the short-term, aims to temporarily address this shortcoming. However because the issuance of allowances has merely been delayed, rather than permanently withdrawn, the carbon market is still stuck with a large, long-term oversupply. Consequently carbon prices are still not expected to rise to levels that would provide a strong incentive for investment in low carbon technology. For the backloading proposal to be implemented it still needs at least 255 of the 345 votes held by member countries (votes per country are listed at bottom) in the European Council. Energy ministers of countries representing 180 votes issued a joint statement a few days ago strongly supportive of the EU ETS and backloading (Denmark, Estonia, Finland, France, Germany, Italy, The Netherlands, Portugal, Slovenia, Slovakia, Sweden and the UK were signatories). The statement argued the EU carbon price is too low, stating: “We remain deeply concerned that the ETS as currently designed cannot provide the price signals needed to stimulate the low carbon investment needed now, because the supply of allowances substantially outstrips demand, leading to a very low carbon price. This also threatens the credibility of carbon markets as the most flexible, cost-effective way to achieve emissions reductions.” Importantly it argued in favour of more permanent solutions beyond backloading to address the oversupply of allowances and low carbon prices, “Targeted interventions may be necessary and we are convinced that only through proper structural reform and by giving investors a clear signal on Europe’s low carbon ambition beyond 2020 can the EU ETS be restored to its original purpose of driving down carbon emissions and stimulating low carbon investments.” However there is resistance to reform of the EU ETS, from Poland in particular. This parliamentary vote, on top of Obama’s recent commitments and China commencing its pilot emissions trading schemes represents a very positive development. But hurdles still remain before the European and therefore the Australian carbon price outlook materially improves. Read more: http://www.businesss…t#ixzz2Y4jMgsWK Continue reading
What Would A Quick Transition To ETS Really Mean?
July 4, 2013 – 12:05AM Matthew Wright and Trevor Jack Read more: http://www.theage.co…l#ixzz2Y06Kt4Wm The newly minted Rudd government may bring forward the date at which the Gillard carbon tax converts to an emissions trading scheme (ETS), currently legislated for July 1, 2015. What would an earlier transition to an ETS, linked to the European system, mean for the community, business and global warming? An early transition may be impractical or at least fraught with difficulties (ref Greg Combet). If an ETS was linked to the European scheme and the price there remained low (around $6 a tonne), income from issuing ETS permits would be substantially lower than budgeted for the carbon tax ($24.15 a tonne in financial year 2014 and rising). This budget shortfall could be averted by applying a floor price – in which case the resulting ETS would just be the current carbon tax but with window dressing, a different name and substantial logistical and bureaucratic technical difficulties. Although technically different, an ETS and carbon tax have similar objectives. An ETS sets a limit on pollution (supply constraint) and allows the market to determine the price. A carbon tax sets a price for polluting and allows the market to determine demand (which equals supply). If the defining factors of each system are set consistently, each will result in the same price and demand (i.e. volume of pollution). But the factors need to be set in advance of the period in which they are effective. Accordingly, these factors are based on projections. The problems with the European ETS, principally a price that is too low to have any meaningful effect, arose mainly because the key factor (the volume of permits) was based on a projection that didn’t allow for the GFC. This is not a criticism – not many people saw the GFC coming. But it explains why the scheme is so ineffective and the price so low. An argument for transitioning to the ETS earlier than currently legislated is that it would be cheaper. True, in the short term, given that the carbon tax would be around $25 and the ETS cost would be about quarter of this. But this is cheaper in the same sense that buying a five-litre can of fuel is cheaper than buying a 20-litre can. Each is a can of fuel. But the useful content is different by a factor of four. Similarly, a $25 carbon price buys much more real abatement than $6. And the policy objective is surely real carbon abatement and not just “anything so that we can be perceived to be doing something”? Changing to an ETS and linking with Europe would be similar to retaining the carbon tax but reducing it to $6 a tonne – but a lot easier. But what is the effect of a carbon tax at $6 a tonne? On consumers? A lower carbon tax might flow through to lower prices for electricity and goods heavily dependent on electricity for production. But this assumes that generators would pass on resultant cost reductions. Is this likely? Government control/monitoring is likely to be necessary to ensure such behaviour – as it was to ensure price increases were not excessive when the tax was introduced. Assuming the compensation package – including lower personal taxes, based on a higher carbon price – is not changed, the net result would be lower prices. It is likely that such changes in prices would be imperceptibly small. And such lower prices would be offset by the cost of higher taxes/lower services necessary to make up for the forgone tax revenue. (TANSTAAFL – There Ain’t No Such Thing As A Free Lunch.) The effect on businesses not liable for the carbon tax? Essentially similar to consumers – generally imperceptibly lower input prices but with the possibility of higher taxes to make up for forgone government revenue. On businesses liable for the carbon tax? Lower costs, much of which might flow through to higher profits. The effect on global warming? Carbon pricing can affect short-term production decisions and thereby change short-term CO2 production. A lower carbon price should increase, by a small margin, CO2 emissions. But the main imperative for any carbon abatement policy, is to affect long-term investment decisions and transform the community and economy to a cleaner future. For example, any serious response to global warming must result in no new fossil-fuelled power stations. Decisions on investments with 30-year-plus lifetimes are based on all the future circumstances, including explicit carbon costs. If investors perceive the Australian government taking a token approach to global warming and expect this to continue well into the future, they should factor lower future carbon prices into their decision making – i.e. more coal-fired power stations rather than better/smarter grids, energy conservation measures, renewable power. On the other hand, if investors perceive that the government and community generally want action, they will expect carbon pricing to rise steeply over time. Thus, investors would invest in renewable alternatives, rather than fossil fuels. Combined with the Coalition’s policies, which provide no incentive for economy-wide transformation, the effect on global warming of the government implementing a lower carbon price is likely to be further delay in de-carbonising the Australian and global economies. On political standing? With appropriate spin, (possible) lower costs to consumers, higher profits to generators, and omission of the need to fund the revenue shortfall, there may be short-term political gain, relative to the “ban the carbon tax” alternative, in switching to a lower carbon price. But the government’s credibility in terms of having a serious long-term strategy to address global warming would become similar to that of the opposition – essentially non-existent. If the political need is to be seen to be doing something, then an ETS, with a floor around $25, might dissociate Rudd’s “new policy” from Gillard’s so-called dishonestly introduced carbon tax yet maintain the price at a level at which it is plausible, that investors would believe the government to be serious and thereby consider cleaner rather than more carbon-intensive investments. Matthew Wright is the executive director of climate and energy think-tank Zero Emissions. Trevor Jack is an actuary with JAC Actuarial Consulting. Read more: http://www.theage.co…l#ixzz2Y06GVUtC Continue reading
Global Investment Falters But Tax Havens Prosper, U.N. Finds
By Tom Miles GENEVA | Wed Jun 26, 2013 6:05pm BST (Reuters) – Efforts to stop companies syphoning money through tax havens are failing and offshore centres increased their share of foreign direct investment (FDI) again last year, according to a U.N. report. “Tackling offshore financial centres alone is clearly not enough, and is not addressing the main problem,” said the annual World Investment Report, published on Wednesday by economic thinktank UNCTAD. While investment sinks in many economies, one country is enjoying above all is enjoying a boom: the British Virgin Islands, with a population of 30,000, is now the fifth biggest recipient of FDI in the world, the report said. The Caribbean archipelago welcomed almost $65 billion (42.4 billion pounds) of inward investment flows in 2012, just less than fourth-ranked Brazil , and 10 times the amount of FDI it received in 2006. FDI flows to such offshore tax havens have soared in the past five years, rising from an average of $15 billion in 2000-2006 to $75 billion per year in 2007-2012, the report said. “Tax haven economies now account for a non-negligible and increasing share of global FDI flows, at about 6 percent,” the United Nations thinktank said. Meanwhile, traditional FDI – cross-border corporate acquisitions and overseas expansions – has slumped. Among the worst hit are rich euro zone countries such as Belgium, which attracted $103 billion in 2011 but lost money in 2012 as existing investors sold up. The Netherlands saw a similar but smaller reversal, while Germany ‘s $49 billion haul of FDI in 2011 shrivelled to less than $7 billion in 2012. Global foreign direct investment shrank by 18 percent to $1.35 trillion in 2012 and is likely to remain at a similar level this year, the report said. UNCTAD forecasts global flows of $1.6 trillion next year and $1.8 trillion in 2015. In tax havens, the vast majority of FDI flows do not go into projects based in the country. Instead they are redirected back to the source country, a process known as “round tripping”. “For example, the top three destinations of FDI flows from the Russia n Federation – Cyprus, the Netherlands and the British Virgin Islands – coincide with the top three investors in the Russian Federation,” the report said. That could mean that global FDI is actually even weaker than it appears, since a growing proportion is simply round-tripping. Even more money is channelled through “special purpose entities” (SPEs). Firms set up these foreign affiliates for specific purposes such as managing foreign exchange risk or facilitating the financing of an investment. Money flowing to SPEs in just three countries – Hungary, Luxembourg and the Netherlands – amounted to $600 billion in 2011, dwarfing the $90 billion of flows to tax havens. Those countries’ SPE flows were not counted as FDI in the report. However, the report said SPEs were gaining importance relative to FDI flows and anecdotal evidence showed that most of the money sent to SPEs was invested in third countries. Still more tax is avoided through cross-border transfer pricing schemes, which companies can use to shift profits into low-tax jurisdictions and show apparent losses in high-tax markets, the report said. Despite the OECD trying to stem the flow of FDI to tax havens, the overall flows to tax havens overall “do not appear to be decreasing”, the report said, partly because big companies still needed somewhere to park their cash mountains. “Efforts since 2008 to reduce flows to OFCs (offshore financial centres) have coincided with record increases in retained earnings and cash holdings,” the report said. Also, although big investors such as Japan and the United States had succeeded in cutting the amount of flows to tax havens, many non-OECD members had now taken their place, ensuring the flows to tax havens continued and grew. The report called for a discussion of corporate tax rate differentials between countries, extraterritorial tax regimes and tax levied on repatriated earnings . “Without parallel action on these fronts, efforts to reduce tax avoidance through OFCs and SPEs remain akin to swimming against the tide,” the report said. (Reporting by Tom Miles; Editing by Ruth Pitchford) Continue reading
