CAP-AND-TRADE ATTACK: COMING TO THE U.S.

Shifting to a cap-and-trade system has not been easy for the European Union (EU) and the coming U.S. system will meet critiques like this one.

In the first “trial” phase of its Emissions Trading Scheme (ETS), EU nations were allowed to set their own caps and allocations were not auctioned. The price of credits plunged and the scheme failed to curb emissions. In the new phase, significant changes have been instituted. All emissions are capped. The European Commission (EC) has set allocations based on 2005 emissions. 10% of allocated credits will be auctioned to create competition for them. It is expected that Phase 3 will have far more of the allocated credits being auctioned, driving the cost of using carbon for energy higher and stimulating more carbon market activity.

One loophole in Phase 2 has now been identified: Power companies, the biggest single source of emissions, can wait for their allocated credits to rise in value and sell them at a profit but then pass the increased cost of generating power beyond their allocated caps on to consumers.

It is no scandal or outrage when such a loophole is identified. On the contrary, closing the loophole moves the EU one step closer to accomplishing its purpose of reducing emissions via a market-based system. As the price of energy moves upward toward the true cost of burning fossil fuels, power companies will spend what they must to curb emissions. From an unnamed source in Britain’s power generation establishment: "We need a much higher carbon price for the economics [of spending $3 billion for carbon capture technology] to make sense."

Note: The US should pay the EU some kind of royalty fee for doing so much of the hard preliminary work and finding so many of the loopholes in cap-and-trade before the US takes it up.

Power firms to pocket £6bn from carbon ‘handouts’ in new emissions regime
Danny Fortson, 02 January 2008 (UK Independent)

WHO
UK power companies, the biggest emissions generators in the nation

After an extended period of fluctuation, EU emissions credit prices have stabilized. But are they headed for a sharp rise? (click to enlarge)

WHAT
- Phase Two of the European Trading Scheme (ETS) resets caps on European Union (EU) nations to lower allocations. The total value of credits allocated to the EU power companies is estimated at £6 billion ($3.17 billion). This is expected to drive the value of carbon credits up.

WHEN
- Phase Two of the ETS began January 1, 2008, and runs through the end of 2012.
- Draft provisions for Phase Three will be announced for the first time on January 23.
- Congress will begin debate later this month on the Lieberman-Warner proposal for a US cap-and-trade system.

WHERE
The article focuses on British power companies but in general applies to all EU power companies.

WHY
- UK power companies create 1/3 of all UK emissions, 100+ million tonnes of emission allowances.
- If the 22 euro/tonne price of the credits allocated to the power companies goes to the expected 30 euros or 35 euros per tonne, the £6 billion ($3.17 billion) value would go to
£2.24bn ($4.42 billion) or £2.6bn ($5.13 billion).
- ETS rules allow the companies to profit from the sale of emissions credits. If the power company then exceeds its emissions cap, it can pass the higher cost of doing business on to the consumer. This constitutes a loophole in the system. The EC must and surely will move to close the loophole.

The highest emissions have long come from power generation. (click to enlarge)

QUOTES
Jake Ulrich, managing director, Centrica: "If companies and individuals are to be made to reduce their output of CO2, the ETS needs to be structured to make polluters pay. To do this, we need to eliminate the current free handouts of allowances to emit, which give big windfalls to polluters and do not encourage development of clean generation…We want to see [free allowances] end from 2012 and instead [to] introduce 100 per cent auctioning in the power sector."