What kind of carbon trading system for the US? Jules Evans
March 23, 2009 | More on Climate and resource scarcity, Economics and development | One comment
There looks likely to be another acrimonious debate in the US over President Obama’s plan to auction 100% of the carbon permits generated if the US signs up to a cap on its emissions at the Copenhagen summit.
Big US utilities, particularly coal-powered ones, say they want the permits to be given them for free, otherwise, they say, the cost will be handed on to consumers:
Some cap-and-trade corporate allies and lawmakers from both parties say the plan would amount to a tax increase falling most heavily on consumers whose power comes from coal, the most polluting power source.
“It was wrong-headed thinking,” said Michael Morris, chief executive officer of American Electric Power Co, the biggest U.S. electricity producer from coal. “Don’t call it cap-and-trade when it’s really a tax,” he said in an interview.
The Columbus, Ohio-based utility wants no-cost permits at the outset. Congress faces “an awfully long debate” if a bill imposes all those costs on companies, he said.
Speaking last week with a group of CEOs in Washington, Obama indicated he may budge from his 100 percent auction stance. He said he will work with companies to “find a structure that arrives at that right balance” between giving permits away and selling them. “We are not going to be able to move this in an effective way without partnership with the business community.”
Come again?
Phase One of the EU carbon trading system handed out free permits to European utilities, who still passed on the cost to their consumers, and pocketed the record profits. It was punishing consumers, and rewarding pollutors with a multi-billion-euro windfall.
That’s why the EU has moved to an auction system in Phase 2 – indeed, it’s holding an auction tomorrow.
Obama should stick to his guns.
Meanwhile, the EU is debating whether to set a reserve price for carbon permits, after the price of carbon collapsed from Eu30 per tonne in the middle of last year, to Eu10 now.
PWC is the latest to call for governments to set a floor price below which they won’t sell.
More opposition from Barclays Capital, which is by far the biggest trader in the carbon market, and a good reply from John Hawksworth, the author of PWC’s report:
Trevor Sikorski, a director in Barclays Capital’s carbon trading division, said that any attempt to impose a floor price would represent “a market distortion that is unneeded”. He added that even a floor price would not guarantee investment in low-carbon technologies, arguing that the role of prices was not to assign capital expenditure but instead “equilibrate markets by putting a price on the scarcity of the commodity… if the market needs investment to equilibrate, then it will signal this.”
However, Hawksworth said that while imposing price floors and ceilings would serve to distort conventional markets, the artificial nature of the carbon market meant that it represents an exception to the rule.
“Normally you would say that if a price is low, it is low for a reason,” he admitted. “But in this instance the market has been created for the specific reason of bringing down emissions and that is difficult to achieve if the price gets too low, so governments need the flexibility to address excessive price volatility.”
Delicious
Rss
Twitter - David Steven
Just following up on my ‘auction the permits’ position as expressed above, the alternative view was put to me yesterday by Patrick Birley, the head of the European Climate Exchange here in London.
He suggested it might be worth giving out emission allocations to US utilities for free in the first instance ‘just to get them involved in the scheme’.
You can then gradually reduce the allocations over the coming years, as the EU has done, and increase the amount of permits that are auctioned. Over time, you reward those utilities who reduce their emissions, and punish those who don’t, but it happens over time.
This doesn’t necessarily have to mean a big free giveaway for the utilities if
a) the permits are not over-allocated, as was the case in Phase 1 of the EU scheme and
b) the utilities are not allowed to pass on the costs of carbon permits which they were given for free, as also happened in phase 1 of the EU scheme.
If Obama auctioned 100% of permits, Birley suggested, ‘the law wouldn’t be passed for years and years’ because of the lobbying power of the utilities in the US.
The question is, does the world have time to move slowly on this issue? Could people power / NGOs successfully oppose the lobbying power of the utilities.
This article suggests popular opinion may not be sufficiently galvanised:
http://blogs.tnr.com/tnr/blogs/galston/archive/2009/03/23/a-cap-and-trade-calamity.aspx