I just read the new report on carbon trading (pdf) from Friends of the Earth. Given the charity’s stance on anything related to carbon trading, the critical approach is unsurprising. The report makes some good points, but also makes some points that don’t seem well thought out. This is a shame because the charity could achieve much more by taking a reasoned position in the debate and focusing on the things that need changing.

One of my gripes is that the report contains some rash statements, like:

The EU ETS scheme has clearly failed to provide adequate incentives for European firms to reduce their emissions in Phase I;  Phase II is performing poorly and is likely to fail.

Is it? Last time I checked it was doing OK! Or:

The complexity of the carbon markets, and the involvement of financial speculators and complex financial products, carries a risk that carbon trading will develop into a speculative commodity bubble that could provoke a global financial failure similar in scale and nature to that brought about by the recent subprime mortgage crisis.

That’s not a good comparison. There is a lot of derivative trading in the EU ETS but we know exactly what the underlying asset is. The derivatives are simply tools to make trading smoother. The idea that carbon markets are a ponzi scheme run by speculators runs through the report, and some errors are made, including that most carbon credits are held by speculators (they aren’t; most credits are held by statutory market participants).

And the environmental economics get a bit shaky with the argument that cap and trade actually ‘locks in’ high emissions:

Polluters have an incentive to make extra emission reductions under emissions trading so that they can sell credits, therefore, emissions trading stimulates innovation. This model accurately explains the situation of sellers of credits. [...But it ignores the buyers...] Carbon trading makes lower-cost credits available to these firms as an alternative to the higher-cost investments that they would otherwise have to make. Hence trading removes any incentive that they have for technological innovation.

This would be better explained as “cap and trade makes equally valuable emission reductions for less money”.

I do, however, agree with FoE’s stance on offsetting. The report says:

developed countries are using the prospect of increased carbon market finance to hide from their commitments under the United Nations Framework Convention on Climate Change (UNFCCC) to provide new and additional sources of finance to developing countries. Carbon market finance comes from offsetting developed-country emissions cuts which should be additional. Counting it towards the financial commitments of developed countries is double counting.

This is right. And the report makes a generally fair rehearsal of all the usual issues with offsetting and the CDM.

If the parties to the UNFCCC can turn the screw on carbon markets, by (a) using the cap to demonstrate greater commitment to more ambitious reductions and (b) cutting out offsetting, then carbon markets like the EU ETS can be an effective central tool in mitigation. There is no reason why cap and trade should exclude direct support for low carbon technologies where governments feel help is needed.

It’s not practical to ask the UNFCCC to throw out carbon markets, and I would like to see FoE take only its reasonable points to the negotiations.

The Department for Energy and Climate Change has been running a consultation on the meaning of the term ‘carbon neutral’. Today they published their report. ‘Carbon neutral’ has been given the definition:

Carbon neutral means that – through a transparent process of calculating emissions, reducing those emissions and offsetting residual emissions – net carbon emissions equal zero.

The government is repeating the general mantra that carbon offsetting must be the last step in carbon management, following measurement and internal reduction.

I have always found this view a bit simplistic and also feel the government is sticking its oar in too far by giving a hard line in an area of voluntary corporate responsibility. There is no similar guidance for corporate foundations regarding which charities they should support, for example.

For most organisations, it is not clear what ‘residual’ emissions are. At some point the cost of internal abatement reaches an unbearable level and offsetting makes more sense. But this point is not obvious for any organisation. Very few have a full breakdown of the environmental projects available to them and the cost per tonne of each project. And even if they did, they would be unlikely to be able to decide on the threshold for which projects are affordable – particularly if they cannot compare internal projects with carbon offsets on the same terms (because internal projects should be prioritised).

The carbon offsetting industry supports a strict ‘measure-reduce-offset’ hierarchy because it is regularly accused of creating the moral hazard that it’s OK to keep on polluting. A self confident offsetting industry – an industry that believes its credits have environmental value – would position offsets as a legitimate tool that can be weighed against internal reductions.

Having made those criticisms, I would strongly advise any company wishing to claim it is ‘carbon neutral’ to follow DECC’s guidance. There is no point saying you are carbon neutral if you are going to be shot down by campaigners or switched on customers who believe you are making unsubstantiated claims. Following the guidance at least means you can point to a common methodology. Even better, avoid the term carbon neutral altogether.

I’ve developed a game that explains the differences between three key policy options for reducing emissions: command and control, tax and cap-and-trade. There are other games like it, but I think this one works really well and we like to use it with clients to explain the rationale behind the current preference that many governments have for cap-and-trade policies.

‘Command and control’ is when the government simply tells industry to reduce emissions by a set amount. ‘Tax’ involves levying a charge on each tonne of pollution. ‘Cap-and-trade’ is a policy type that allows companies to buy and sell emission credits, and therefore choose who makes the necessary reductions. Here’s how the game works:

Up to six participants (or six teams of two or three) are cast as the CEOs of large, carbon-intensive companies. They have asked their business analysts to prepare reports on how they can reduce their carbon emissions. These reports are shown at the top of each worksheet (you can download the worksheets here). Each company can implement two projects. You don’t have to implement an entire project – you can do half of it for the half the cost.

The facilitator (who is cast as the government), then asks each company to work out how much it will cost them to meet emission reductions under a command and control regime (i.e. you must meet the reduction target, and you can only implement your own projects). The facilitator asks each company to report how much money they spent and the emission reductions they achieved, and writes totals up on a flipchart.

Next, a tax regime is used. Each company will be charged £40 for every tonne of carbon that they miss their target by. Again, they report the results.

Finally a cap-and-trade scheme is used. Each company decides how many credits they would buy or sell at four price points (using auction ‘order books’, which you can download here). The data is fed into a spreadsheet that works out the optimal clearing price and shows who buys and who sells (the spreadsheet is quite simple but WordPress won’t allow me to upload it, so I have created a pdf. If you message me on Twitter – @danlewer – I can email it to you). It’s called a French auction and it’s just like real carbon markets.

The exercise shows that:

• Command and control achieves the desired emission reductions, but at a high price;
• Tax is cost efficient, but unpredictable in terms of emission reductions; and
• Cap-and-trade is cost efficient and achieves the desired reductions.

The game involves huge simplifications, of course, but does outline some basic economics behind these policy choices.

In January I looked at European oil and carbon prices to show how they were reacting to the economic recession. Today I had another look at these two markets to see what’s happened over the past six months.

The graph below (click to expand) shows the December 2009 EUA contract (from ECX) and the Europe Brent spot price (from the Energy Information Adminstration, converted in Euros using currency data from OAndA). The prices have been indexed to January 2007. Historically, carbon has largely followed oil.

In 2009 the trend seems unclear. While daily trading news is full of headlines like “carbon nudges higher on strong energy complex”, carbon seems have recovered less than oil. In January 2009, the nominal prices of oil and carbon were both around 70% of January 2007. At the end of last week, oil was at 110%, while carbon was at 80%.

Performance of EUAs vs crude oil

I don’t have any clear commentary to offer just now. Glancing at the graph, it looks like carbon has fallen behind oil by about three weeks, but that doesn’t feel like a very plausible theory. I’d be interested to hear any thoughts.

Carbon offsetting has a reputation problem. Some parts of the ‘carbon’ industry act dishonestly or are not environmentally motivated, and people outside the industry tend to lump the diverse organisations involved in carbon trading together. When an exposé story appears in the media, we all suffer.

This week there was a story about suspected VAT fraud in carbon markets. Dodgy brokers were buying carbon credits abroad (which does not attract VAT), and then selling them in the UK and applying VAT. They are thought to have made £38m. It’s called carousel fraud or ‘missing trader’ fraud (because the broker disappears with the tax). One funny thing about this story is that none of the coverage says which market the fraud was in. Were these CDM credits (the carbon offsets that the UN allows governments to use)?

Twitter was full of people saying that this story confirmed carbon trading to be a con. Several newspapers referred to “so-called carbon credits”. Why “so-called”?

Another example is the campaigns by NGOs like Friends of the Earth and WWF against the use of offsets in statutory carbon trading schemes. Under the Kyoto Protocol, governments of rich countries can offset some of their emissions by funding projects in the developing world. The NGOs feel this allows them to wriggle out of their responsibilities.

Friends of the Earth said:

Dangerous climate change will be unavoidable if the UK, EU and USA succeed in increasing the use of carbon offsetting, Friends of the Earth is warning in a new report released today [Tuesday 2 June 2009] that exposes carbon offsetting as ineffective and damaging.

WWF:

The problem with carbon offsetting is that at best it robs Peter to pay Paul – with no net benefit for the planet. All too often, offsetting is simply used to justify business-as-usual behaviour in the UK and other countries.

These charities are referring to the CDM or whatever succeeds it when the Kyoto Protocol expires in 2012. While both have misgivings about voluntary carbon offsetting, neither would object to its use by a company or individual who is doing all they can to reduce their own footprint. Unfortunately most people are not aware of the difference between voluntary and statutory carbon markets and articles like the above cast the whole sector in a poor light.

The challenge for organisations involved in carbon trading is to help their market understand what happens to their money. No customer can be expected to spend their money if they believe it will be appropriated by fraudsters.

I just ran a workshop on climate change with  120 bright and articulate Quakers aged 13 – 20. Some of the results of the discussion were so interesting that I thought they were worth sharing.

In one session, I asked the young people whether they agreed or disagreed with various statements. The results looked like this:

The last two of these questions were lifted from HSBC’s annual ‘climate confidence’ survey (pdf). Here’s how the data compare.

What’s going on there? How come this group of well-informed (most of them knew where Mozambique is, which was more that I could say) and thoughtful world-inheritors cares less about climate change than the general population? I put this to them, and the two most common answers were:

We’re being more honest. In the national survey, people were probably trying to look good.

(that’s my theory)

Teenagers are focused on problems closer to home. Climate change is too abstract to concern young people.

In another session, I asked the young people to rank the effectiveness of various actions in terms of addressing climate change. The picture below shows how they stack up (each column represents the consensus of a group of around 12, with the top action rated most effective – click to expand).

• Red = Go vegetarian
• Yellow = Stay in the UK instead of flying abroad on holiday
• Orange = Discuss climate change with your friends
• Blue = Write to a supermarket to tell them to be greener
• Green = Write to your local politician to ask them to do more about climate change
• Purple = Join a campaigning NGO

Results from the session with young Quakers

The clearest message is the variation, and the groups said that people don’t have the information to understand the effectiveness of actions like these. But to force a crude ranking, where the top rated action scores 6, the second scores 5 and so on, the order from most to least effective is:

• Stay in the UK instead of flying abroad on holiday (47)
• Join a campaigning NGO (40)
• Write to your local politician to ask them to do more about climate change (38.5)
• Go vegetarian (31.5)
• Write to a supermarket to tell them to be greener (31)
• Discuss climate change with your friends (22)

One thing is for sure – young Quakers prefer Marmite to Twitter.

Thanks to Yorkshire Friends Holiday School for inviting me to talk.

I recently received a press release from a company called My Emissions Exchange. I get lots of press releases – mostly about ethical shampoo and that sort of thing – but this one caught my eye.

‘MyEEX’ (no relation to German energy exchange EEX I assume) sells carbon offsets. The ‘projects’ behind the carbon offsets are individuals who reduce their home energy bills. You can sign up to MyEEX, enter your baseline bill, reduce your energy use, enter your new bill and MyEEX will create carbon credits that represent the reductions. They will then sell the credits on voluntary offset market – not sure who to – and return some proportion of the money to the individual.

For those of you familiar with the concept of additionality, alarm bells will be ringing. How do we know the baseline bill is not unusually high? How do we know the individual would not have reduced their energy use anyway (making the carbon offsets irrelevant)? Why do people need to be paid to reduce their bills? Who are the buyers anyway?

When I saw this I assumed it was an enterprising but poorly conceived project that probably wouldn’t get that far, but today I spotted a very promotional article in The Times!

“People really want to make a difference by cutting down their carbon emissions, but at the moment it’s all very woolly and they’re not seeing anything concrete from their efforts,” said Paul Herrgesell, the company’s project manager.

“This will let people actively track their energy usage and make money at the same time, both of which will motivate people and make them more aware of their carbon emissions.”

Herrgesell said the firm is hoping to expand the website to measure all types of personal carbon emissions, but is using households bills as a starting point.

“Our vision is to cover personal carbon footprints produced by car and air travel, and even, eventually, food and services,” said Herrgesell.

Bonkers!

A pig farm in Mexico that was to host an Ecosecurities CDM project is suspected to be the epicentre of the swine flu outbreak. Unfortunately I can’t share the link with you because I have only seen this on a subscription news service (the headline is here), but I think one critical question needs to be asked: can we really claim swine flu is additional if pandemics occur with predicable regularity? Surely a question for the CDM board!

The EC has published verified emissions data.

Bloomberg:

Power plants and factories in the European Union’s emissions trading program produced 25 percent more carbon dioxide than the amount of permits they received, according to Bloomberg calculations based on European Commission data.

The data is 91 percent complete, Stavros Dimas, the environment commissioner, said today in Brussels. The comparison between verified emissions and the allowances total is a like for like comparison, using only figures for installations that data is available for.

Point Carbon has just published its annual survey of people working in carbon markets. It’s full of useful insights and I can email you a copy if you want one.

In particular, I was interested in a chart on the expected trading positions of participants representing companies in the EU ETS (below). The proportion of companies with surplus EUAs has jumped about 10 ppts between 2008 and 2009, from 15% to 25%. The proportion that need more EUAs or CERs is something like half (the top four categories).

This tells a clear story: as recession bites, demand for carbon credits will be lower. But by this metric (which admittedly is a bit crude – it’s just the proportion of people who report being short/long and doesn’t account for the volume of emissions they represent), the movement is not so predicted to be big enough to sink the market.

Last week Reuters reported the first ‘hot air’ deal, in which Ukraine sold 30 million AAUs to Japan. The cost was not disclosed. AAUs are the credits created under the Kyoto Protocol – if a country has a target of 1 million tonnes then it will be given 1 million AAUs by the UN.

Eastern European countries have far more AAUs than they need because their targets under the Kyoto Protocol are based on their emissions in 1990, before the Soviet Union collapsed and took Easten European industry with it. The chart below (courtesy of Global Warming Art) shows carbon dioxide emissions by region – you can see how emissions in Eastern Europe have declined since 1990.

This leaves the bloc with many more AAUs than they need – hence they are able to sell them to countries that find their targets more challenging, like Japan. These AAUs are often called ‘hot air’ and trades are felt to be immoral by environmentalists because they allow rich countries to buy themselves out of meaningful reductions.

Hot air deals are unavoidable under the Kyoto system. While Ukraine has pledged to spend the revenue on “six specific environmental measures”, the impact on emissions of these projects is very ambiguous.

Where AAUs are traded between countries, the revenue should go into projects that reduce emissions to the same extent as the AAUs, using the same rules as the CDM. This would allow AAU trades to continue without underminining the environmental integrity of the Kyoto system (at least to the extent that the CDM’s additionality test works), but would not necessarily inflate the AAU cost to the CER cost (if the seller was able to find cheap projects to spend the money on).

Carbon Retirement is a company I’m involved with, and it retires EUAs as an alternative to carbon offsetting. We believe that retirement of cap and trade allowances offers a credible alternative to project-based carbon offsets.

One exciting piece of news this month is that we’ve reached the final of the Daily Mail and Make Your Mark ‘Enterprising Young Brits’ competition. Part of the competition is a public vote for your favourite business. We’d love to win – we don’t spend any money on marketing and it would give us some free publicity. You have to sign in to the website to vote, which takes 2 or 3 minutes, so this is really a competition to see whose supporters are the most tenacious! We know it’s ours – so if you can spare the time please vote for Jane Burston and Dan Lewer here.

The competition closes on Tuesday 24th March at 11am.

I strongly support the Camp for Climate Action. I attended the camp at Heathrow in 2007 and saw that the participants were engaged with policy in a relevant and radical way, and that they were exploring new and more sustainable ways of living and organising.

So I was dissapointed to see that the camp is organising a demo at the European Climate Exhange on the 1st of April.

ECX is the biggest exchange for EUAs (the permits traded in the EU Emmission Trading Scheme), and during February an average of 15m tonnes were traded there per day (1 EUA = 1 tonne of CO2. To put that into perspective, the annual carbon footprint of the UK is about 500m tonnes).

The Climate Camp’s website says:

By creating a brain-bending system of carbon pollution licenses, fossil fuel companies and trading firms have found a way to keep on churning out global warming gases and to reap huge windfall profits at the same time … [The UK government is] handing control of our climate over to the same people and systems that caused the financial collapse … Don’t let the financial and fossil fools make the rules!

This is wrong, of course – the Directives behind the EU ETS were written by the European Commission, not the traders and polluters, making the EC the most successful environmental regulator in history. The EU ETS will effectively limit carbon dioxide emissions within its perimeter to a known amount. Billions of Euros have already been invested in energy efficiency as a result of the carbon price this creates. This investment is the net economic effect of the scheme – not the windfall made a minority of companies.

Cap-and-trade is not viewed by anyone as the single solution to climate change, and it is not incompatible with the technology and lifestyle changes that the Climate Camp endorses. There’s not much to be gained from dismantling the EU ETS.

Finally, ECX is just one of several private exchanges that facilitates trade in EUAs – it has nothing to do with European or member-state level environmental policy.

The Climate Camp’s targetting of ECX is poorly informed and unconstructive. It panders to activists’ natural distrust of the market and establishment. As climate change moves into the mainstream and becomes more of a concern for governments, effective activists will need to engage with mainstream initiatives like the EU ETS rather than instinctively rejecting them.

Carbon prices have been falling recently. Since July 2008, EUAs have lost over 60% of their value and are one of the worst performing commodities in 2009. The chart below (click to expand) shows the EUA price indexed to January 2007. I have also included the oil price, which has been converted from dollars to euros, for comparison.

As you can see, carbon has largely followed oil. The main mechanism at work is that oil prices drive gas prices, which in turn determine the cost of switching energy generation from coal to gas. Burning gas produces less carbon dioxide per unit of energy than coal, so demand for EUAs goes down when gas gets cheaper. Levels of industrial production also drive both markets, of course, which leads them to correlate.

But in the past couple of weeks oil and carbon seem to have ‘decoupled’ (as you can see from the sharp drop-off in EUAs in January, while crude has recovered from a low at the end of last year). A new factor seems to be at play: industrial companies in distress selling their stockpile of EUAs, now surplus as their output shrinks, on the spot market to raise funds they cannot find in the credit market.

Many environmental commentators and journalists are saying that this demonstrates an inherent weakness in cap-and-trade. An article in Reuters last week said that:

companies from some of the European Union’s most polluting industries are now raising funds on the carbon market to help them weather the credit crisis.

That has raised some uncomfortable questions about a scheme meant to fight climate change rather than subsidize companies during a downturn.

“This 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,” said Mark Lewis, Deutsche Bank carbon analyst. “But that appears to be what’s happening.”

The first thing to get straight is that the through the EU ETS, the members states are transferring a liability to the regulated industries, not an asset. EUAs only have a value if there is a cost to complying with the emissions cap they represent. The EUA ‘windfall’ in this situation is better described as a reduced burden of compliance across the whole market, which pushes some companies long while most remain short. There must still be buyers out there no ‘windfall’ would be possible.

This new factor of spot sell-offs is really just a particularly rough piece of volatility reflecting rapid changes in expected demand over the next few years.

Given that EUAs can be banked into Phase III of the EU ETS (which will run from 2013– 2020), it is unlikely that the recession will hit manufacturing and energy so severely that the carbon price will collapse in the way it did in 2006. If this were to happen, does anyone really think a carbon tax, which would continue to brake output regardless, would fare better politically than cap-and-trade?

Geoff Hoon announced that the government will approve the third runway. We can be pretty sure this is not the end of the argument; the campaigning NGOs (and Boris) are going to have a field day.

I thought I’d weigh into the argument (or maybe it’s a non-weigh in). Instinctively I don’t support a new runway – while I can see the leakage point of losing transit passengers, the UK should be showing leadership in climate policy – but I admit I don’t understand the environmental or economic impact.

The debate is full of flimsy sounding statistics around the changes in greenhouse gas emissions, jobs created and business requirements for airport expansion. Each side makes different claims and I suspect there are aren’t many people who know what data is available or what it says.

I believe the aviation industry needs to shrink, but I find it hard to take a reasoned stance on the third runway.

Incidentally, you’ll probably have noticed Greenpeace’s ‘Airplot’ campaign in the media, which I think is a great piece of campaigning.

Questions are being asked of the two working installation-level cap and trade schemes in light of economic recession. The EU ETS – the world’s largest carbon market – is trading at about 16 Euros per tonne and is volatile because no-one is quite sure of the impact of shrinking production. Analysts believe that all reductions could now be met through purchase of CERs. Essentially this means that industry within the EU ETS has lowered its output and can comply with the cap by offsetting rather than making additional internal reductions.

The other scheme, RGGI, a scheme covering power plants in north-east US, held its second pre-compliance auction on 18 December and sold 31.5m allowances at a price of $3.38 per short ton (up 31c from the first auction, which is surprising given the commentary that follows). An article on BusinessGreen says:

… the auction came amid fears that the economic downturn meant the US scheme could repeat the mistakes evident in the first phase of the EU’s emissions trading scheme by setting the cap too high – a scenario that led to a glut of available emission permits and a collapse in the price of carbon.

Non-profit policy thinktank Environment Northeast released RGGI Emissions Trends & the Second Allowance Auction, a report which said emissions were currently 16 per cent below the cap. It pointed to skyrocketing fossil fuel prices earlier in the year as the primary reason for a lower than expected emissions rate.

“RGGI was negotiated back in early 2003 through 2005, and at that time everybody thought the trend would be up,” said Derek K Murrow, director of policy analysis at Environment Northeast. “Since it was negotiated we’ve seen a signfiicant decline, which is really a good thing. Now the question is whether that trend will continue as the programme starts up in 2009, in which case the cap might need to be bought down more quickly after the first compliance period. Or will emissions return to their historic levels, in which case the cap would be constraining?”

Comments like this suggest that cap-and-trade must deliver a carbon price that is neither zero nor unbearably high, and also force emission reductions beyond anything that happens ‘naturally’ (as a result of lower consumption or developments in eco-efficiency, for example). These characteristics sound more like tax than cap and trade. Cap and trade provides an absolute limit for emissions and a price crash indicates that the limit can be met with no unusual investment. Equally, if emissions rise unexpectedly, a cap and trade market will force decisions about where additional reductions will be made.

That’s the strength of cap-and-trade: unforeseeable events that effect emission levels are reflected in the permit price. If the price crashes due to unforeseen cuts in emissions, the cap and trade scheme is not a failed policy.

CDM reform didn’t get anywhere at Poznan. To me, this is the most worrying outcome of the conference. Although technical discussions and low-level negotiation planning were all anyone expected, there is now very little time to do something about the CDM before the Kyoto Protocol runs out.

There was a lot of discussion about Forestry and CCS. Forestry is unsuitable for the CDM – partly because there are issues with calculating the volume of carbon dioxide a forest absorbs, and mainly because forests would produce far more CERs than Annex I countries could buy (essentially we wouldn’t be able to buy enough carbon credits to protect the forests).

The situation with coal is similar in that the CDM couldn’t support the volumes required (I haven’t done the maths on this but the IEA forecasts that to stabilise at even 550ppm we will require 10 new CCS plants every year), except that CCS will be neither operational nor affordable before 2020. Most estimates show that a carbon price of EUR 40 – 75 will be required to make CCS commercially viable, and CERs are unlikely to enter that range.

There was also discussion on making the CDM more transparent and efficient. These discussions didn’t progress either, but we really need a new approach to technology transfer and funding rather than tweaks to a process that can’t demonstrate additionality.

Despite encouraging statements from China, Brazil and Mexico, the developing world will not sign up to quantified emission reductions without a clear understanding of how rich countries will support them. The ethos behind the CDM needs to switch from reducing the cost of compliance endured by Annex I to structural funding for the developing world to pay for abatement.

HSBC recently published their annual ‘climate confidence monitor’ (pdf), a survey of 12,000 people in Australia, Canada, France, Germany, the UK, the USA, Brazil, China, the Hong Kong SAR, India, Malaysia and Mexico.

The summary is short and very interesting. The chart below stands out, showing what people think governments are doing vs. what they governments should be doing. While renewables are the clear favourite (perhaps the polar bears of climate change policy), carbon trading is in the far bottom left despite being the key plank of international and European climate policy.

Hat tip: John Grant.

The Climate Change Bill became law today. That makes the UK the first country in the world to commit to quantified emission reductions regardless of what anyone else does.

The UK’s Committee on Climate Change, an independent statutory body that advises the government on how it should repond to climate change, published its first report today – Building A Low Carbon Economy.

Its advice to the government includes:

• cutting emissions by 80% from the 1990 level (77% below the 2005) by 2050;
• including international shipping and aviation in the target;
• setting an interim target of 21% by 2020, or 31% (the ‘intended’ target) if a global deal is reached at Copenhagen;
• all Kyoto GHGs in the target;
• no government purchase of CERs to meet the interim target. EU ETS participants would be allowed to use CERs as normal – but that is only likely to represent 10% of the reductions. In the inended target, total offsetting would be allowed to reach 20%; and
• all new coal must fit CCS by a deadline (probably between 2020 and 2025).

The report also gives estimates that these targets will cost 1% of GDP by 2020 and 1-2% by 2050. Journalists are saying the government is likely to accept all the committee’s recommendations.

Some industries are claiming that carbon costs could lead them to move outside the EU, which would harm the internal economy and prevent emission reductions. Eurogypsum – the trade body of gypsum manufacturers – is claiming this, but it’s not clear whether the issue is the absolute cost of carbon or the uncertainty over price.

In an interview with Euractive the president of Eurogypsum said:

I cannot challenge the fact that we have to decrease the energy content in our product. But I can also say that in the thirty years that I have been in the industry, we divided the cost of energy in our products by two. And there is still room for progress. So, it is our job in managing the business. Having an incentive to push us to accelerate is okay.

What I am afraid of is the free market for the CO2 tickets because it is out of control. We do not know. When we make a simulation at a certain level, we have no vision of the carbon price. So that is one of the main issues is that the system that they are going to adopt is a system that will give us no vision of what could happen. Maybe it will cost nothing. Maybe it will cost a big amount. So we may take decisions on something that will never happen? They should be conscious about that…

When you have to choose in between certainty or uncertainty, you avoid the uncertainty.

EUAs trade out to 2012 on derivative markets, but not ten years out like Eurogypsum is thinking, and there are no readily available financial products that can transfer that sort of risk.

Over the next few months, as traders speculate on the extent of the recession and talks in Poznan and Brussels hopefully provide some clarity on Phase III, the EUA price is going to be volatile and those pushing back against the climate and energy package are likely to use this as a lever.

France (as EU Council president) is putting together a big package of concessions for industries in central and eastern Europe in an attempt to push the package through. One that I would throw into the mix is a publicly backed long-term carbon hedge. This would hopefully knock on the head the argument “we’re all environmentalists and we don’t mind paying for carbon, it’s the uncertainty that messes with our business models”.