ANALYSIS - EU's Gyrating CO2 Mart Teaches US About Balance
Date: 17-May-06
Country: US
Author: Timothy Gardner
The EU launched a cap-and-trade market last year to meet emissions limits of the gases scientists link to global warming under the Kyoto Protocol. The first round of the pact requires industrialized countries to reduce emissions by about 5 percent from 1990 levels by 2008 to 2012.
Europe's trading scheme gave nearly all the allowances -- rights to emit heat-trapping gases -- to its smokestack industries. But that may have distributed allocations to sources that did not need them -- in effect skewing the supply/demand balance that keeps markets running smoothly, said William Pizer, a senior fellow at Resources for the Future, an independent research institute in Washington, D.C.
"Maybe there should have been some sort of an auction," he said in an interview.
In such cap-and-trade markets, plants that cannot cut emissions under set limits buy them from industrial facilities that have trimmed emissions by taking steps such as operating boilers more efficiently or switching from coal to cleaner natural gas.
An imbalance of credits in the European scheme may have helped to drive CO2 prices to a peak of 31 euros (US$40) a tonne last month, analysts said. This in turn drove power bills higher, as plants hoarded credits in fear that prices would go still higher.
It may have also played a roll in the 65 percent collapse after a handful of countries, including France and Spain, reported that their 2005 CO2 emissions were far below expectations. Prices had recovered by Tuesday, but they were also volatile -- as high as 21 euros and as low as about 15 euros -- on uncertainty about demand.
COAST TO COAST
President George W. Bush withdrew the United States from the Kyoto process in 2001 saying it would hurt the economy. But states on the US east and west coasts are planning their own CO2 reduction schemes.
In the East Coast effort, the Regional Greenhouse Gas Initiative, states agreed to auction at least 25 percent of their allocations. One state in the plan, Vermont, plans to auction all its allocations. Eliot Spitzer, attorney general of New York, another member state, is lobbying for his state to auction all its allocations.
Derek Murrow, an emissions expert at advocacy group Environment Northeast, which is participating in setting up the RGGI, said it would be unlikely to repeat the EU's mistake. He noted that the US states are building their system more slowly than the EU did. That should allow the RGGI to measure the demand for emissions credits more accurately.
Alexander Rau, a founding partner of Climate Wedge, a company that manages a voluntary carbon fund with Cheyne Capital, agreed. "Most of Europe's allocations were based on projections rather than hard data," he said.
Even so, the RGGI plan is far less ambitious than Kyoto. It seeks to cap emissions in the region's power plants at current levels by 2009 and and reduce them by 10 percent by 2018.
California's emissions program has been proceeding even more slowly. Gov. Arnold Schwarzenegger, a Republican, said last month the state would measure its greenhouse gas emissions first, and then consider a cap-and-trade program.
Whether the US systems being developed will work fast enough to reduce the expected effects of global warming -- stronger storms, increased floods, and searing temperatures -- is another question.
But Pizer said efficient trading systems could reduce the risks of creating too lax a market in which the cost of emissions could sink so low there's no incentive to reduce them. Analysts say that could still happen in Europe's gyrating market.
