Using the European Union ETS to combat climate change?

Where, oh where, are the responsible EU politicians? What happened to accountability?

From Financial Times,

Emissions regime could feel the heat

Expanding the European Union’s emissions trading scheme has been highlighted this week as a key mechanism in the drive to tackle global warming. Sir Nicholas Stern, former World Bank chief economist and a senior UK civil servant, said on Monday that establishing a carbon price, through tax, trading or regulation, was “an essential foundation” for dealing with climate change.

UK politicians, led by Tony Blair, prime minister, and Gordon Brown, finance minister, have endorsed his remarks, calling for a massive expansion of carbon trading to combat the threat to the climate.

But, without significant changes to the regime, such an expansion might achieve far less than its supporters hope – the scheme has not forced utilities to change their behaviour by switching from coal to cleaner fuels such as natural gas.

In fact, the EU is projected to burn 10m tonnes of coal more this year than it did last year, and the UK will import the largest amount of coal in its history.

Gerard McCloskey, chairman of McCloskey Group, a coal research and publishing company, said the UK was projected to import 42m-43m tonnes of coal this year, up from a record 35m last year. Mr McCloskey said one reason why coal demand had remained strong was security of supply. There had been nervousness about the reliability of European gas supplies since Russia briefly switched off the tap to Ukraine last winter.

In addition, hydropower had been hit by dry weather conditions in certain parts of the continent, including Scandinavia and Spain.

A third reason is that it is still cheaper to buy coal, and additionally pay for the credit to be able to emit more greenhouse gases, than it is to buy natural gas.

One London coal and gas trader said that in Germany – the largest energy market in Europe – utilities were making near record profit margins of €26.5 ($34) per megawatt hour (MWH) on the coal they used in spite of the cost of purchasing the necessary credits.

“If utilities are making money like that, there is no incentive for them to switch from burning coal,” he said.

In any case, the trading scheme suffered a severe blow to its credibility in April and May when it was revealed that European governments issued more permits than their companies needed to cover their emissions in the first phase of the scheme which started in January last year and ends on December 31 next year.

The price of EU carbon permits dropped from more than €30 per tonne to about €8.5 within three weeks from the end of April to mid-May, although it has since partially recovered to about €11. The drop led many hedge funds to leave the market.

Trading volumes have also dropped sharply. Having grown from an average of about 2m tonnes a day at the end of last year to about 20m a day at the end of April, volumes are currently running at about 1m a day.

There are too many permits, so in reality they should be worthless,” says Francisco Blanch, head of commodities research at Merrill Lynch.

The result is that emission traders have started to switch their attention to phase two of the EU scheme, which starts in January 2008 and ends in December 2012.

Prices for phase two permits are also under pressure. This is because many polluters in the developed world have been able to earn emission credits by investing in clean energy projects in the developing world. This gives them certified emission reductions (CERs), which can then be converted into emission permits.

Traders said the conversion of CERs into phase two permits was the most active trade in the emissions market. This has dragged prices lower because it has increased the supply of permits. After the emissions price collapsed in April, December 2008 carbon prices recovered to about €20 a tonne at the end of May, but are now about €15.50.

Mr Blanch said: “European governments will have to look into this issue of an oversupply of credits coming from the CERs.”

Emphasis added.

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