THE EU FIGHT TO BEAT EMISSIONS

Like almost every other financial market in the world, the European Union (EU) Emissions Trading Scheme (ETS) is down in volume and value. Like almost every other market, the EU ETS has players exercising any advantage they can find for leverage. Like the other markets, the EU ETS has tightened controls to prevent such players from abusing the trading process.

Unlike the other markets, observers have condemned not the players for being irresponsible actors but the EU ETS itself. Why? Because unlike any other market, the EU ETS exists not merely as a marketplace but for a purpose.

The EU ETS is intended to prevent the global climate change-inducing rise of greenhouse gas emissions (GhGs). Yet GhGs are on the rise, EU utilities and power producers are gaming the market and impatient observers are condemning it.

Stockholm University measurements inside the Arctic Circle near Norway just upped the atmospheric GhG concentration to 392 parts per million (ppm), 2-3 ppm over the previous year. This is the highest concentration in 800,000 years. 1/3 of the increase has come since the beginning of the Industrial Revolution from the burning of fossil fuels and other human activities.

Kim Holmen, research director, Norwegian Polar Institute: "The rise is in line with the long-term trend…"

With the intention of reversing the trend, the EU ETS was created as a result of the Kyoto Protocols when many of the world’s nations agreed to take steps to cut back on GhGs. Most climate scientists, such as the Nobel Peace Prize-winning United Nations (UN) Intergovernmental Panel on Climate Change (IPCC) consider atmospheric GHGs higher than 350 ppm a threat to the stability of the world’s climate but hope various actions that reduce human GhG emissions and build a non-fossil fuel-based energy infrastructure might avoid the worst consequences by keeping concentrations from exceeding 450 ppm.

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The EU ETS, commonly called a cap-and-trade system, puts a specific cap on emissions, measured in tonnes of GhGs. It is applied to utilities, power producers, industrial companies and other major emitters. To emit above the level of the cap, a company must by European Union Allowances (EUAs). A tonne of GhGs is equal to one EUA. If a company can conduct its business below the level of its cap, either by using fossil fuels more efficiently or using non-fossil fuels, it can sell the unused portion of its EUAs via the ETS.

Revenues generated by the market, through auctioned EUAs and through fines on violations of caps, are used to build New Energy infrastructure.

The world’s biggest emitters do not presently participate in the ETS. Big emerging-economy emitters, in particular China, India and Brazil, insist their growth is more important and demand that developed Western nations first take responsibility for the harm they have already done. The U.S. has, under the domination of business-first leaders in Congress during the 1990s and under the business-minded leadership of the Bush administration, also refused to participate, for fear it would put the U.S. at a competitive disadvantage.

That is changing.

Yvo de Boer, head of the U.N. climate change efforts, recently praised President Barack Obama's announced intentions regarding climate change.

Yvo de Boer, Executive Secretary, United Nations Framework Convention on Climate Change (UNFCCC): "It's been a night-to-day change in terms of the U.S. position on this topic…"

The rising hope is that the Obama administration will take the kind of role and responsibility that will make it possible, at the crucial world summit in Copenhagen in December of this year, to create a new international agreement in which all the nations of the world commit to a cap-and-trade system.

The upcoming trip by Obama Secretary of State Hillary Rodham Clinton to Japan, China, South Korea and Indonesia was also described by de Boer as having "incredible importance" in laying the groundwork for the Copenhagen summit.

Yvo de Boer: "Now we see the United States coming back to the international negotiations…I believe that a Sino-American way forward on trade, on technology, and on climate change could be a major contribution and impulse to the broader negotiating process."

Meanwhile, the price of EUAs on the ETS – as a result of the international economic downturn, the resultant freeze in available credit and the across-the-board fall in consumption and demand – has fallen to an all-time low. EUAs have lost 3/4 of their value since July 2008 and are down 50% since January 1.

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With less consumption and demand, there is less power production and industrial activity, resulting in less emissions and less need for EUAs.

Companies with unused allowances, allotted free by the EU when the ETS was initiated to entice players into the market, are dumping them for cash as the urgency of the short run overrides any long-term concern about the cost of emissions

Some contend the worst consequence of this situation is that some companies may stockpile the cheap EUAs for the coming decade and use them to burn coal.

Others say the worst consequence is that there are so few revenues generated by the market to invest in New Energy infrastructure.

Actually, the worst consequence is that BOTH are consequences of current circumstances.

An emissions trader who did not want to be identified as the one outlining a way for companies to do their worst, explained the situation succinctly.

Unnamed emissions trader: "If you're a utility looking to build coal plants in post-2012 this is a bargain…"

The long-term consequences of the fall in the EUA price are uncertain. The cap remains and will come down over time. In fact, companies dumping cheap EUAs and companies buying up cheap EUAs could be controlled if the EU decides to regulate the ETS by tightening their caps.

On the other hand, if the EU does not effectively deal with the present circumstance and the economic downturn is sustained, there could be an even worse result: Cheap coal could extinguish the economic rationale for building New Energy infrastructure.

Mark Lewis, energy and emissions markets analyst, Deutsche Bank: "It's going to make new renewable capacity less attractive…"

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This is another crossroads in the development of the cap-and-trade system concept. There must be effective regulation or the system will fail. It is exciting to watch the process unfold. But this is not a sporting event or a competition between singers. It is literally the fate of the world that hangs in the balance.

Big financial players appear to be betting that a strengthened EU ETS and a growing New Energy economy will emerge from the crisis.

The European Investment Bank (EIB), a major financial force behind the offshore wind expansion the EU plans as its New Energy lynchpin, has not altered its plans to put another billion euros ($1.3 billion) into offshore projects this year on top of the 2 billion already invested. The bank’s investment could climb as high as 7-to-8 billion euros.

Juan Alario, Energy Efficiency and Renewables Divison Head, EIB: "This year, I expect the number of renewable projects will most likely be higher than the number of conventional energy projects…"

EIB is not the only big financial institution betting on New Energy.

Richard Simon-Lewis, director of project finance for energy and utilities, Lloyds TSB Corporate Markets: "A lot of deals are being done by clubs of banks…For the very big deals ... we are seeing the multilaterals, the likes of the European Investment Bank and potentially the government coming in to co-fund."

Alario said New Energy development, along with most other economic growth, is slowing but he expects the bank’s total New Energy investment to be 3 billion euros in 2009, up from the 2.3 billion in 2008 and 2 billion in 2007.

A just-completed pact between 350 of Europe's cities to cut their GhG emissions 20% by 2020 attests to the boom in the New Energy economy local leaders see coming.

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There are sure to be players in any market. The ETS is no exception. Energy and power markets are famously gamed. The name Enron is emblematic of such behavior. There 2 important questions the EU ETS must answer and neither is whether individual bad actors can make intermittent scores.

The first is whether the cap-and-trade market serves its intended GhG-cutting purpose on behalf of the EU community. When it is clear the ETS can be made to do so, cap-and-trade will be ready to serve the world community.

The second is whether the counterproductive actions of the bad actors can be managed and, if criminal, punished.

Many studies of phase 1 of the EU ETS (2005 - 2008) show abuses and failures but most of the failures (like giving too many EUAs away for free) have been rectified and some of the abuses (like utilities profiting too easily without cutting emissions) have been eliminated. There are studies of the current phase (running through 2012) that reveal different abuses and failures. The EU has been designing regulations to manage those since they began emerging last year.

Few saw the current economic crisis coming or were prepared to cope with it. The EU managers of the ETS must now do what all other market managers are doing. They must find the Madoffs and make sure they are not able, in the future, to abuse the world's climate and make off with the profits.

The U.S. will be faced with enormous and momentous choices regarding global climate change in 2009. It must decide whether to institute its own cap-and-trade system and (at Copenhagen in December) whether to marry itself to the world’s cap-and-trade system.

Many believe a tax rather than a cap-and-trade system is the best way to get the world GhG concentration back down to 350 ppm.

In making its decision, the U.S. had better understand very clearly the implications of what has been going on in the EU ETS since 2005.

Point of interest: If the U.S. EPA had been as proactive during the Clinton and Bush years at regulating the coal industry as the EU has been at regulating the ETS, there would likely today be a lot less environmental devastation in U.S. coal regions.

From harisheema034 via YouTube.

Europe's big lenders still backing green power
Pete Harrison (w/Daniel Fineren and James Jukwey), February 12, 2009 (Reuters)
and
EU cities in joint green pledge
10 February 2009 (BBC News)
and
UN climate chief praises new US administration
Mari Yamaguchi, February 13, 2009 (AP)
and
CO2 hits new peaks, no signs global crisis is causing dip
Alister Doyle (w/Andrew Roche), February 12, 2009 (Reuters)
and
Cheap EUAs to cut renewables investment, may spur more coal
Nina Chestney and Gerard Wynn (w/Guy Dresser), February 12, 2009 (Reuters)

WHO
European Union (EU) Emissions Trading Scheme (ETS); Andris Piebalgs, Energy Commissioner, EU; Kim Holmen, research director, Norwegian Polar Institute; U.S. National Oceanic and Atmospheric Administration; Yvo de Boer, Executive Secretary, United Nations Framework Convention on Climate Change (UNFCCC); President Barack Obama; U.S. Secretary of State Hillary Rodham; Juan Alario, Energy Efficiency and Renewables Divison Head, EIB

WHAT
Atmospheric levels of GhG concentrations are now at 393 ppm. At the same time, record low EUA prices threaten New Energy investments and may make Old Energy a better investment. But the Obama administration is moving the U.S. toward participation in the world’s fight against global climate change, big institutions in the EU like the EIB and major utilities are moving ahead with the development of a New Energy economy and more than 350 cities across Europe committed to taking action to cut GhGs.

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WHEN
- Winter 2008-09: GhG concentrations have been measured at 392 parts per million (ppm), a rise of 2-3 ppm from winter 2007-08.
- Actual CO2 concentrations are likely higher because they peak just before the start of spring in the northern hemisphere.
- The 350-city pact will cut GhGs 20+% by 2020, in line with the EU-wide goal to cut emissions 20% by 2020.
- The EU signed on to the Kyoto Protocol in 1997.
- The successor pact to the Kyoto agreement will be finalized at the December 2009 Copenhagen summit.
- The EIB began investing in offshore wind projects in 2002 with the 80-turbine Elsam project off Denmark's west coast.

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WHERE
- The new GhG concentration level was measured by a Stockholm University project on the Arctic archipelago of Svalbard off north Norway.
- 27 nations comprise the EU.
- Secretary of Stat eClinton will visit: South Korea is about to be the first country not part o the Kyoto agreement to set an emissions reduction target.
- Secretary of Stat eClinton will visit: Indonesia is crucial to bring into the next international agreement and an effective and workable policy to manage deforestation, a major factor in global climate change will be required to bring it in.
- Secretary of Stat eClinton will visit: Japan’s emissions reductions goal for 2020, to be set by June, could be as low as 7% and as high as 25% (of the 1990 level).
- Some cities in the 350: London, Birmingham, Coventry, Nottingham and all the North-East councils in the UK as well as Paris and Madrid and cities in Switzerland, Norway, Ukraine, Croatia, Turkey and Bosnia-Hercegovina.
- EIB is looking at offshore wind projects in the North Sea and Baltic Sea.

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WHY
- The Stockholm University finding of a GhG concentration at 392 ppm is higher than any other, such as the readings made by the U.S. National Oceanic and Atmospheric Administration.
- Plants breathe CO2 (the major GhG) in and breathe oxygen out. Burning fossil fuels generates CO2.
- There are seasonal variations in GhG concentration.
- EUAs could fall as low as 5 or 6 euros/tonne.
- The EU ETS is meant to force emitters to cut GhGs by improving efficiencies or switching to New Energy.
- Many non-EU banks have pulled funding from New Energy projects but big banks and utilites are still investing and in some cases upping investments.
- Utilities and power producers usually only buy EUAs to cover emissions 1-to-3 years into the future but very low prices may entice them to buy years ahead and have them available for excessive generation of spew far into the next decade.
- The pact between the 350 cities could save ~8 billion euros/year in fuel costs.
- The cities’ agreement requires a sustainable energy action plan by February 2010 and a progress report every 1-to-2 years. The European Investment Bank (EIB) will finance the project through EUAs and other emissions reduction tools.

From 350org via YouTube.

QUOTES
- Kim Holmen, research director, Norwegian Polar Institute: "It's too early to make that [2009] call…That's a tricky one to do…If we had, for example, a year with an unusually warm Siberian winter, that could cancel the human variation".
- Garth Edward, head of emissions trading, Citigroup: "If you look at the price today it may start to become very attractive, not for compliance purposes today, but for compliance purposes for years…The purpose of an emissions trading programme is to deliver emissions below a certain cap, end of story. We all probably want the advantage of investment into (low carbon) technologies, but that's an indirect and uncertain effect…"
- Unnamed energy and emissions markets analyst: "Then I think you really would have a question mark (over the objectives of the scheme)… Absolutely there is a danger of that, potentially, and that would be terrible."
- Christian Kjaer, European Wind Energy Association (EWEA): "The main problem for the smaller developers is the short-term freeze on lending…We may see some of the smaller projects which have turbine delivery contracts but are struck by the banking liquidity freeze being taken over by the larger power companies…There are some indications coming out of the United States that the market could drop a little, but then there are also signs the Chinese market could grow a little…So overall, I would say the market will grow in 2009, but probably not by the 30 to 40 percent we've seen in recent years."