Tag Archives: european
Europe Acts to Fix Its Crippled Carbon Market
SustainableBusiness.com News After months of wrangling, a vote in the European Parliament is bringing relief to the EU’s stricken Emissions Trading System (ETS), the world’s first and largest cap-and-trade program. The vote shows the political will to address the oversupply of allowances (permits to emit carbon) that has led to unsustainably low carbon prices. On July 2, Members of the European Parliament (MEPs) voted in favor of a “backloading” proposal which would withhold hundreds of million of permits. Pulling back available permits to balance supply and demand (in order to raise prices) is exactly what’s been needed, but a previous vote caved to industry interests, which convinced them that higher carbon prices risked the bloc’s competitiveness. That move collapsed carbon prices by another 45%, to €2.63 ($3.38) per ton of carbon dioxide, and led many to question whether Europe remains committed to the program – its flagship climate change policy. However, that price collapse triggered intense debate and a renewed effort to save the market. “This is a good decision by the European Parliament and is an important step forward for climate change policy,” says Ed Davey, the UK’s climate change minister. “We need a stable carbon market so we get more certainty for investors so emissions reductions can be achieved at the lowest cost possible.” Carbon allowances have lost 75% of their value over the last four years as Europe’s economic downturn, and the faster-than-expected development of renewable energy capacity has reduced demand for allowances from emitters. As the world’s first market, it did not have rules that would come into play when demand drops. The lack of the ability to reduce the supply of allowances led to a glut. Last year, the European Commission proposed to ‘backload’ 900 million allowances, holding them back until later in the decade. This would push prices up, giving time for structural reforms to the system to be introduced. “This is a reassuring signal for industry and international observers – many of whom have recently adopted their own emissions trading schemes – that the EU remains committed to decarbonizing Europe’s economy in the most cost-efficient way,” says Hans ten Berg, the Secretary General of Eurelectric, which represents Europe’s electricity sector. “Today’s positive vote is a much needed step in the right direction, but it is nevertheless only a first step. We urge the Commission to continue down this path of strengthening the ETS in the long run by proposing more significant structural reforms.” The backloading proposal still needs to clear several more hurdles, although analysts say last week’s vote was the toughest. Traders expect the Commission to begin withholding allowances next year. Structural reforms, however, are likely to be years off, given the drawn-out processes involved in European policy making. Elections next year to the European Parliament are likely to slow deliberations, and most observers don’t expect reforms to be agreed until 2017. But last week’s vote shows there is political will to fix Europe’s carbon market, say participants. “The ‘yes’ vote should provide a short-term boost to carbon prices and confirms the EU’s commitment to the success of the ETS and to implementing the long-term improvements that are still needed,” says Thomas Rassmuson, a Founding Partner at CF Partners, a risk advisory and investment firm specializing in renewables and commodities. Continue reading
EU Missing A Chance To Jump-Start Investment In A Low-Carbon Economy
Published 04 July 2013, updated 05 July 2013 Time is running out for Europe to make a low-carbon economy attractive, argues Stephanie Pfeifer. Stephanie Pfeifer is the chief executive of the British-based Institutional Investors Group on Climate Change. Last year investment in low-carbon energy in Europe fell to $13.4bn, a 25% drop on 2011 levels, according to Bloomberg New Energy Finance. By the European Commission’s own projections, transitioning to a low-carbon economy requires investment of €1 trillion by 2020, increasing to perhaps €7 trillion in the next 40 years. The sums do not add up. It will be very difficult to meet targets for emissions reduction – 40% by 2030 – without significantly more money flowing into low-carbon energy and other low carbon assets. This is why more than 80 European investors worth €7.5 trillion last week called on EU policymakers to make the vision of a low-carbon, single energy market investable by urgently tabling proposals for detailed climate and energy policy. The biggest drags on investment are policy uncertainty, short-term targets and retroactive changes to support for clean energy. Investors need to plan many years in advance to make investments in energy infrastructure which may endure for a generation. The uncertainty around future policy and disputes concerning EU-wide targets makes this sort of planning very difficult. Achieving the 40% emissions reduction target by 2030 requires substantial investment decisions to be made before 2020, but this can only happen when a post-2020 climate and energy framework is in place. Investors are concerned this may not be the case until 2015, or even later. As a welcome first step to help restore confidence, we would like to see draft legislation before the replacement of the current Commission and Parliamentary elections next year. The longer investors have to wait for concrete policies, the stronger the economic pressure to defer investment decisions. While a 2030 framework is essential, much longer-term targets – 15 years or more ahead of time – would provide investors with greater certainty and help drive investment. Meeting investment and emissions targets has also been made far more difficult by the absence of a strong and reliable carbon price signal. The Emissions Trading System is not doing its job and only the permanent removal of the structural surplus of carbon allowances can get the scheme back on track. Addressing the surplus issue is a vital first step but will not provide a lasting fix. A well-functioning carbon market needs a stable and meaningful carbon price, and this can only come about through the introduction of a transparent mechanism to introduce flexibility in allowance allocation. With atmospheric C0 2 at a millennial high, and the world on track for warming of between 3.6 and 5.3 degrees, the physical impacts of climate change will disrupt societies and put the investments of millions of people at risk. Continuing to rely on carbon-intensive energy is not a smart strategy. But at present, Europe is in danger of missing out on billions in crucial low-carbon investment. A low-carbon economy can drive growth, create jobs, tackle climate change and generate prosperity. To make this low-carbon vision a reality requires leadership. European policymakers must seize the opportunity to make Europe an attractive place for energy investment before it’s too late. Continue reading
Carbon Folly Comes At A Price
HENRY ERGAS From: The Australian July 08, 2013 Illustration: Eric Lobbecke Source: The Australian GOOD on the Clean Energy Finance Corporation, the $10 billion fund established by Labor’s climate change package. Other government efforts at picking winners end up shafting taxpayers. The CEFC is doing so from the start. Not that the CEFC has released much information about its maiden “clean” energy project: the refinancing, announced last week, of Victoria’s $1bn Macarthur Wind Farm. But what is known makes intriguing reading. In theory, the CEFC is intended to address “barriers to funding cleaner energy projects”. But there is no evidence Macarthur couldn’t access capital. On the contrary, private investors offered the final tranche of finance the venture required, albeit at a slightly higher interest rate, reflecting the loan’s risk. Faced with that offer, the parties involved in Macarthur turned to the CEFC which, despite the government’s competitive neutrality obligations, undercut the private bid. That largesse was doubtless welcome; yet the beneficiaries, who fall into four groups, hardly seem natural recipients of Australian taxpayers’ generosity. The first are our cousins across the Tasman, with the CEFC’s intervention allowing New Zealand’s government-owned Meridian Energy to more profitably dispose of its investment in Macarthur prior to its privatisation later this year. A second beneficiary is AGL, Meridian’s partner in the venture. The CEFC previously described AGL as exercising “significant market power” in the purchase of renewable energy, meaning it extracts “super profits”; in adding a public subsidy to those profits, perhaps the CEFC was simply abiding by Matthew 13:12, “For whosoever hath, to him shall be given.” The Matthew principle applies with even greater force to the third recipient of the CEFC’s philanthropy, the Malaysian billionaire Syed Mokhtar al-Bukhary, who bought Meridian’s share. Syed Mokhtar’s links to Malaysia’s ruling party have facilitated the construction of a corporate empire that is investing in renewable energy worldwide. Last but not least is Macquarie Bank, with Macquarie Capital advising on the sale to Syed Mokhtar and managing Meridian’s float. With that cast of characters, the CEFC might have been expected to lean over backwards in demonstrating its intervention’s merits, all the more so as the CEFC’s chief executive and two of its board members are former senior employees of Macquarie, which gained directly from the CEFC’s decision. In fact, the sum total of the CEFC’s public disclosure amounts to a two-page press release claiming its funding will facilitate investment in wind generation. If the CEFC relied on a proper cost-benefit analysis, it hasn’t disclosed it; nor is it difficult to understand why: any reasonable appraisal would disclose a large social loss. That can be seen by undertaking the analysis the CEFC should have carried out. Assume that without the CEFC’s intervention, investment in wind generation would decline an implausibly large 10 per cent. That capacity would be replaced by a gas-fired plant, causing greater carbon emissions. By preventing that shift, the CEFC can claim a social benefit; but even assuming the carbon price understates the social value of abatement by $3 per tonne, that benefit is no greater than $6.6 million a year. However, like all bailouts, the CEFC’s will weaken the incentives for wind projects to be selected and operated efficiently. Even if their efficiency only declines by a mere 5 per cent, the social loss would be nearly four times larger than the $6.6m benefit. And to that loss must be added the higher cost of wind generation per unit of power supplied, further offsetting the environmental gain. The aggregate result is that for each $1 of benefit, the CEFC’s intervention makes Australians $5 worse off. That outcome highlights the extent to which carbon policy has degenerated into a mechanism for redistributing income from taxpayers and electricity consumers to favoured constituencies, imposing steep economic costs along the way. And if the CEFC reflects that phenomenon in microcosm, the carbon tax embodies it on a vast scale. After all, prices in European carbon markets have been far below our initial $23 tax since it came into effect. Abatement could therefore have been purchased internationally at a fraction of the cost the carbon tax has imposed on Australian industry. And the consequences of forcing emissions reductions here that could have been done more cheaply elsewhere have been anything but trivial. Rather, Treasury’s own modelling, adjusted for the absence of an integrated world carbon market, suggests that had our tax been aligned with Europe from the outset, national income would be $3.5bn higher by the end of 2014-15. Moreover, over the same period, households would have paid $4.2bn less in electricity prices, saving $450 per household. Why then has the tax remained at such high levels? Because decreasing it to European prices would have slashed government revenues over the period to 2014-15 by $12bn. It would thus have limited the scope to curry favour through tax cuts and the allocation of free permits, cash handouts and exemptions. And it would have provided a far smaller implicit subsidy to the renewable energy industry, which has been the carbon policy’s most vocal supporter. All that points to a crucial lesson: despite the incessant chatter about “market mechanisms”, this policy is an entirely artificial government construct, lacking any anchor linking the burdens it imposes to any gains it creates. In contrast to normal markets, prices can therefore continue indefinitely at levels which do not balance benefits with costs. And in the penumbra of the cash flows it generates, questionable deals can be struck with private interests at taxpayers’ expense. These deficiencies are not minor flaws; they are integral to the system Labor has set up. Until a clean broom is brought to this area, expect decisions such as the CEFC’s to remain the order of the day. Continue reading
