The Coming Carbon Bubble
Print
Comment
Email
RSS
Twitter
The Coming Carbon Bubble
Beware the hidden dangers of a cap-and-trade system.
Posted Friday, July 10, 2009 - 9:57am
How much money will offsets eventually be worth, and how many of them will be out there? No one knows yet, but agribusiness—especially the ethanol-producing corn sector—is lobbying hard for generous offset allowances. This is going to have an impact on the price of carbon credits. If enough offsets are pouring into the market, the value of the credits will be deflated.
Finally, the recession itself threatens to throw another monkey wrench into the stability of carbon pricing due to reduced industrial production. Less production means fewer greenhouse gas emissions, which means lower demand for credits. Take a look at the European Union Emission Trading Scheme, the largest emissions market in the world today, to see what we mean. Europe, in general, is a few years ahead of the United States when it comes to this whole emissions-reduction game; as a result, their carbon market can, in some instances, be a useful crystal ball.
As recently as last summer, the going rate for a carbon credit in the European Union was about €30. Recently, though, holders have been hocking them for as little as €10 since buyers can't drum up the necessary credit to pay the pre-bust prices. Europe also gave away, rather than auctioned, the credits. This decision factors into the current price deflation: Since utilities got the credits for nothing, they're still making money even if they're selling them for peanuts.
The U.S. carbon market is barely out of the womb, and there are already a whole slew of variables that could knock it into disarray. If the administration can keep its eye on the ball when it comes to regulation and not be distracted by the sweet nothings the i-banking community is sure to be whispering in its ear, CO2 will grow into a stable and well-adjusted market. If not, we're looking at our next problem child. Hope for the best—but don't exhale just yet.
Thanks to Erich Pica of Friends of the Earth, Richard Sandor of the Chicago Climate Exchange, and Ken Schneider of hedge fund RNK.
- « first
- ‹ previous
- 1
- 2
- 3
Photograph of a brown coal conducted thermal power station in Germany by Ralph Orlowski/Getty Images.
Comments
on the other hand...
It's really easy to see the hand of "speculation" where there is none. Gas prices last fall may have gone up due to speculation or they may have gone up because demand outpaced declining supply. Seeing as oil imports fell a lot and oil inventories did not rise, I'm inclined to believe the latter. Likewise, the decline of the price of European carbon credits has a much simpler explanation then speculation. GDP tanked last year while energy prices went up. This decreased demand for electricity. Also, eastern europe suddenly felt all the investment from abroad dry up, further reducing electricity demand in the regions most dependent on carbon intensive electricity production. Given that a cap and trade system is only meant to bring carbon emissions below a certain ceiling, it's not surprising that this decline in electricity demand would result in a steep fall in the value of carbon credits. Speculation is something we need to worry about in carbon credit markets as elsewhere, but it is poor economic policy to go chasing bogeymen where none exist.
Carbon Footprint
PAS 2050 is the specification for calculating a carbon footprint. It sounds really good but on digging into it, I've determined it is voodoo magic. For example it has you calcualte the carbon footprint of the vehicle that transports an item from the warehouse to the store. Sounds good but what kind of vehicle, what's the distance between the warehouse and the store? That's just a couple of impossible questions on only one piece of the life of a particular item. The entire chain is full of different options that impact the carbon footprint. Furthermore, what is the carbon footprint itself? The spec doesn't address that. It basically says whatever the scientist decides. That means one scientist will calculate it one way and another will calculate it a different way. The entire foundation for cap and trade is Voodoo Magic and we're going to pay for it.