Carbon Expo musings

I spend most of last week in Barcelona at the Carbon Expo Conference, blogging for the Guardian, ‘networking’ and catching up on news and gossip.

If you missed the first three instalments the first was a scene setter, the second covered the fact that hopes appeared high for a deal in Copenhagen and the third reflected on the future of the carbon market and the need for Governments to create more buyers for carbon reductions.

This was the final instalment, which is far too long for a blog, but I needed to vent:

As Carbon Expo 09 draws to a close the focus of meeting shifted today to the EU. The European Commission kicked proceedings off by running through the deal agreed last December. The European Emissions Trading Scheme (EU ETS) has the dubious privilege of being the world’s first large scale private sector carbon trading scheme. It has not had an easy birth. Already 4 years old it is still not able to show that it’s delivering emissions reductions.  <!--break-->

All hopes are now pinned on the third trading phase which will begin in 2013.  But the effectiveness of this phase is also in doubt. Firstly, a deal has to be agreed in Copenhagen if the targets in the scheme are to have any ambition at all (otherwise they stay at a meagre 1.74% reduction per year – significantly less than the amount industry cut this year in response to the recession). Secondly, they have to find a way to get rid of the ‘hot air’ (unearned spare permits) created by the recession which can now be freely banked for future use. Europe’s industry have been handed large numbers of permits, all awarded in the expectation that our industrial output would be expanding.

The opposite has happened and there are now potentially half a billion spare industrial permits in this phase that can be carried over to the next. When the annual requirement to reduce is only around 350 million tonnes a year and half of that can be met with overseas credits the industrial surplus will be enough to stave off any real investment for at least another 3 years. Meaning that more than 10 years will have passed since the scheme was introduced before Europe is required to actually do anything as a result of the cap and trade scheme.

With this background, it was interesting to hear the Commission today set out its proposals for a new sort of trading mechanism for developing countries. They want more people in the market and are proposing that whole sectors of economic activity in developing countries could be incentivised to reduce emissions and sell permits. To do so they would need to first meet a threshold which takes their emissions well below their business as usual projections. The curious thing is, if I were a developing country with a sector I was pretty sure could reduce emissions, why would I wait for other countries to decide whether or not I am allowed to sell permits? It would be much more straightforward to introduce your own carbon market and issue you yourself with as many permits as you see fit.

This is what the EU has done and it what the US is currently doing. Two billion permits a year created in Europe, around five billion in the US. What’s to stop China issuing itself a few billion too?  And by taking control in this way it can choose its own ‘thresholds’.  The EU saw fit to allow a growth target for most of its industry despite the fact that it
houses some of the least efficient installations in the world. 

Of course this sort of race to the bottom is very dangerous and I am not seriously advocating it. What I am trying to get across is that
the EU and US may think they occupy a moral high ground from which they can dictate to other countries, but the facts just don’t support this. It’s no good introducing a cap if it is so loose as to be meaningless. And who gave the US – a country which, for a decade, turned its back on international efforts to tackle the problem – the right to decide now how much pollution it can continue to pour into the atmosphere? 

The UN should clearly have a much stronger role in choking off the supply of greenhouse gas pollutants. Leave it to domestic Governments and their private sectors and you will get business as usual masquerading as effort. If China really wanted to stir things up she should announce a cap and trade scheme – and propose to issue 10 billion tonnes of permits without consulting the rest of the world. Then it can sit back and watch the condemnations fly, about how irresponsible they are being, how this will wreck
the global effort to take action and the market. Perhaps then the extent to which the west is currently mis-using emissions trading policy will sink in. It’s time for a reality check.

 strong>Footnote: Those of you who bother to read all the blogs from Carbon Expo may notice somethingof a u- turn in my attitude towards the US’s proposed legislation. I should explain – the whole package of measures in the Waxman- Markey Bill is still I believe a remarkable piece of draft legislation.  It doesn’t just focus on emissions trading but introduces many other policies that will more directly affect emissions: regulatory standards, energy efficiency measures, renewable targets, CCS
support, vehicle efficiency standards – it’s all there.

The one major failing is the level of the cap in the trading scheme. And, as it is this that will dictate the future levels of pollution, it is a big, big failure. I also
learned this week the real reason why the politically impossible seems all of sudden now to be possible. It is not just down to the magic Obama effect. Thanks to a recent Supreme Court ruling the US Environmental Protection Agency already has the legal power to introduce regulations to curb greenhouse gases
under the Clean Air Act. They can set up a cap and trade scheme for stationary sources of carbon dioxide any time they wish, without asking for any further permissions from the Senate or anyone. This is what is focusing minds on Capitol Hill. Knowing this, there really is no excuse for such a paltry target for 2020.