By Alex Morales and Alessandro Vitelli – March 28 (Bloomberg) — Carbon markets were supposed to save the world from climate change by making fossil fuels more expensive. These days, a lifetime of pollution costs less than a tank of gasoline.
Using one type of United Nations carbon credit, it’s possible to offset 581 tons of emissions, about as much as the average European generates over 80 years, for 63.91 euros ($81).
A ton of carbon is produced by burning about 102 gallons of gas, the U.S. Environmental Protection Agency says.
“The fact that prices are so cheap says the market is broken,” said Edward Hanrahan, director of ClimateCare, a company in Oxford, England, that invests in carbon-reducing projects to allow small businesses and consumers to compensate for their emissions. “It’s not spurring large emitters to make investments.”
The byproduct of burning coal, oil and gas was never supposed to be this cheap. When the European Union started its market eight years ago, policymakers expected costs of at least
25 euros a ton to coax industry to shift to renewable energy.
Analysts such as Sir David King, former chief science adviser to the U.K. government, have said industry won’t eliminate carbon for less than 100 euros a ton. It’s about 4.95 euros in Europe, and 11 cents a ton in a UN-backed market.
Lawmakers in the European Parliament will vote on a stopgap measure supporting prices next month. At the same time, officials and executives from Texas to Tokyo are debating whether it may be easier to impose a tax.
“When you see these numbers, you realize there is something going wrong,” said Dieter Helm, a professor of energy policy at Oxford University who advises EU governments on carbon. “It tells you that decarbonizing the world’s economies is extremely cheap, which it isn’t. We need a carbon tax. We want a carbon price to reflect where you want to go, not just current circumstances.”
Carbon markets were set up to help developed countries meet their legally binding emissions targets under the 1997 Kyoto Protocol. The aim was to issue factory owners and utilities allowances for their pollution that decline over time, encouraging them to reduce emissions. Excess permits are traded on the markets. The economic slump curbed factory production and pollution, creating a glut of the certificates.
Some markets are especially hard hit. Credits from the UN’s Joint Implementation program were at 4 cents in January and 11 cents yesterday. The EU Emissions Trading System accounts for 89 percent of the $61 billion market worldwide. Its value shrank 24 percent last year despite a 26 percent surge in volumes traded to 10.7 billion tons.
Mopping up the excess requires both the European Parliament and 27 member governments to agree on a plan. Lawmakers on April
16 are scheduled to vote on the first element of a European Commission proposal known as “backloading,” which would delay allowance auctions through 2015, temporarily restricting supplies.
Success isn’t certain. Poland, Greece and Cyprus are opposed out of concern energy prices would rise and revenue from auctions would drop. Germany, the Czech Republic, Bulgaria, Portugal and Romania haven’t decided how to vote. Climate Commissioner Connie Hedegaard wants to go further, ensuring that clearing the surplus isn’t pushed into the future.
“We can’t simply continue to overflood a market that is already over-flooded,” Hedegaard said in an e-mailed response to questions. “The next step is then to discuss the more structural measures to provide a sustainable solution to the surplus in the longer term.”
Others aren’t sure the backloading proposal will work.
Stefan Dohler, head of asset optimization and trading at Vattenfall Energy Trading, said the EU should look for a “permanent set-aside,” eliminating some of the excess forever.
U.K. Climate Secretary Ed Davey supports that view.
Oil companies Exxon Mobil Corp. and Total SA say it would be easier to levy a tax on carbon, giving companies certainty about what pollution will cost.
“A carbon tax is much more straightforward,” Rex Tillerson, chairman of Exxon, which is based in Irving, Texas, said in an interview with Charlie Rose on March 8. “It’s much simpler to administer.”
Without a big adjustment to the structure of the European market, buyers fear it “might just fall away,” said Abyd Karmali, head of carbon for Bank of America Corp. in London.
“You might end up with a patchwork quilt of measures across the
27 member states, where each state decides to put in place its own policies to buttress what isn’t being done by the European emissions-trading program.”
For now, cap-and-trade systems are gaining favor outside the U.S., where legislation for a market stalled in 2009 despite the support of President Barack Obama.
South Korea will begin trading in 2015. California has held two auctions since its market started this year. Australia and the EU are working to link their systems. In Japan, Prime Minister Shinzo Abe’s government may revive debate on carbon markets in the autumn after parliamentary elections. It shelved plans for trading in 2010.
“Carbon prices fixed by a tax give companies less flexibility,” Takashi Hongo, a fellow at the Mitsui Global Strategic Studies Institute who has advised the government on climate policy, said in an interview in Tokyo. “Trading says the private sector is more efficient than government.”
Those trading systems haven’t done much to boost the price of carbon. In the EU, benchmark permits touched a low of 2.81 euros on Jan. 24, less than a 10th of their record price and closed yesterday at 4.95 euros a ton.
The market for UN Clean Development Mechanism benchmark credits hit 27 euro cents in December and was at 33 euro cents yesterday, less than 1.5 percent of the record 23.38 euros in July 2008.
Individuals would struggle to buy any offsets at those prices, because the markets were established for companies and involve brokerage and registration fees.
“It is not going to drive any behavioral change whatsoever,” Hanrahan said, the voluntary credit dealer whose cheapest offsets sell for 7.50 pounds a ton ($11). “The payment would be meaningless.”
The following is a table showing the cost in euros of offsetting a lifetime of emissions at 11 cents per ton, the current price of credits on the UN’s Joint Implementation program.
Country Annual Life Cost of
Tons CO2* Expectancy Lifetime’s Per Person**
Qatar 36.90 78.5 years 318.47 euros
U.S. 17.31 78.7 years 149.95 euros
Canada 15.73 81.2 years 140.47 euros
Japan 8.97 83.6 years 82.53 euros
EU-27 7.29 79.7 years 63.91 euros
China 5.40 73.8 years 43.82 euros
India 1.39 66.0 years 10.08 euros
Dem Rep Congo 0.05 48.9 years 0.25 euros
* International Energy Agency data for 2010.
** Based on Bloomberg calculations, taking a simple average of life expectancies for men and women, based on UN projections for the period 2010-2015, except for the EU-27 figure, which uses Eurostat data from 2009.
With assistance from Ewa Krukowska in Brussels, Mathew Carr in London, Chisaki Watanabe in Tokyo and Jeremy van Loon in Calgary. Editors: Reed Landberg, Randall Hackley
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