By Anthony Faiola, Published: May 5
Europe’s carbon-trading market
Carbon “started as the commodity of the future, but it has now deteriorated,” said Matthew Gray, a trader at Jefferies Bache in London and one of a diminishing breed of carbon dealers in Europe. “Its future is uncertain.”
The problems plaguing Europe’s cap-and-trade system underscore the uphill battle for international cooperation in the global-warming fight. After middling progress at various summits, officials from more than 190 countries have been charged with forging a global accord by 2015 aimed at cutting carbon emissions. But critics point to the inability of even the European Union — a largely progressive region bound by open borders and a shared bureaucracy — to come together on a fix for its cap-and-trade system as evidence of how difficult consensus building on climate change has become.
Negotiations to launch a similar system across the United States collapsed in 2010, replaced with a regional approach in which California, for instance, moved forward with its own program. Aided by a boom in cheaper and cleaner shale gas as well as the spread of more renewable energies, including wind and solar, the United States has — like Europe — nevertheless seen a continuing drop in its overall emission levels.
But there are also signs that years of increasing investment in clean energies are ebbing on both sides of the Atlantic. In 2012, overall clean-energy investment in the United States fell 37 percent,to $35.6 billion, compared with a year earlier, according to a new report by the Pew Charitable Trusts. European countries, including green leaders such as Germany, also saw declines, leading analysts to call the problems with the region’s cap-and-trade system that much more troubling.
At the core of the problem is a massive oversupply of carbon allowances. Demand for carbon began to fade in the late 2000s as a recession set in and factories across Europe dramatically curbed production. But there were also built-in flaws. Unlike newer cap-and-trade programs such as the one in California, Europe’s system never established a price floor that could have prevented a market collapse. In addition, too many free allowances were given to too many companies. Some, in fact, never had to pay for allowances at all, allowing them to hoard them or even sell their carbon credits at a profit.
On April 16, the European Parliament was on the verge of temporarily tightening the supply of allowances to boost the price of carbon and shore up the ailing market. But opposition by countries led by Poland — a nation strongly dependent on heavy-emitting coal power plants — defeated the measure. The rejection sent the price of carbon plummeting to a historic low of roughly $3.60.
Shoring up prices
A bright future for cap-and-trade systems may yet exist. Promising new programs, for instance, are being rolled out in California, Australia, Quebec and a few provinces in China, with officials in some areas setting a minimum price for carbon credits to prevent the kind of market collapse seen in Europe.
But if Europe is unable to shore up the price for carbon credits here, observers say, it could complicate hopes down the line of linking various programs together. The price per ton in California, for instance, is above $10 — about two and half times the price in Europe.
Large emitters such as the steel industry, however, say the system is working just fine. With a price determined by supply and demand, industry groups say, it is only fitting for the price to be low now. Also, given the region’s weaker economic activity, they note that the European Union is still virtually assured of meeting its pledge to cut carbon emissions — a reduction of 20 percent by 2020 compared with 1990 levels — even with the cap-and-trade system faltering.
Yet critics argue that the low price of carbon has removed the incentive for European companies to reduce their carbon footprints. They point to a boom in the use of cheap imported American coal in European power plants. In addition, many fear that the lack of an incentive to make more green upgrades will create a boom in emissions if and when European economies recover.
As the regional plan falters, some countries are going it alone on domestic initiatives. This year, for instance, Britain introduced a carbon tax on emissions that British manufacturers say has put them at a competitive disadvantage with their counterparts on the continent. It suggests the potential pitfalls ahead as countries and even smaller jurisdictions such as states, provinces and cities introduce a disparate patchwork of climate-change measures.
Optimists point to hope that the European Parliament will once again vote on a measure to tighten the supply of carbon credits in the coming months, thus shoring up the price. They also note that the European Commission is studying more ambitious proposals for a bigger overhaul of the region’s cap-and-trade system.
But given the growing resistance in some European countries to anything that might drive energy costs up further, others wonder whether Europe’s leaders still have the political will to take aggressive action.
“We’re risking the credibility of European politicians by not fixing this system,” said Johannes Teyssen, chief executive of German energy giant E.ON. “How can they travel to world climate-change conferences claiming others should do more when our own system is on its deathbed and they do nothing?”
Eliza Mackintosh contributed to this report.
* * *
In Europe, Paid Permits for Pollution Are Fizzling (N.Y.Times)
Andrew Testa for The International Herald Tribune. The trading floor at CF Partners in West London. The market for carbon permits is more volatile than its founders envisioned.
By STANLEY REED and MARK SCOTT
Published: April 21, 2013
LONDON — On a showery afternoon last week in West London, a ripple of enthusiasm went through the trading floor of CF Partners, a privately owned financial company. The price of carbon allowances, shown in green lights on a board hanging from the ceiling, was creeping up toward three euros.
*The Emissions Trading System began with a test phase that ended in 2007. Note: Data are for the futures contract expiring in mid-December each year. Phase 2 price was initially for the December 2008 futures contract.
That is pretty small change — $3.90, or only about 10 percent of what the price was in 2008. But to the traders it came as a relief after the market had gone into free fall to record lows two days earlier, after the European Parliament spurned an effort to shore up prices by shrinking the number of allowances.
“The market still stands,” said Thomas Rassmuson, a native of Sweden who founded the company with Jonathan Navon, a Briton, in 2006.
Still, Europe’s carbon market, a pioneering effort to use markets to regulate greenhouse gases, is having a hard time staying upright. This year has been stomach-churning for the people who make their living in the arcane world of trading emissions permits. The most recent volatility comes on top of years of uncertainty during which prices have fluctuated from $40 to nearly zero for the right to emit one ton of carbon dioxide.
More important, though, than lost jobs and diminished payouts for traders and bankers, the penny ante price of carbon credits means the market is not doing its job: pushing polluters to reduce carbon emissions, which most climate scientists believe contribute to global warming.
The market for these credits, officially called European Union Allowances, or E.U.A.’s, has been both unstable and under sharp downward pressure this year because of a huge oversupply and a stream of bad political and economic news. On April 16, for instance, after the European Parliament voted down the proposed reduction in the number of credits, prices dropped about 50 percent, to 2.63 euros from nearly 5, in 10 minutes.
“No one was going to buy” on the way down, said Fred Payne, a trader with CF Partners.
Europe’s troubled experience with carbon trading has also discouraged efforts to establish large-scale carbon trading systems in other countries, including the United States, although California and a group of Northeastern states have set up smaller regional markets.
Traders do not mind big price swings in any market — in fact, they can make a lot of money if they play them right.
But over time, the declining prices for the credits have sapped the European market of value, legitimacy and liquidity — the ease with which the allowances can be traded — making it less attractive for financial professionals.
A few years ago, analysts thought world carbon markets were heading for the $2 trillion mark by the end of this decade.
Today, the reality looks much more modest. Total trading last year was 62 billion euros, down from 96 billion in 2011, according to Thomson Reuters Point Carbon, a market research firm based in Oslo. Close to 90 percent of that activity was in Europe, while North American trading represented less than 1 percent of worldwide market value.
Financial institutions that had rushed to increase staff have shrunk their carbon desks. Companies have also laid off other professionals who helped set up greenhouse gas reduction projects in developing countries like China and India.
When the emissions trading system was started in 2005, the goal was to create a global model for raising the costs of emitting greenhouse gases and for prodding industrial polluters to switch from burning fossil fuels to using clean-energy alternatives like wind and solar.
When carbon prices hit their highs of more than 30 euros in 2008 and companies spent billions to invest in renewables, policy makers hailed the market as a success. But then prices began to fall. And at current levels, they are far too low to change companies’ behaviors, analysts say. Emitting a ton of carbon dioxide costs about the same as a hamburger.
“At the moment, the carbon price does not give any signal for investment,” said Hans Bünting, chief executive of RWE, one of the largest utilities in Germany and Europe.
This cap-and-trade system in Europe places a ceiling on emissions. At the end of each year, companies like electric utilities or steel manufacturers must hand over to the national authorities the permits equivalent to the amount gases emitted.
Until the end of 2012, these credits were given to companies free according to their estimated output of greenhouse gases. Policy makers wanted to jump-start the trading market and avoid higher costs for consumers.
Beginning this year, energy companies must buy an increasing proportion of their credits in national auctions. Industrial companies like steel plants will follow later this decade.
Companies and other financial players like banks and hedge funds can also acquire and trade the allowances on exchanges like the IntercontinentalExchange, based in Atlanta. Over time the number of credits is meant to fall gradually, theoretically raising prices and cutting pollution.
The reality has been far different because of serious flaws in the design of the system. To win over companies and skeptical countries like Poland, which burn a lot of coal, far too many credits have been handed out.
At the same time, Europe’s debilitating economic slowdown has sharply curtailed industrial activity and reduced the Continent’s overall carbon emissions.
Steel making in Europe, for instance, has fallen about 30 percent since 2007, while new car registrations were at their lowest level last year since 1995.
Big investments in renewable energy sources like wind and solar also reduced carbon emissions, which have fallen about 10 percent in Europe since 2007.
As a result, there is a vast surplus of permits — about 800 million tons’ worth, according to Point Carbon. That has caused prices to plunge.
The cost of carbon is far too low to force electric utilities in Europe to switch from burning coal, a major polluter, to much cleaner natural gas. Just the opposite: Britain increased coal burning for electricity more than 30 percent last year, while cutting back gas use a similar amount, and other West European nations increased their coal use as well.
“The European energy scene is not a good one,” said Andrew Brown, head of exploration and production at Royal Dutch Shell. “They haven’t got the right balance in terms of promoting gas.”
Fearing that prices might go to zero because of the huge oversupply, the European authorities proposed a short-term solution known as backloading, which would have delayed the scheduled auctioning of a large portion of the credits that were supposed to be sold over the next three years. But the European Parliament in Strasbourg voted the measure down on April 16.
Lawmakers were worried about tampering with the market as well as doing anything that might increase energy costs in the struggling economy.
“It was the worst possible moment to try to implement something like that,” said Francesco Starace, chief executive of Enel Green Power, one of the largest European green-energy companies, which is based in Rome.
The European authorities, led by Connie Hedegaard, the European commissioner for climate change, have not given up on fixing the system. But analysts like Stig Scholset, at Point Carbon, say that there is not much the authorities can do in the short term and that prices may slump for months, if not years.
That means more tough times for financial institutions. Particularly troubled is the business of investing in greenhouse gas abatement projects like wind farms orhydroelectric dams in developing countries like China. JPMorgan Chase paid more than $200 million for one of the largest investors in these projects, EcoSecurities, in 2009.
Financiers say these projects used to be gold mines, generating credits that industrial companies could use to offset their emissions elsewhere. But so many credits have been produced by these projects — on top of the existing oversupply of credits in Europe — that they are trading at about a third of a euro.
Market participants say they see many rivals pulling back from world carbon markets. Deutsche Bank, the largest bank in Germany, has cut back its carbon trading. Smaller outfits like Mabanaft, based in Rotterdam, have also left the business.
Anthony Hobley, a lawyer in London and president of the Climate Market and Investors Association, an industry group, estimates that among the traders, analysts and bankers who flocked to the carbon markets in the early days, half may now be gone.
But carbon trading is unlikely to fade completely.
For one thing, European utilities and other companies now must buy the credits to comply with the rules. And they can buy credits to save for later use, when their emissions increase and the price of credits rises.
Despite Europe’s sputters, carbon trading is beginning to gain traction in places like China, Australia and New Zealand.
In London, Mr. Rassmuson concedes that the business has turned out to be more up-and-down than he anticipated when he and his partner set up their firm in a tiny two-man office in 2006.
But he said his firm was benefiting from others’ dropping out. He is also branching out into trading electric power and natural gas.
Like many in the carbon markets, he says what he is doing is not just about money.
“Trying to make the world more sustainable is important to us,” he said. “It is a good business opportunity that makes us proud.”
A version of this article appeared in print on April 22, 2013, on page B1 of the New York edition with the headline: In Europe, Paid Permits For Pollution Are Fizzling.
Uma (in)certa antropologia 