Charles Clover
These are gloomy times for those convinced that cutting fossil fuel emissions is vital for the climate and the health of the oceans. Yvo de Boer, the formidable United Nations climate chief, has resigned, public belief in global warming is on the wane and there is shrill triumphalism in the blogosphere about the silly errors made by climate scientists.
Meanwhile, carbon trading — the process by which polluting companies can buy credits from companies with fewer emissions — is not proving as straightforward as had been hoped. Corus, for example, has mothballed its steel plant on Teesside, but is now widely expected to profit hugely by selling £250m worth of carbon credits that the government is giving it.
In the European Union the price of emitting a ton of carbon has plummeted to €13 (£11.60) — a level that is undermining investment in renewable energy. Recently Drax, our biggest coal-fired power station which has invested in technology to burn carbon-neutral wood and fuel crops, announced that buying carbon credits and continuing to burn coal was cheaper than using the new technology. It is little wonder that the idea of buying and selling permits to pollute has come under attack from sceptics and environmentalists alike.
So you may be surprised to learn that the most detailed evaluation of the first three years of the EU’s emissions trading scheme has ruled that it is a success, cutting emissions significantly below the levels they would otherwise have reached. This study (Pricing Carbon, published by Cambridge University Press) reveals that over its three-year trial phase the scheme cut greenhouse gas emissions by about 300m tons of carbon — equivalent to half the UK’s annual emissions.
The world’s first cap and trade scheme — still regarded with suspicion by US senators — has not only reduced emissions but has also created a template for more ambitious cuts.
Unfortunately, the EU’s total emissions still rose during those three years, although less than they might have otherwise. But don't forget: the trading scheme did what it said it would, however much the greens grumble about the utilities switching from coal to less carbon-heavy gas rather than to wind power. It also cut carbon emissions without dire economic consequences and with far less noise than if Europe had levied a carbon tax.
This matters because it is a common view — in America and among climate sceptics such as Christopher Booker and Nigel Lawson — that putting a price on carbon imposes an unacceptable cost on western economies. Nonsense. As Denny Ellerman, an economist from the Massachusetts Institute of Technology, and lead author of Carbon Pricing, says, it is clear that US banks’ bad debt has had a far greater effect on the European economy than the price on energy imposed by carbon trading.
One reason people are convinced that trading has been a failure is the low carbon price — caused by recession and an over-allocation of permits. Then there are the windfall profits that sometimes result when governments give companies such as Corus free allocations of permits to pollute. The political reality, however, is that free allocation of permits buys the co-operation of the big industry lobbies, which higher taxes would not. Buying off opponents in the early phase, as President Barack Obama plans to do, may be grubby but who says taxes are a more honest alternative?
It’s interesting to examine how carbon trading has fared during a recession. Because fewer people wanted energy, the price of permits went down, thus lowering the burden on hard-pressed companies. When some found they could not borrow cash from banks, they raised it by selling their allowances — gambling that they would be able to buy them back when customers returned. A carbon tax, imposed by politicians, would have certainly resulted in more companies closing. Carbon trading also works far better across borders than taxes. It has created a new global economy (worth €121 billion) in which large transfers of private money flow from rich countries to poor ones.
The parliamentary environmental audit select committee recently evaluated trading and taxes — and came down on the side of trading. It has asked for more trading and better targets and wants the system to be extended to more businesses. In the committee’s view, we may need to tax imported goods produced in countries where there is no carbon price. And why not? Taxes and trading are not by definition incompatible.
The fact remains that carbon trading is still giving some people a chance to make a quick buck. I can sympathise with the Republicans, who have launched a lawsuit against the threat to use regulation to reduce carbon emissions if the Senate does not pass the Obama administration’s new cap and trade bill.
How long, then, before America starts trading carbon? It could be a while yet — after all, it took 10 years to negotiate emissions trading for sulphur under the US Clean Air Act — and I believe that is why the UN climate chief resigned. But America will go with cap and trade in the end. The latest evidence shows that it would be mad to do anything else.
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