Apparently Markets Allow Buying and Selling

January 29th, 2009

Posted by: Roger Pielke, Jr.

Some folks are surprised to learn that market mechanisms for carbon trading allow both the buying and selling of emissions permits. Clearly this sort of capitalistic behavior must be stopped if carbon markets are to work. The Guardian has the details:

Britain’s biggest polluting companies are abusing a European emissions trading scheme (ETS) designed to tackle global warming by cashing in their carbon credits in order to bolster ailing balance sheets.

The sell-off has helped trigger a collapse in the price of carbon, making it cheaper to burn high-carbon fossil fuels and leading to a fall in the number of clean energy projects. The moves were seized on by environmentalists and other critics who have previously criticised the European Union’s ETS for delivering more windfall profits for business than climate change.

“This [ETS] was not designed as a scheme to give corporates cheap short-term funding options in the face of a credit crunch meltdown where banks are not lending, but that appears to be what’s happening,” said Mark Lewis, a carbon analyst at Deutsche Bank.

Steel, concrete and glassmakers are believed to be the main sellers along with financial speculators such as hedge funds. The sell-off of the pollution permits has led to carbon prices plunging 60% – from over €30 to around €12 per tonne.

The EU’s emissions trading scheme was set up as a market solution to cut greenhouse gas pollution from industry. Polluters were issued with permits that can be traded between companies and countries as a way of encouraging an overall reduction in carbon output. However, companies are now cashing them in for their own financial benefit.

Up to €1bn-worth of carbon emissions permits are said to have been sold off in recent months as industrial companies see an opportunity to bring in funds at a time when their carbon output is expected to fall due to lower production.

Environmentalists expressed anger last night about the way the ETS was being used. “The ETS has bowed to corporate self-interest at every stage of its design and implementation, so there is no surprise that it is now being used as a cash cow to see firms through a difficult financial phase,” said Oscar Reyes, a researcher with Carbon Trade Watch.

Point Carbon, an information provider and consultancy, claims the sell-offs are only one of a number of factors that are influencing prices and argues it is “rational” for companies to be selling off credits at this time.

3 Responses to “Apparently Markets Allow Buying and Selling”

  1. jae Says:

    LOL. As you have been saying all along…. Hope the Obama Admin. is actually understanding this problem (I doubt it, though, since they seem to have very little concept of how capitalisim actually works, as proved by the “stimulus” bill).

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  3. JesseJenkins Says:

    Oregon Congressman Peter DeFazio seems to be taking a similar line, essentially arguing to “keep the cap, ditch the trade” in this op ed for the Oregonian this week. Is this the new “populist” environmentalist position on carbon regulations?

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  5. TokyoTom Says:

    Touche, Roger. I thought the same thing; it seems that enviors don’t understand markets, even ones they help to create. In a recession, production contracts, so the demand for carbon permits (and prices) also falls.

    Of course, it’s a little more complicated, as (1) the EU has little incentive to make ETS really work unless the US, China etc. agree to bear some of the pain as well, and (2) enviros want to create political pressure to get better performance. If they want to keep prices high, perhaps they ought to consider buying (and holding without using) some permits themselves.