This blog is no longer active

Posted in Other on November 15, 2011 by Dan

I’m not updating this blog any more, but I’ll leave the posts available as an archive. You’re still welcome to contact me using the link to the right.

EUAs vs crude oil update

Posted in Carbon markets with tags , , , , , , , , on May 28, 2010 by Dan

I’ve updated the chart of EUAs vs crude oil (see below). I’ve included some comments based on an incomplete understanding of the dynamic between the two, so any comments would be gratefully received.

For the past year, EUAs have been rangebound between 12 and 16 euros. Oil, conversely, has trended strongly upward from $63 (EUR45) a year ago to a high of $80 (EUR63) a week ago. This is in contrast to the first period shown on the graph, between Jan 2007 and Spring 2009, where EUAs and crude were strongly correlated.

The relationship between EUAs and crude oil is partly that both are driven by overall demand for energy, but this changes over the long-term. The relationship observable in this graph is more likely driven by the ‘dark-spark’ mix of energy production in Europe. This refers to the mix of coal (dark) and gas (spark) in energy generation. Oil prices tend to drive the price of natural gas, which is clean relative to coal. When oil increases in price, energy generators switch to coal and therefore demand for carbon credits increases.

The increase in oil price over the past year would usually indicate a greater proportion of coal going into Europe’s energy supply. However, higher demand for carbon credits has not resulted. The sluggishness of EUAs in responding to oil prices is probably a reflection of poor industrial recovery following the credit crunch.

(click to expand)

Peak Oil primer

Posted in Other with tags , , , , , , on February 21, 2010 by Dan

I drafted this article a few months ago for Carbon Retirement‘s newsletter, but simliar ‘peak oil primer’ articles were published around the same time by a couple of big publications and I decided not to publish it. In hindsight, I think this article is a bit more factual and have decided to post it here.

Through the Twentieth Century, we continuously increased the rate at which we drilled oil, but cheap, easily accessible oil may now be running out. This article looks at some of the debates around ‘peak oil’ and starts to explore how it could be relevant to people and businesses.

What is peak oil?

Peak oil is something that happens in all oil fields. The light, good quality oil rises to the top. It is cheap to extract and easy to refine. As the field empties, the remaining oil is thicker and stickier and more difficult to extract and refine. The finished product becomes more expensive to produce and production tails off.

If you add together fields that are at different stages in their lifecycles, you get a similar pattern, suggesting that peak oil also applies to regions. Here in Europe, for example, we are already well past the peak.

Oil production in OECD Europe

What is less certain is whether oil production on a global level is going to peak any time soon, and how peak oil will affect economies, companies and communities.

What evidence is there for global peak oil?

There is agreement on one thing: there is still a lot of oil in the ground. The question is how much of it is accessible at a price we are prepared to pay. Much of it is deposited in places that are difficult to reach, or is controlled by unpredictable or hostile governments.

One important piece of evidence is the rate of new discoveries. A pattern is noticeable in countries where production has already peaked: the rate of new discoveries peaks a few decades before production peaks. In the US, discoveries peaked in the 1930s and production peaked in 1971. In the UK, discoveries peaked in 1975 and production in 1999. Global discoveries peaked in 1964.

A second piece of evidence concerns the recent oil price shock. Higher prices should stimulate more production if there are opportunities to develop new oil fields, but while the oil price increased from around $50 per barrel in early 2007 to around $145 in mid-2008, production hardly changed.

Thirdly, the average amount of energy required on average to get oil out the ground is increasing. According to Simon Ratcliffe of the Association for the Studies of Peak Oil and Gas, in the early Twentieth Century one unit of energy was required to produce oil containing 100 units of energy. In the 1970s, this ratio had declined to around 25:1. Today, some fields are only achieving 4:1.

There are many predictions of when global peak oil will occur. Some say it is happening now or even happened in the past few years. Others believe that production will continue to increase for several decades. The chart below shows a range of forecasts. The International Energy Agency (a forum for industrialised countries) has some of the most optimistic views.

Global oil production forecasts

Global oil production forecasts

Mbpd = million barrels per day CO + NGL = crude oil and natural gas liquids Source: The Oil Drum:

In August 2009 the IEA’s latest research showed that oil production is likely to be lower that previously thought. The forum’s chief economist told The Independent:

One day we will run out of oil … and we have to prepare ourselves for that day. The earlier we start, the better, because all of our economic and social system is based on oil, so to change from that will take a lot of time and a lot of money and we should take this issue very seriously.

The oil and gas companies are often optimistic about oil production. BP, a company that is investing in difficult oil deposits like tar sands in North America, believes that more sophisticated extraction technology will allow affordable oil to continue flowing for several decades. In a speech earlier this year (pdf), David Eyton, BP’s Head of Research and Technology, said:

There has been much debate about if and when we will reach ‘peak oil’. BP’s viewpoint is that there is no shortage of fossil fuels: we estimate that the world has already demonstrated the commercial viability of around 40 more years of conventional oil resources, 60 years of gas and 130 of coal at current consumption rates. Technology can extend all of these timelines well into the next century, in particular through the development of more unconventional resources. In our view, the more pressing challenge in the next decade is likely to be environmental — and more about the ‘peak carbon carrying capacity’ of our atmosphere than the availability of fossil fuels.

Shell’s view is more conservative, but still shows a belief that technology will allow new sources of oil to be gainfully exploited (from the Peak Oil Task Force report):

The global supply of oil will flatten by 2015, in Shell’s view, and if the oil industry globally is to maintain hydrocarbons supply on this plateau, very heavy investment will be required in ultradeep water, pre-salt layers, tight gas, coal-bed methane, in the Canadian tar sands and other areas of unconventional oil production

Until we have clearly passed the peak there will be a range of views, and the oil and gas industry is likely to be at the optimistic end. Several people we spoke to in preparation of this article, including some ex-employees of oil and gas companies, felt that companies like Shell and BP tend to be optimistic about their future production to protect their share prices.

How might society be impacted?

A reduced oil supply will have a particular impact on transport because 99% of transport fuel is petroleum (BERR 2008) – a product of oil. Food will also be affected because fertilisers are made from oil and the global food supply chain relies on transport for moving food between continents.

Let’s think about what could go wrong. Trade will reduce as transport becomes more expensive, and countries and local communities will be forced to diversify to produce food and energy. With less total energy going into the global economy and less labour specialisation, economies will shrink.

More competition for resources will lead to military occupation of oil rich areas. Politics will become nationally focused as countries seek to secure their energy and food supplies.

People differ in their view of the severity of these changes. Nathan Hagens, an energy researcher at the University of Vermont, identified four views  of our future:

  1. The ‘renewable energy’ contingent, who generally subscribe to the belief that solar based flows will eventually replace fossil fuels in a somewhat seamless transition and that Peak Oil is probably a good thing with respect to the environment;
  2. The energy technologists, who believe that even in face of near term peak, that better drilling, seismic, and recovery techniques combined with increases in unconventional fuels will keep us roughly on a business as usual path. (BP falls into this group);
  3. The End of Growth group – who think we have overshot resource limits (not just energy) and must generally powerdown to some cocktail of both more sustainable means and aspirations; and
  4. The Dieoff Crowd – that some large proportion (possibly all) of humankind will perish due to biological tenets based on fact that we are akin to a plague species, our rapaciousness trumps our ingenuity and ability to plan for future…essentially humans are not smarter than yeast.

In some countries, local communities have begun to organise to increase their resilience to these changes. These movements are called Transition Towns. They seek to reduce their energy use, grow food locally and improve community links. In short – to break their reliance on global energy systems.

How is peak oil relevant to a business manager?

It’s tricky for a manager of a company that is not directly involved in energy to engage closely with peak oil. The debates are complex and technical, with different points of view. As a result, most people who think about peak oil are geologists or involved in the oil and gas industry, and sustainability managers are not usually engaged with the issue. Peak oil is in a similar place to climate change ten years ago – which was mainly a concern for campaigners and atmosphere scientists.

However, a decline in oil supply would have a big impact on every economic sector. Oliver Dudok van Heel, a sustainability expert, believes that “some carbon intensive businesses will not survive. If a business model is based on liquid fossil fuels being available at a low price, they will have to change the way they operate. Overall, economies are likely to grow less and possibly shrink.”

As a business manager, you need to think about the resilience of your business model. Here are five questions to start you off.

  • How sensitive is your business to higher energy prices? What would be the impact on profitability of a long term increase in the price of oil?
  • How reliant on oil are your customers? Do their businesses depend on transport, for example? If their businesses suffer, yours will suffer too.
  • Are there commercial opportunities in a more limited energy scenario? Even if the economy shrinks, some businesses will be successful if they can help local communities to diversify and meet their immediate needs.
  • Are there ways that your business can support local food and energy production?
  • What are other organisations in your sector doing about peak oil?

Project-based carbon offsetting is like a lottery with no prizes

Posted in Climate Change with tags , , , , , , , , , on December 7, 2009 by Dan

At Carbon Retirement, we have just published a short piece of research into the efficiency of carbon offsetting through the Clean Development Mechanism, covered today by the BBC. It shows that for every £1 spent on CERs by voluntary buyers, 28p goes to the project’s capital expenditure and maintenance costs.

The chart below, from the report, summarises the costs per CER, with the grey chunks representing project expenditure. Project costs total £3.78 per CER, or 28% of the price paid by the final buyer.

Costs in the CDM market, per CER

Costs in the CDM market, per CER

This isn’t a study of profitability for any of these actors and the costs at each stage might be reasonable. The big chunk taken by the pCER buyer in our model, for example, may be a fair reflection of the risk it holds that the project will not deliver CERs.

However, the research shows that the efficiency of the overall system is very poor. While some transactional costs are inevitable and you could never expect 100% of your money to go to project funding, 28% seems far too low. Imagine if a development charity told you that 72% of your donation went to middlemen and admin fees!

Co-incidentally, 28% is also the proportion of UK national lottery revenue that goes to charity. So, buying carbon offsets to mitigate climate change is like buying lottery tickets to give money to charity. With carbon offsetting, you don’t even win a prize!

Friends of the Earth report on carbon trading – risks burying its good points with garbled points

Posted in Carbon markets with tags , , , , , , , , on November 5, 2009 by Dan

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.

Does the government need to provide guidance on the term ‘carbon neutral’?

Posted in Carbon markets with tags , , , , , , , on October 1, 2009 by Dan

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.

Carbon trading game – understanding the difference between the three basic types of environmental policy

Posted in Climate policy with tags , , , , , , , on September 29, 2009 by Dan

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 available here). 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.

Is carbon still following oil?

Posted in Climate Change with tags , , , , on August 23, 2009 by Dan

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

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.

Why does carbon offsetting struggle with its reputation?

Posted in Climate Change with tags , , , , , , , , , on August 23, 2009 by Dan

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.


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.

Do young people care about climate change less than everyone else?

Posted in Climate Change with tags , , , on August 19, 2009 by Dan

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:

Agree Don’t know Disagree
I like marmite 48% 3% 49%
I support a football team 40% 0% 60%
Twitter is a good idea 8% 46% 46%
Climate change should concern everyone 98% 0% 2%
It’s hard to know what to do about climate change 70% 0% 30%
Climate change and how we respond to it are among the biggest issues I worry about today 5% 45% 50%
I am personally making a significant effort to help reduce climate change through how I live my life today 15% 35% 35%

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

% of young people that agreed in the workshop (from table above) % of UK that agrees (from HSBC survey 2008)
Climate change and how we respond to it are among the biggest issues I worry about today 5% 26%
I am personally making a significant effort to help reduce climate change through how I live my life today 15% 26%

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 Quaker workshop

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.

Suspect carbon offsetting

Posted in Offsetting with tags , on May 13, 2009 by Dan

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.


EU 2008 Carbon Dioxide Emissions Exceed Permits by 25 Percent

Posted in Carbon markets with tags , , , , , on April 1, 2009 by Dan

The EC has published verified emissions data.


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.

EU ETS: “No longer as short”

Posted in Carbon markets with tags , , , , on March 31, 2009 by Dan

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.

Hot air deals should be linked to CDM

Posted in Carbon markets on March 24, 2009 by Dan

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 – vote for us!

Posted in Climate Change on March 18, 2009 by Dan

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.

Camp for Climate Action has a common sense failure

Posted in Carbon markets with tags , , , , , , , on March 10, 2009 by Dan

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.

EUA sell-off is a natural reflection of economic recession

Posted in Carbon markets on January 27, 2009 by Dan

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?

Non-weigh in to third runway

Posted in Other with tags , , , , on January 15, 2009 by Dan

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.

Cap and trade in the context of shrinking production

Posted in Climate policy with tags , , , , , , , , , on December 28, 2008 by Dan

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.

Lack of CDM progress at Poznan will be the major sticking point for negotiations over the next year

Posted in Climate policy with tags , , , , , , , on December 15, 2008 by Dan

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.