Carbon trading 'undermined by boom and bust'

Terry Macalister and Ashley Seager, The Guardian 23 Mar 09;

A shake-up in the way the "boom and bust" carbon markets are working in Europe is being urged ahead of tomorrow's auction of new emission certificates by the UK government.

The Carbon Trust, which is funded by government money, and the consultancy PricewaterhouseCoopers argue that some kind of floor price or carbon tax might have to be put in place to prevent the EU's emissions trading scheme (ETS) being discredited by a further collapse in prices, which have already slumped from €30 per tonne to just over €10.

As ministers prepare to raise money by selling off more carbon certificates to –polluting companies, Michael Grubb, economist at the Carbon Trust, said the ETS was being badly undermined by volatility and uncertainty as the financial crisis ate into a scheme that was meant to fight global warming.

"Very low carbon prices could wreak much damage on the credibility of emissions trading and undermine the EU's attempts to form a platform of leadership in the [forthcoming] Copenhagen [climate change] negotiations," Grubb said. "Moreover, the historic pattern of boom and bust points to [the] inherently volatile characteristic of emissions trading to date and the potential benefits of building in more robust design. There are various options that could be considered." Among these, he said, were reserve price auctions in which a minimum floor price is set.

Richard Gledhill, PwC's global climate change leader, said that volatility and low carbon prices were undermining the business case for long-term investment in emissions reductions.

He added that a mixture of cap-and-trade schemes such as the ETS plus a –carbon tax could be the way forward. "Business needs clear, long-term price signals if major shifts in private sector investment are to be made," he said.

PwC points to estimates that the world needs to spend about $500bn a year over the next 20 years on renewable energies and energy efficiency alone, many times the current level. That level is already dropping back because of the seizing-up of capital markets.

"Much of the debate on whether climate change should be tackled with a tax or through carbon trading is unduly black and white," said John Hawksworth, PwC's head of macroeconomics. "Our evaluation of the arguments suggests that neither carbon taxes nor carbon trading is clearly superior to one another. Both approaches have pros and cons.

"A hybrid trading scheme with price ceilings and floors offers a potentially attractive balance of price flexibility and predictability that we think merits serious consideration by governments as a potential alternative to either pure trading or pure tax solutions."

PwC also say that the extra money governments would generate through the use of carbon taxes or trading could provide useful income to spend on environmental programmes without having to raise income or corporate taxes. Estimates show, for example, that auctioning carbon permits under the ETS could raise up to £8bn a year by 2020.

The consultancy says its hybrid system could be merged into the ETS with relatively few modifications and then linked into similar schemes in the US and other major developed economies. It could also be used for developing countries such as China and India in the medium term.

• This article is an extended version of that which appeared in today's paper