Carbon slump threatens emission-cut goals

by Michael Richardson

SINGAPORE — First, came the credit crunch and recession. Now there is a carbon price slump that may undermine one of the main ways governments have chosen to combat global warming. This is happening as Japan, the United States and other advanced economies develop plans for carbon trading based on national emissions targets.

Since 2005, the European Union has pioneered a trading scheme for industrial greenhouse-gas emissions, including carbon dioxide — the main gas blamed by many scientists for warming the planet. The scheme imposes a cap on emissions from factories and power plants that rely on fossil fuels in the 27-nation bloc. It uses a fixed quota of emissions permits.

Firms that lower their emissions by saving energy or turning to nonfossil fuel sources like solar and wind power can sell their permits to less efficient companies. The program was designed to be a major component of Europe’s plan to deliver a 20 percent cut in emissions by 2020 over 1990 levels, making it the global leader in fighting climate change.

Early last month, Australia confirmed that it would follow the EU when it unveiled legislation that the government hopes to pass by the middle of this year establishing a carbon pollution reduction scheme that in some respects is more comprehensive than Europe’s.

Energy-intensive Australia committed itself to reduce emissions by 5 percent of 2000 levels by 2020, but has said it will back a 15 percent cut by then if other rich nations promise to make similar moves at a climate change summit to be convened by the United Nations in Copenhagen in December. Meanwhile, the U.S., which rejected carbon-capping under the Bush administration on the grounds that it would hurt the economy, now aims to pass a federal cap-and-trade law later this year.

Whether these initiatives become an effective global mechanism for reducing emissions depends on the willingness of other big energy users and industrial polluters to adopt similar schemes. Among them are China, India and South Korea. Most developing countries oppose measures that would impose extra costs on their economies.

However, some critics assert that developed-economy carbon trading is fundamentally flawed and that, although it was intended to cut emissions by making polluters pay, it is now removing this incentive.

The EU’s emissions trading scheme got off to a controversial start when prices plummeted after some governments issued too many permits. No sooner had this problem been fixed, when the economic slowdown struck.

With industrial output and exports falling, there are less emissions. Cash-strapped firms have been selling their permits to raise funds. As a result, prices on Europe’s six carbon exchanges hit a low of 8.05 euro per metric ton in February, a drop of nearly 75 percent from the level of 31 euro last July, when demand and prices for coal, oil and natural gas were are record levels.

Research group Point Carbon said recently it expected the value of the global carbon market to drop 32 percent this year to 63 billion euro from 92 billion euro in 2008, and that the EU’s emissions trading scheme would account for just over two-thirds of the business.

Declining emissions are good for the climate. However, Europe’s trading scheme was not intended to deliver a 20 percent cut in emissions on its own. It was supposed to raise large amounts of revenue for the government, which would use the money from selling permits to help pay for renewable energy development, carbon capture and storage from heavily polluting plants, energy efficiency, and measures to ease the cost impact on business and consumers of the change to a lower carbon economy.

The Australian and U.S. cap-and-trade schemes are similarly designed. All the schemes allow the market to set the basic price of carbon. The Australian government has forecast an initial price of around $A23 per ton when it starts auctioning permits to the country’s biggest companies, covering 75 percent of national greenhouse gas emissions, from July 2010.

Based on this estimate, the government expects to raise around A$11.5 billion in the financial year that starts in mid-2010 and over A$23 billion in each of the following two years. Of course, economic recovery may be under way by then and drive carbon prices higher as industrial production, exports and demand for energy increase.

But at present the carbon price is more than 25 percent below the budgeted level. Unless it rises, governments in Australia, Europe and the U.S. will be short of money to fund their side of the cleaner energy bargain with companies and consumers.

Worse still, the low carbon price makes it relatively cheap for industry to keep polluting. Emissions trading schemes allow firms either to buy domestic permits from the government or import them under a U.N. program linked to the Kyoto Protocol, known as the Clean Development Mechanism.

Project developers who establish clean energy projects in the developing world, mainly China and India, sell the emissions credits to companies that choose to buy them to comply with environmental regulations at home.

The U.N. carbon permits called certified emissions reductions or CERs are also languishing. As a result, investor interest in clean energy projects in the developing world is being stifled.

Some critics argue that if governments are serious about climate change, they should tax carbon pollution instead of depending on a fluctuating market price. This would provide business and consumers with cost certainty and governments with assured revenue. However, imposing hefty new environmental taxes would be very unpopular and create a political backlash.

Emissions trading already raises objections at a time of deepening recession and rising unemployment, but at least in the initial phase, it is a relatively low-cost option. Whether it is an effective mechanism for ushering in sustainable economic growth over the long-term remains to be seen.

Michael Richardson is a visiting senior research fellow at the Institute of Southeast Asian Studies in Singapore.