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Cap and trade round-up: show me the money?

2012 September 13

While a federal carbon pricing scheme has long been declared dead in the U.S., late August saw a flurry of activity in other markets, including Australia, European Union (E.U.), and California. Australia’s cap and trade scheme took a somewhat unexpected turn, as Australia and the E.U. jointly announced on August 28 that their two emissions trading schemes would officially link up starting in 2015 and operate jointly by 2018. Meanwhile later that week in California, 150 major emitters participated in a practice allowance auction mimicking the activity that will regularly occur in the upcoming cap and trade scheme starting in January 2013. The Australia-EU linkup and California’s upcoming launch paint two very different pictures of cap and trade schemes.

In theory, cap and trade schemes exist for two functions: 1) to set a cap on emissions and decline that cap over time such as to reduce emissions of harmful greenhouse gases; 2) to introduce a price for carbon (due to the demand for emissions reductions) that will give various sectors of the economy a signal to innovate better and cheaper low-carbon technologies. It looks as if California’s emissions trading system (ETS) will successfully serve both of these functions, while the E.U. and Australia ETS’s may fail to spur innovation as oversupply of low-priced credits will continue to flood their markets for a while.

The E.U. ETS has seen incredibly low prices this year for both allowances and UN offset credits, dwindling in the range of €8 and €2 per ton of carbon dioxide respectively. The U.S. Regional Greenhouse Gas Initiative (RGGI) which covers northeastern U.S. power stations has rarely seen a price above $5 per ton of carbon dioxide. The main reason is that baselines were set before the unforeseen circumstances of an economic crisis and low-priced natural gas came into play. In the E.U., similar factors are at play with the added oversupply of UN offset credits applying further downward pressure. Australia has done away with its carbon price floor as it plans to join up with the E.U. ETS. Its market may be well supplied

What are we to make of all these low prices? Are carbon markets actually working? Will they actually spur innovation needed for long-term deep cuts in carbon emissions? Harvard economist Robert Stavins pleads that we not fret at this point. He argues that the systems are indeed playing the cap function, while low prices are really due to exogenous factors rather than poor design. Other U.S. NGO’s point to the success of RGGI auctions in raising nearly $1 billion, which many states have re-invested into energy efficiency programs. The E.U. has meant to set many reforms into motion to help prop up prices, but these have face delays. Meanwhile, California is looking like a golden opportunity. Bloomberg New Energy Finance notes that the value of California allowances for delivery in December 2012 are already closing at $19.50 per ton, about twice the value of E.U. allowances at a €7-8 per ton value. The firm’s forecast for prices in 2020 for both the E.U. and California markets sits at about $55 per ton.

Perhaps each scheme will have its difficulties, but the number of cap and trade schemes and pilots is rising. South Korea’s scheme was approved in May, while China’s seven pilot schemes are set to launch in 2013. As experience accumulates, hopefully design will improve and carbon prices will rise, guiding the world’s economies to a lower carbon future. And of course, there’s always hope for a federal scheme in the U.S. If President Obama can get re-elected and put some skin into the carbon game, he will indeed prove that “climate change is not a hoax”.

What do readers think? Is the EU-Aus tie up a bad idea? How much longer do we have to wait until carbon prices will actually cause long-term shifts in the way we use and produce energy?

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  • disqus_fVqoFyAg1I

    If you cap too broad, people will naturally go for the cheapest solutions. Defining the scope is key if the goal is to encourage innovation. However, if the goal is reducing emissions in a cost-effective way, low prices may not be bad. How do you see the possibility for sectoral crediting/trading under NAMAs? What are the linkages to the current cap-and-trade schemes?

    • susty

      Sectoral crediting/trading seems like the long lost stepchild of carbon markets. The idea has lost momentum, but I think EU is still interested in implementing it, but China seems to be out of the picture with their own ambitions for a carbon market. Not sure if Aussie’s will be interested in such sophisticated sectoral credits. Also, my argument is that higher price is what drives innovation. And there are many other factors affecting price much more than the scope of the cap, including available abatement options, pace of reduction/cap, offsets, etc.

  • http://twitter.com/sustainablejohn sustainable john

    Sectoral crediting/trading seems like the long lost stepchild of carbon markets. The idea has lost momentum, but I think EU is still interested in implementing it, but China seems to be out of the picture with their own ambitions for a carbon market. Not sure if Aussie’s will be interested in such sophisticated sectoral credits. Also, my argument is that higher price is what drives innovation. And there are many other factors affecting price much more than the scope of the cap, including available abatement options, pace of reduction/cap, offsets, etc.

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