An update on the carbon markets - setting free the bears

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Jonathan Shopley

Posted 18 April 2011

When negotiators from 190 nations reconvened beginning of April in Bangkok to work on an implementation plan for the Cancun Agreements that had been so carefully negotiated in Mexico in December 2010, the stark reality that Cancun had side-stepped all the major political issues (like the very nature and structure of the legal agreement) shattered the short-lived hope of real progress, And so the wheels have come off – again, and the process which everyone so fervently hoped would deliver a successor to Kyoto in Durban in December 2011 is once more mired in procedural wrangling. 

That hasn’t stopped the carbon markets from breaking free of any bearish sentiment that could understandably take hold during this period of deepening uncertainty.  Japan’s tsunami and the question mark hanging over the renaissance of nuclear power since the disaster at Fukushima, has underscored the continuing and even greater dependence we have on fossil fuels.  That is holding EU ETS prices for CERs and EUAs at levels not seen for some years.  

2011 EUA CER prices

But there are a couple of lone bears straining at the tangled bounds of an international agreement, and these solitary efforts hold some promise that we could break free of the UNFCCC quicksand, and make some headway.

Polar Bear Politics

Polar Bear Politics

“A Cap & Trade bill is dead.  ‘Polar bear politics put paid to that’.  Now it’s all about jobs, energy security, and clean air.” is how Republican Senator Lindsay O. Graham set the polar bear loose in a recent address at the London School of Economics when he opined on the future of climate change policy in the US.  

This is quite a change in view by the Senator from South Carolina.  In December 2009, Graham had announced his support for Senators John Kerry and Joe Lieberman’s commitment to a Federal climate change bill.   After a run-in with Senate Democrats about their shifting priorities to immigration issues, he withdrew his support for the Bill.  He cited ‘polar bear politics’ as the villain, and by that he meant over-egged and under-cooked science emoting the plight of polar bears and the wider and farthest environments to side-step concerns about the impact of carbon constraints on US employment, energy security, and economic stability at home.

Graham has now put his weight behind a Clean Energy Standard (CES) for the US – something that Barak Obama has been working on given the US hasn’t much chance of passing a Federal Cap & Trade bill this side of 2015.  At the heart of the current drafts of the CES is a commitment to 80 percent of the nation’s electricity coming from clean energy technologies by 2035.  Clean energy includes carbon capture and storage for fossil fuels and nuclear.  Questioned on whether nuclear and oil are realistically part of the future picture, Graham pointed out that the Gulf of Mexico accident and spill are already in the political rear-view mirror, and that Fukushima proves rather than undermines the relative safety of nuclear options.

Whether you agree with Graham’s analysis the heartening news is that by challenging ‘polar bear politics’, he and others have begun to mend the deep and previously unbridgeable divide that splits America onto two camps – those that see the fight against climate change as a just and right cause, and those that see it as an assault on US economic fortunes.  He is adding momentum to the plea from Jeff Immelt, CEO of GE who has been calling for a more unified approach to climate politics – one that speaks to a solution which creates jobs, clean energy, and energy security.  Whatever way the US decides to set its pathway to a low-carbon future, real progress in delivering absolute reductions across the US economy will make a huge and positive impact on international negotiations which are so severely hamstrung without a plausible US presence and contribution.

Grizzly Bear Politics

Grizzly Bear politics

The central image in the Californian flag is the famed Grizzly Bear – renowned for its solitary and fearsome independence.  Like the grizzly, California’s AB32 legislation is making slow and ponderous progress, despite many obstacles, towards a State-wide cap & trade system slated to start in 2012.  California (which has some experience to draw upon), doesn’t believe that a CES is a substitute for cap & trade.  I think they are right.  California struggled in the past to implement car fuel efficiency standards and zero emission vehicles.  More recently, and worryingly, in South Carolina (Senator Graham’s state) legislators  sought an exemption from a Federal law which phases out incandescent bulbs in favour of energy efficient alternatives with a proposed state law called the Incandescent Light Bulb Freedom Act.  Direct regulation be damned....  However, if California prevails and takes the head-wind in setting up a successful cap, trade and offset system, a federal lookalike could well follow.  That will happen when the cost efficiencies of market-based approaches are proven as a powerful way to protect the US’s international competitiveness, by drawing in much needed private capital and keeping the marginal cost of carbon abatement low.  Here’s hoping the grizzly bear makes it across California state lines.

Pooh Bear politics

“I don't see much sense in that,“ said Rabbit. “No,“ said Pooh humbly, “there isn't. But there was going to be when I began it. It's just that something happened to it along the way.“

Winnie the Pooh, AA Milne.

The UK Coalition Government’s last Budget announced this April brings this AA Milne line to mind.  The UK was the first nation to commit to an 80% reduction in GHG emissions during the last Labour administration.  It set up the Climate Change Committee to advise the Government on 5 year budgets and policies to meet its reduction ambitions by 2050.  The Department for Energy & Climate Change was established, and The Carbon Trust was well funded with revenues raised through the Climate Change Levy.  The UK’s emission trading scheme (ETS) was the pilot that encouraged and informed the EU’s ETS. So far so good, and momentum was built on the belief that climate change represents an opportunity to reform the UK economy and become a leader in global environmental & clean technology sector (currently valued at some £3.2 trillion).   

A variety of schemes were planned and some implemented to put the UK on a glide path to the 80% mid-century target.  Most notably feed-in tariffs for solar power, the Carbon Reduction Commitment (CRC), zero carbon homes, plans for a well funded Green Investment Bank.  However, four things conspired to put the skids under these ambitious plans.  

  • The first is that the country has a massive public deficit, and the current administration is turning to every tax opportunity to reduce it.  The Liberal Democrats brought high ideals of shifting the UK tax burden from labour and capital to resources to the Coalition Government they formed with the Conservatives.  The Conservatives fell upon this idea as an addition, rather than an alternative, to the current tax base.  This means that the CRC is now a straight carbon tax, and the recent budget announced a carbon floor price in the UK for its involvement in the EU ETS – a stealth tax of some ingenuity.  One that prompted Karl-Ulrich Köhler, Chief Executive of Tata Steel’s European operations (one of the UK’s largest manufacturers), to call it “a potentially severe blow to the sustainability of UK steelmaking”.  
  • The second is that the UK is deeply committed to coal and oil, and has little chance of escaping the grip fossil fuels have on the economy any time soon.  So funds for schemes supporting renewable generation are being redirected to those that support decarbonising fossil fuels (carbon capture and storage), and if nuclear power survives Fukushima, new nuclear capacity.  
  • The third is the fact that so much of the UK’s housing and commercial building stock, and other aspects of its economic infrastructure are rather old, and very energy inefficient.  It makes every sense to prioritise energy efficiency improvements because they save energy, carbon and money.  The Budget prioritised action to “incentivise and ensure take-up” of the Green Deal, the Government’s flagship energy efficiency programme.
  • The fourth is that the UK government remains confused about whether it will be best served by a low price of carbon, which enables the economy to compete internationally, or whether by raising the price of carbon with taxes, it will be able to spur investment in renewable and low carbon technologies and realise the low-carbon Britain vision.  They have chosen the later, and there may be some logic in that – but not while substantial subsidies still exist for coal and nuclear power, and the Green Investment Bank is capitalised at a paltry £3bn, with no current ability to raise capital in its own right.

So, to give credit where it’s due – the UK government has figured its priorities and is pursuing them with refreshing focus – tax carbon to fix the deficit, spend money on making fossil fuels clean, and invest in the ‘low hanging’ reduction opportunities.  The downside is that private investment in renewable energy in the UK fell to US$3.3bn in 2010 down from US$11bn in 2009, according to a report by the Pew Environment Group. Pew attributes this to political uncertainty and says that it casts doubt on the government’s efforts to put clean energy at the centre of its growth strategy.

However, UK energy and climate policy may yet reconnect with its wider vision once short-term objectives are achieved -- and the government comes to realise that a low price of carbon applied equally across the global economy still makes the most sense even though things have become a bit muddled along the way.

Panda Bear Politics

Panda Bear politics

So, that’s a selected snap-shot of what some bears are up to in two of the world’s longer standing democratic free-market economies.  Let’s take a look at what is happening in one of the last remaining centrally controlled, socialist regimes, The National Development and Reform Commission of the Central Government of China recently announced its plans to use carbon trading as one of a range of measures to reach its aim of cutting the carbon intensity of China’s economy 40-45 per cent below 2005 levels by 2020.  This will set the world’s biggest emitting nation on a path to launch cap & trade markets in six provinces accounting for a quarter of China’s GDP by 2013, and scale up to a national scheme from 2015.

Soon after this announcement was made public, CBEEX and Bluenext announced Franshion Properties as the first Chinese firm to buy China’s Panda Standard pilot credits (a Chinese adaptation of the VCS standard). Franshion Properties, a subsidiary of the state-owned Sinochem Group listed in Hong Kong, bought the 16,800 voluntary emission reductions (VERs) from a bamboo reforestation project in Yunnan province, at a price per credit of around US$9. That was swiftly followed by an announcement from the China Industrial Bank that it would be the first Chinese lender to finance CDM projects using revenue from future offset sales as security.  The bank is backing a small-scale hydro project in Fujian province, using revenue from the project’s expected 43,000 annual certified emissions reductions (CERs) from March 2012 as security for the loan.   

Now a group of 249 Chinese companies and organisations are to design verification standards to measure emission reductions and energy savings, with the hope that the group’s work will help the government overcome what is one of the biggest stumbling-blocks for the development of a Chinese carbon trading scheme – a lack of emission monitoring, reporting and verification systems.

Quite an impressive example of how clear and ambitious climate policies have the potential to rapidly unlock and deploy private capital in the huge task of decarbonising an economy.

And if you are thinking that this is but small in relation to the China challenge, take a look at the surprising power packed by even the smallest Panda bear by clicking here.


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Jonathan Shopley

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