Carbon trading – should we bother with an Emissions Trading Scheme?

The European Commission thinks that a global market for trading carbon should be part of a way to tackle climate change and is working to create a worldwide carbon trading market. Climate change is so serious that we should welcome anything that we help reduce carbon dioxide emissions, but I have fears that global or indeed any market in carbon dioxide emissions will not help reduce emissions but will have the opposite effect.

The European Union has a carbon trading market already – the Emissions Trading Scheme, under which some polluters can trade the right to add to global warming by selling emissions that they have not apparently made (but they were entitled to make) to other polluters that have made more emissions than they were entitled to make.

The Emissions Trading Scheme has many artificial aspects of it. To some extent, the emissions licensed and the emissions (or rather lack of them) which are trading are based on estimates, rather than actual emissions. There is no meter reading available of the emissions actually being put out. Not every polluter is part of the scheme – some have been give free passes and each nation within the European Union fights is corner to give its own industries bound by the scheme as many exemptions as they can negotiate in order to preserve the competiveness of those economies.

Markets have always developed in economies to serve needs; they sell what people want. This way trading – buying and selling takes place and the “market” sets the price of the goods or services that are wanted according to demand. The distinguishing features of the ETS are (a) no one wants to buy carbon – the market is created by seeking to limit its production and (b) there is no end use for the product.

The economic theory of the ETS as I understand it is that the “traders” can pollute, within limits, and if they exceed those limits they must buy credits from companies that have apparently credits to spare by having limited their production.

They only way that you can get an industry to limit its carbon dioxide production is if that industry implements measures. These can be efficiency measures in relation to energy or renewable energy measures, and both of these are expensive. It is hoped that the ETS will provide a cheaper way of emission control than laws requiring the reduction of emissions. I fail to understand how this will work, because the reduction of emissions can only take place by measures, which industries have to pay for. They will not recover the certain and predictable cost of measures from an uncertain and unpredictable market and will provide little incentive.

Mainly heavy industries are covered. If your own industry is not covered you will know that if the European Union gets its way it will be covered by 2020. I cannot think of a greater disincentive for businesses not covered by the ETS to invest in renewables and efficiency. They would be best suited, in terms of their own businesses success, to simply wait until they are forced to join the ETS, and then they will put off all investment in carbon reduction until then.

It should be noted that the price of carbon under the ETS has been gradually falling. It traded at 16 Euros per tonne a few weeks ago, and is now at 11 Euros a tonne, which is a tremendous variation in such a short period. No doubt the price is low because in this market one of the big carbon dioxide polluters, the steel industry, is cutting its production hugely, and this therefore polluting less and has plenty of carbon credits to sell. Its lowering of pollution is nothing to do with the ETS; it is directly related to the market supply and demand of steel. When steel production picks up, it will be able to use the so called “credits” without reducing its pollution in any of its processes.

These huge swings in the price of carbon are very unattractive for “investors” in carbon credits. They cannot hedge the prices easily, and the development of an effective carbon reduction mechanism depends, above all, on the carbon price being sufficiently high and maintaining that strength to require investment in carbon dioxide emission savings.

The ETS was devised by bankers, familiar with the market mechanisms that apply to banking. They devised it in the same way that they devised these toxic bonds that have caused such as crisis of confidence in the banking industry, and we can expect it to play the same sort of role in the welfare of the planet that the banking industry, through its greed and folly with the money of others, has played in our economies.

Economies can recover from their imperfection, until new imperfections develop and cause them to collapse, and this is the fundamental point about the boom and bust cycle, which Gordon Brown claimed to have abolished. The problem with climate change is that unless something more effective than an Emissions Trading Scheme is use, the planet will not be able to recover from the effects of the imperfections of carbon trading.

5 Responses

  1. In a nutshell, the Emission Trading Scheme is a tax and at a time whn business is struggling as the recession bites, it is difficult to see any logic in placing further burdens on business. The truth is, the global slowdown will in itself lead to lower emissions, therefore, for the time being at least, it will be self-policing.

  2. Zeke

    Thanks for drawing this to my attention. The website you have shown has done a straight cut and paste from my blog. I don’t mind people using the ideas, but to use the exact words is not only plagiarism but also copyright theft.


  3. […] Carbon trading – should we bother with an Emissions Trading Scheme? […]

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