What kind of carbon trading system for the US?

by | Mar 23, 2009


There looks likely to be another acrimonious debate in the US over President Obama’s plan to auction 100% of the carbon permits generated if the US signs up to a cap on its emissions at the Copenhagen summit.

Big US utilities, particularly coal-powered ones, say they want the permits to be given them for free, otherwise, they say, the cost will be handed on to consumers:

Some cap-and-trade corporate allies and lawmakers from both parties say the plan would amount to a tax increase falling most heavily on consumers whose power comes from coal, the most polluting power source.

“It was wrong-headed thinking,” said Michael Morris, chief executive officer of  American Electric Power Co, the biggest U.S. electricity producer from coal. “Don’t call it cap-and-trade when it’s really a tax,” he said in an interview.

The Columbus, Ohio-based utility wants no-cost permits at the outset. Congress faces “an awfully long debate” if a bill imposes all those costs on companies, he said.

Speaking last week with a group of CEOs in Washington, Obama indicated he may budge from his 100 percent auction stance. He said he will work with companies to “find a structure that arrives at that right balance” between giving permits away and selling them. “We are not going to be able to move this in an effective way without partnership with the business community.”

Come again?

Phase One of the EU carbon trading system handed out free permits to European utilities, who still passed on the cost to their consumers, and pocketed the record profits. It was punishing consumers, and rewarding pollutors with a multi-billion-euro windfall.

That’s why the EU has moved to an auction system in Phase 2 – indeed, it’s holding an auction tomorrow.

Obama should stick to his guns.

Meanwhile, the EU is debating whether to set a reserve price for carbon permits, after the price of carbon collapsed from Eu30 per tonne in the middle of last year, to Eu10 now.

PWC is the latest to call for governments to set a floor price below which they won’t sell.

More opposition from Barclays Capital, which is by far the biggest trader in the carbon market, and a good reply from John Hawksworth, the author of PWC’s report:

Trevor Sikorski, a director in Barclays Capital’s carbon trading division, said that any attempt to impose a floor price would represent “a market distortion that is unneeded”. He added that even a floor price would not guarantee investment in low-carbon technologies, arguing that the role of prices was not to assign capital expenditure but instead “equilibrate markets by putting a price on the scarcity of the commodity… if the market needs investment to equilibrate, then it will signal this.”

However, Hawksworth said that while imposing price floors and ceilings would serve to distort conventional markets, the artificial nature of the carbon market meant that it represents an exception to the rule.

“Normally you would say that if a price is low, it is low for a reason,” he admitted. “But in this instance the market has been created for the specific reason of bringing down emissions and that is difficult to achieve if the price gets too low, so governments need the flexibility to address excessive price volatility.”

Author

  • Jules Evans

    Jules Evans is a freelance journalist and writer, who covers two main areas: philosophy and psychology (for publications including The Times, Psychologies, New Statesman and his website, Philosophy for Life), and emerging markets (for publications including The Spectator, Economist, Times, Euromoney and Financial News).

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