Archive for Carbon markets

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)


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.

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.

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.