Guest essay by Eric Worrall
h/t JoNova – carbon traders are complaining that over-issuing of carbon permits, a lack of political will to make carbon trading work, has destroyed investor confidence in the industry.
Tough to Keep the World From Warming When Carbon Is This Cheap
Carbon markets, the free-enterprise solution to saving the world from global warming, are now in danger themselves.
The idea was simple enough: Set a cap on carbon emissions, issue enough permits to allow power plants, refineries and the like to stay within those limits and then shrink the cap over time to achieve reductions. The companies whose emissions fall fastest can sell their permits for a profit to slower responders — call it a reward for good behaviour.
The reality, though, is more complex. Undercut by a lack of political will on the size of caps and overtaken by costly new environmental mandates, carbon markets in the U.S., Europe and Asia are collapsing, with prices so low they’ve become virtually valueless. The credits auctioned in the U.S. Northeast in June, for instance, sold for just $4.53 a short ton, a 40 percent drop from December.
“Climate policy has been muddled and messy,” said Michael Grubb, a professor at University College London’s Institute for Sustainable Resources who has advised the U.K. energy regulator. “Governments have set inadequate targets due to lobbying pressures and because they didn’t think carefully enough about overlapping efforts. That has destroyed investor confidence that carbon prices will rise.”
The problem is that the permits are selling at a slower and slower rate. The surplus of allowances is becoming so large in systems run by Europe, California and Quebec — which together account for more than 90 percent of global trading — that by 2022 it could cover the emissions spewing from every car on Earth for a full year, according to estimates by the London environmental group Sandbag Climate Campaign CIC and Bloomberg New Energy Finance.
In California’s market, all 23 million allowances sold in an auction in 2014. In May, 7.3 million permits found buyers, only 11 percent of what was put up for sale.
What went wrong?
Carbon trading is the only “market” I know of, in which all the players who matter benefit from fraud.
Issuers of carbon credits benefit when they sell fraudulent permits – they are making money for nothing.
Buyers of carbon credits benefit when they buy from a market flooded with fraudulent carbon permits – fraud keeps prices down.
Regulators benefit personally from fraud, when they receive bribes to turn a blind eye to dodgy dealing.
Politicians benefit from fraud, and from overissuing of permits, because it makes them look like they are doing something about CO2, without actually doing anything which might damage their re-election chances, or have a significant detrimental impact on jobs or the economy.
The only people who appear to be suffering are merchant bankers, who can’t find anyone willing to buy and hold carbon credits as an investment, because everyone believes prices are going to continue spiralling down into total collapse. And of course, anyone who was silly enough to believe carbon markets might have an impact on CO2 emissions.