2010 has been a bad year for the climate.
Not just for climate treaty negotiations – few expect a deal in Cancún in Mexico this December after the failure in Copenhagen last December. But also for the carbon markets that ultimately depend on strong policies.
Huge interests are at stake. Pioneering investors feel let down and are warning they could go to the wall. The uncertainty could go on until Cancún, or even longer.
This is on top of uncertainty over the post-2012 status of the UN clean development mechanism. The CDM’s future is further clouded by European Union proposals to stop many types of UN offsets from entering the EU Emissions Trading Scheme after 2012.
Why should we worry? There are several reasons.
One is the escalating row over the environmental integrity of the United Nations Clean Development Mechanism (CDM). Responding to criticisms, the CDM Executive Board is deciding whether to restrict industrial waste gas projects that have produced fully half of all CDM credits since its launch.
Even if it only limits such projects in future it could significantly affect supply. If it imposes restrictions retrospectively on credits from existing projects then business confidence could suffer.
On the other hand, if it does not take firm action then trust in the scheme’s integrity will continue to be challenged.
Another is continuing controversy over the EU ETS. After a bumpy first trading phase the European Commission seemed to have tackled the problem of over-allocation of emission permits. But that was before the recession.
Now, pressure group Sandbag has estimated that in its entire 2008-12 second phase the scheme will achieve emission reductions of only 32 million tonnes of CO2. Moreover, some 1.8 billion unused allowances are likely to banked, or carried forward into phase III, potentially depressing prices for years to come.
This matters because the whole point of the EU ETS cap is to create scarcity of emission rights and therefore a significant incentive to cut carbon. If the cap doesn’t fit there is no scarcity and precious little incentive.
True, if we are content with short term fuel-switching from high carbon coal to medium carbon gas, then the kind of EU ETS we have now, with prices bumping along around €15 per tonne will do just fine.
But if we want to kick-start a low carbon energy technology revolution through longer-term investment in low or zero carbon energy sources and energy efficiency, then we need a much higher carbon price.
Closer to home, the future of the UK’s Carbon Reduction Commitment – Energy Efficiency Scheme, a flagship for emissions reduction outside the EU ETS, is also looking decidedly shaky. The Coalition wants to simplify it. Now the advisory Committee on Climate Change has given it a green light.
The most likely change now is abandonment of the cap-and-trade phase due to start in 2013. And so far it is far from clear whether an uncapped allowance scheme based mainly on mandatory reporting and public league tables of performance will be able to guarantee emission cuts.
A fourth reason for concern is that the pendulum seems to have begun to swing away from cap-and-trade towards carbon taxes.
The Labour government was almost messianic on emissions trading. It led the world in designing the CRC to extend the concept from heavy industry into broad swathes of commerce, industry and local government. Other EU member states have been following developments closely.
Now the coalition looks set to turn the CRC into something far more like a carbon tax than a trading scheme. Moreover, by advocating a floor price on carbon in the EU ETS it is seeking to introduce a tax element into the flagship EU trading scheme for heavy industry.
This is not to say that a shift from trading to taxes could not be effective. But whether it will be any more effective than the policies tried so far is far from clear. The devil will be very much in the detail. But whichever policy mix we go for, it will take a will of iron to see it through in the absence of an international agreement.