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Is This The End Of Carbon Trading, Or Just A Hiccup?
Ratcliffe-on-Soar power station: carbon markets are supposed to be effective, not just hot air. PA/David Davies Just as scientists almost universally agree greenhouse gases contribute to the planet’s changing climate, economists almost universally agree the problem is made worse because polluters don’t pay for the mess they make. A carbon tax is one way to force companies to pay for their pollution. A carbon market is another, established by a “cap and trade” system where a limited number of permits (or “allowances”) are sold or given away each year. Every company must surrender one permit for every tonne of carbon produced. The capped limit is lowered over time to reflect the aim of steadily lowering emissions. The resulting carbon price ensures total emissions do not exceed the limit. Market logic suggests that if permits become more scarce relative to demand, then the cost of the permits, the effective “carbon price”, will rise (and vice versa). Carbon markets have been set up around the world, in Australia and California, Kazakhstan and China. In the UK, companies are covered by the European Union Emissions Trading Scheme (EU ETS). Each system is designed slightly differently, and the resulting carbon prices vary widely. Some policy-makers hope that these systems will one day join to form a global carbon market , so that polluters everywhere pay the same price for their pollution and cannot simply move operations to somewhere cheaper to pollute. But despite a recent agreement on a link between the Australian and EU markets, a global market remains a distant prospect. A really distant prospect, perhaps, given recent headlines that pronounced the EU ETS dead in the water – carbon prices previously above €30 per tonne (which some economists considered too low) have tumbled to below €5 where they have languished for months. In April the European Parliament considered a plan to increase short-term carbon prices by delaying the issue of 900 million permits; MEPs rejected the move and the EU carbon price fell to €2.7 per tonne. Dead, or just sleeping? How has the carbon price fallen so low that it needs “rescuing”? A low carbon price would be a sign of the scheme’s success if it meant companies had developed clean technologies to reduce pollution cheaply over the long-term, lowering demand for permits whose price would fall. Instead, carbon prices are low because the recession has dented economic output, and consequently emissions are lower. Low carbon prices present no incentive for companies to make long-term investments in clean energy, arguably the aim of the EU ETS. When the carbon price rises or falls to extremes, politicians are tempted to interfere with the supply of permits. This means carbon prices can move significantly depending on political developments, as well as factors such as economic output and the weather (cold weather means more carbon is generated as the heating is turned up). This has led some economists to argue that carbon taxes are a more suitable tool for a problem like climate change. A stable carbon tax would give companies a predictable incentive to reduce emissions, year after year. It would avoid the wild price swings of a market. True, taxes don’t guarantee that a set limit on emissions will be achieved – carbon markets have been preferred because they provide this guarantee. But the EU ETS only limits emissions for the five to ten years; what really matters is that emissions fall considerably over the next few decades. A tax that was set to increase gradually over time, with the plan for review after ten years, could meet the overall objective of reducing emissions and send a much clearer message. But supporters argue that carbon markets work well if designed well ; they just need some additional features to keep a lid on wild price fluctuations. For instance, prices might be stabilised by transparent rules that define how many permits are released onto the market as carbon prices rise or fall. Fewer permits would be released onto the market when prices are low, and more when prices are high. The UK has unilaterally implemented something similar, introducing a domestic “ carbon price floor ” in April. This ensures that most UK companies (there are various exemptions) have to pay a carbon price of at least £16 per tonne this year, rising to £30 by 2020. In an EU-wide market, however, the effect is simply to shift emissions out of Britain and into Europe, possibly driving energy-intensive industries abroad in the process. An EU-wide price floor would sensibly prevent the risk of price crashes, leaving only the problem of price spikes to be addressed. In the short term, efforts to “save” the EU carbon market continue. German Chancellor Angela Merkel said recently that she favours systematic changes that would solve these problems once and for all, rather than a temporary fix of withholding permits. But her finance minister opposes intervention. The politics are messy, but the stakes are high. If carbon prices do not provide an incentive for companies to move to cleaner production now, the transition will be forced on them later, with greater urgency, and at much greater cost – to us and them. Continue reading
The Question the Fed Should Be Asking
By Caroline Baum May 15, 2013 Ed Koch, the late mayor of New York City , used to stop residents on the street and ask, “How am I doing?” With next month marking the four-year anniversary of the end of the 2007-2009 recession , the longest and deepest since the Great Depression, it seemed like a good time to ask the same question — of the Federal Reserve . The Fed’s actions to right the economy, once described as “unprecedented,” now seem ordinary. The various emergency-lending facilities have been closed, but the overnight rate is still at zero to 0.25 percent, and the Fed is engaged in its third round of quantitative easing, or large-scale asset purchases, which this time is open-ended ( until it isn’t ). So how’s the Fed doing? Based on standard metrics, economic growth has been tepid as far as expansions go. Real gross domestic product has increased at an average 2 percent pace since the second quarter of 2009. The unemployment rate has inched its way down to 7.5 percent from a peak of 10 percent in October 2009, a stark contrast to the rapid doubling of the rate from the recession’s onset in December 2007. In other respects, the economy is doing just fine. Asset markets are elated at the Fed’s liquidity provisions. And to the extent that the goal of policy was to encourage risk-taking, inflate asset markets and hope for a spillover to the broader economy, I guess two out of three isn’t bad. The risk is that Nos. 1 and 2 create problems before No. 3 takes hold. Credit Risk Some background first. Fed chief Ben Bernanke has gone out of his way to explain how monetary policy works once the traditional policy tool, the overnight interbank rate , hits zero. When the Fed buys long-term Treasuries, it depresses yields and forces investors to buy assets that carry more credit risk, such as stocks and corporate bonds. Lower yields make housing more affordable. Higher stock prices work through the wealth effect to increase consumer spending , leading to higher corporate profits and personal incomes in what he called a “ virtuous circle .” Let’s take a look at the results. The Dow Jones Industrial Average and the Standard & Poor’s 500 Index set new highs this week, a reflection of either the Fed’s liquidity provision or record corporate profits , take your pick. ( Price-earnings (SPX) ratios remain well within historical norms.) Credit spreads have narrowed, just as the Fed wished. Home prices have come roaring back, posting large gains in parts of the country that were hardest hit by the housing bust. Phoenix led major U.S. cities with a year-over-year jump of 23 percent, followed by San Francisco (up 18.9 percent) and Las Vegas (up 17.6 percent), according to the S&P/Case-Shiller Home Price Indices for February. And the National Association of Realtors reported that the U.S. median price rose 11.3 percent in the first quarter from a year earlier, the biggest increase in seven years. Then there’s the art market. After “giddy competition” last fall, the spring art auctions at Sotheby’s and Christie’s in New York featured catalogs that “weigh as much as a phone book and contain relatively hefty price tags,” according to the Wall Street Journal. Apparently there are a lot of new collectors, many from abroad, with money to throw at trophy art. Another example: The average price of a New York City taxi medallion topped $1 million last month. The Federal Advisory Council , a group of 12 bankers who advise the Fed, warned about a bubble in U.S. farmland prices and excessive risk-taking at their Feb. 8 meeting, according to minutes obtained by Bloomberg News reporters Craig Torres and Joshua Zumbrun under a Freedom of Information Act request. Horse Race Fed officials have started to walk back from their asset-price/virtuous-circle policy prescription, sprinkling recent speeches and press conferences with references to “reaching for yield” and “excessive risks” and invoking the central bank’s dual mandate of full employment and stable prices instead. At his March 20 news conference, Bernanke said the Fed isn’t “targeting asset prices.” Rather policy makers are “trying to identify, much more so than in the past, whether major asset classes are deviating in terms of their price or valuation from historical norms.” The degree to which assets are leveraged, something the Fed is monitoring, is crucial to determining potential systemic risk. This is all good. But there’s a more important consideration. Four-and-a-half years of an overnight rate near zero and aggressive securities purchases by the Fed have succeeded in raising asset prices. The question is whether higher asset prices will deliver jobs and economic growth before they become destabilizing. This is what policy makers are referring to when they talk about the costs versus the benefits of QE: the horse race between risk-taking and economic growth. It sounds as if Bernanke and the Federal Open Market Committee are getting ready to re-handicap the race at their meeting next month. ( Caroline Baum , author of “Just What I Said,” is a Bloomberg View columnist. The opinions expressed are her own.) To contact the writer of this article: Caroline Baum in New York at cabaum@bloomberg.net To contact the editor responsible for this article: James Greiff at jgreiff@bloomberg.net Continue reading
Farm Prices Soar In Memphis Area, Across Region
By James Dowd, Ted Evanoff, Wayne Risher, Commercial Appeal Posted May 9, 2013 The price of Mid-South farmland has skyrocketed recently. (Lance Murphey/The Commercial Appeal) Jack Nall has watched the price of Arkansas Delta farmland steadily increase during the last year. “I’m always astounded to hear prices that farmland is going for,” said Nall, executive vice president of First Community Bank of Eastern Arkansas in Marion. “It seems like people are looking for a return on their investments and rather than re-enter the stock market, they’re betting on real estate.” Over the last year, the price on select Memphis-area farmland has surpassed $4,000 per acre, a 33-percent rise in one year on some parcels. It is a price spike being repeated across the nation’s farm belt as pension funds, hedge funds, foreign investors and others try to make money in an era of low interest rates. But the buying spree has raised concerns land values could collapse, burdening lenders, investors, farmers and communities that depend on the farm tax base. Continue reading at the Commercial Appeal © 2013 Knoxville News Sentinel. All rights reserved. This material may not be published, broadcast, rewritten or redistributed. Continue reading
