The EU-ETS: Fix it or shut-it down, Part 4 – Winners & Losers

This is Part 4 of a blog series on emissions trading systems. Read the first blog: The EU-ETS: Fix it or shut it down, please, Part 2: Decisive Korea v Divisive Poland, and Part 3: Brokers’ carbon credit forecasts: Do the opposite of what they say.

This comment concludes my series on the Emissions Trading Scheme of the European Union (or EU-ETS), the largest cap and trade system in the world.  The value of this carbon market is some $150 to $200 billion.  As I argued in previous parts of this series, the EU-ETS suffers from design flaws; from the speed at which the EU can take decisions (correcting flaws must pass through a tripartite co-decision process, involving an initial proposal by the European Commission, negotiation and approvals by the EU Parliament and the Council of Ministers); and (currently) from low prices.

In turn, these weaknesses have created unintended winners and losers:

  • WinnerEuropean Polluters.  As I argued in Part I of this Series, polluters pocketed €15 billion (and counting) of cash by banking excess allowances while some were basking in the comfort of knowing they can continue to pollute without having to make any investments in new technology, thus locking in polluting technologies for even longer than they would have done without the EU-ETS at all.  This is €15 billion of funding going to the wrong place.
  • Winner: European Polluters, again. Now able to buy significant quantities of Emission Reduction Units (ERUs) and Certified Emission Reductions (i.e. global carbon credits, or CERs) from emission reduction projects in developed and developing countries at historically low prices, submit these as compliance instruments while pocketing the spread (€4 in free cash per carbon credit, in other words billions in wasted taxpayer money) and bank more European Union Allowances (i.e. European carbon credits, or EUAs) for use over the next decade or so.
  • Winner: European Polluters, yet again. Looking forward to purchasing plenty of EUAs in auctions at low prices. The UK auctions 4 million allowances tomorrow, which can be banked for as long as necessary. At today’s prices these allowances will keep existing (polluting) technology running for a few more years.
  • WinnerFinancial Institutions.  As I argued in Part 3, financial institutions got their forecasts about this market consistently wrong for some 5 years now, but they still persevere with their erroneous forecasting.  The key reason is the amount of trading profits the highly volatile carbon market throws their way.  (I picked on Barclays in Part 3, little did I expect that a few days later they would emerge as one of those banks who contributed to rigging the $350 trillion markets of fixed income securities priced off of Libor, but there you go.  I suppose the EU-ETS trading profits will pay for some of the penalties they will incur because of their Libor-related behaviour, with thanks to the European taxpayer).
  • LoserThe European citizen.  Utilities pick their pockets as they end up paying more for energy even though the utilities received most of their current`emission permits for free and are now buying more at low prices.
  • Loser: European Government Budgets. Revenues from auctions of EUAs are set to deliver a fraction of the anticipated revenues, a proportion of which were earmarked for research and development of adaptation and mitigation technologies, and most of which would have provided a welcome boost to vulnerable European public finances.  French taxpayers could have been spared some (if not all) of the tax increases France announced on 4 July.
  • Loser:  The European economy.  A proper price signal from the EU-ETS – commonly accepted to be at least €20 per ton/ CO2 – would drive billi/ns of dollars into energy infrastructure in Europe, improving energy efficiency, sustainable resources management, creating jobs, reducing energy consumption and continuing to clean up Europe’s environment.  Europe recently led what New York Times columnist Thomas Friedman labelled the “green revolution;” today it has lost its way and is lagging China, Korea, Australia, California and others.
  • Loser: Economic efficiency.  Emissions trading is the most efficient means of reducing GHG emissions but every day that the EU-ETS fails to start to deliver changes in technology (today it is cheaper to burn coal and submit allowances than to switch to gas) adds more pollution regionally and globally and increases future healthcare bills.
  • Loser: The Global Community. The Kyoto Protocol is gasping at its last breath. The current hope is that the Durban Platform can take over when it finally expires, but the negotiating record of the various international task forces involved is not good. The EU’s Climate and Energy Package can be the flagship of aggressive emission reduction targets and the EU-ETS can achieve these targets in an economically efficient manner. The EU-ETS has the potential to link with schemes in Australia, Korea and China, and such linkage can take over from stalled multilateral talks. But this can only happen if the EU-ETS sets a price which drives change.
  • Loser: Communities and economies that would stand to benefit from sustainable development associated with emission reduction projects, such as the greenhouse gas abatement, clean energy and sustainability projects Sindicatum builds, owns and operates. These predominantly private sector funded projects have delivered a wide range of benefits to millions of people in developing and least developing countries. Low carbon prices mean these projects may stop and new projects will not be developed.

The narrative is completely upside-down.  The EU-ETS is sending money to polluters and banks, at the expense of the European citizen; of European Government budgets; of the European economy; of Economic efficiency; of jobs; of the global community; and of greenhouse gas abatement and sustainability.

The cure is straightforward.  The EU-ETS is a regulatory driven market, therefore the regulator needs to intervene forcefully and decisively and prevent those few winning at the expense of everyone else from polluting this debate (for a good example of what I mean, see the interview of Kurt Bock, Chief Executive of BASF, in the Financial Times on 22 April).

Fix it or shut it down, please.

Assaad Razzouk is Group CEO of Sindicatum Sustainable Resources, a global sustainable resources company headquartered in Singapore.

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