Emissions trading: PR fallout from Europe

Last November I speculated that the low price of carbon permits in the European emission trading scheme (ETS) was a hint that European governments were not as brave about tackling climate change as their rhetoric might suggest.

The low price was the result of over-generous allocation of emission permits to power generators. The more permits on the market, the lower the price. The allocations were based on companies’, and their home countries’, estimates of emissions in upcoming trading periods. Naturally, a company and its home country would want to highball its estimate to give it more wiggle room.

None of this should be a surprise to anybody. Starry-eyed idealists might think higher operating costs for power generators will spur some giant collective effort to find a way to make wind or solar power viable. Everyone else knows it will just jack up electricity prices. In the deregulated European power markets, no company wants to be the first to bid its product out of range. Hence the pretty obvious collusion between companies, countries, and the European Commission (which approves the national permit allocation plans).

And hence the predictable result that some of the very companies whose emissions the ETS was designed to curtail continue to turn handsome profits. The price of carbon permits was not enough to make the operating costs of Drax Power, the UK’s biggest coal-based generator, higher than those of competing gas-based generators. In these favourable conditions Drax last year sold massive amounts of power, made massive profits—and emitted massive greenhouse gases (GHGs).

This is going to continue until European governments stop protecting domestic power generators. They won’t stop doing this until the truly farcical situation in Germany is resolved. The German government, the biggest supporter of Kyoto and the ETS, is phasing out nuclear power. This leaves its coal-based generators with two alternatives for cutting emissions: gasified coal or natural gas. Both types are expensive at current prices; both emit GHGs. And natural gas has security-of-supply problems. The main supplier is Russia.

I think a better model of an emission trading scheme is the Regional Greenhouse Gas Initiative (RGGI) in the U.S. northeast. Nuclear generators can flourish under the RGGI.

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