Tom Heller, Stanford Professor and head of George Soros-backed Climate Policy Initiative, spoke at last night's Climate One session at the Commonwealth Club. Prof Heller made some very interesting comments, amid jokes, arising from his never-ending virtuous circle of whistle-stop as a "soft diplomat" on international climate policy.
Heller had just returned from Europe, where he noted that the EU Emissions Trading System was suffering from the bargain basement price of carbon, which no one, especially those who designed the scheme in the early 2000s could ever have predicted.
In December, allowances tanked at €7/tonne, this week's Economist notes, and the price hasn't traded much above that since. If that weren't bad enough, the article cites Matthew Gray of Jefferies, an investment bank, who reckons that "by 2020 the ETS will have an accumulated surplus of 845m permits, against a planned cap that year of 1.8 billion permits."
Australia's carbon tax at A$23/tonne now seems fantastically overpriced and sustaining California's carbon allowances at more than $15/tonne appears over-optimistic.
Decreased demand due is only one reason the price is so low. Heller pointed out the blindingly obvious elephant in the room was the EU triple suite of policy targets: 20% renewables and 20% energy efficiency savings and 20% emissions reductions by 2020. Demand for renewables coupled with energy efficiency savings would of course reduce emissions and deflate demand.
If Europe's economy was motoring along, the economics would be different. But no one could have anticipated the depth and lengths of the global economic downturn together with Europe's debt crisis.
But Heller also added that there was little appetite for allowances because investors didn't believe in the targets. Something jarred with me at this suggestion. I thought it might be that only a limited amount of carbon allowances can be traded beyond EU's compliance periods. But that was scrapped after the phase 1.
California's scheme does allow for unlimited trading between compliance periods.
But it does also impose holdings limits. For 2013 vintages, holding limits will be 6m tonnes - enough to "prevent participants from acquiring market power".
Non-utility covered entities may purchase no more than 15 percent of allowances sold at any auction; other entities are limited to four percent of allowances sold at auction.
The EU's holding limits formula is way more complex.
But carbon allowances differ from other financial products in that they are compliance instruments intended for use within a particular programme. Even the EU ETS only extends to 2020… perhaps it too will get dropped like Kyoto. I felt that Heller was suggesting that these carbon compliance instruments should be more attractive to long term investors. But I'm not sure that markets view compliance instruments in the same way as physical commodities like oil and sugar or 20/30-year bonds. The development of the green bonds market has been slow in coming, notes Environmental Finance, with $16 billion of environmental bonds issued to date, mostly by the World Bank and the European Investment Bank (EIB). Carbon allowances by design cannot send long-term market signals.
He said though that overall, the EU ETS was reducing emissions despite its flaws and unintended consequences. But he offered a doomsday scenario for global emissions. He said we were on track for 650ppm - 750ppm, and the best we could hope to achieve was a stabilisation at 550ppm, resulting in a 3C-5C rise in global temperatures. In response to an audience question about personal action, he quoted Mike Lee: "Just do it". Live or do something else, he added.
In later comments, one of the intriguing comments Heller made was that the EU should have been given the task of managing international climate negotiations, rather than the UN.
Marc Stuart, who founded EcoSecurities, one of the world's largest and first carbon trading companies. It was sold to JP Morgan for almost $200m in 2010. Stuart said that even though market mechanisms were having little impact on reducing global emissions, the UN policy framework had achieved a qualitative if not quantative effect. "It would be naive to think that these markets would have happened otherwise," he said.
Heller posed the rhetorical question whether the framework conceived in 1997 to formulate international climate policy goals was working in today's world and the future we were now faced with. Like all good attorneys since Atticus Finch, he already knows the answer…