March 08, 2010
European CO2 Permits Lead To Political Profits

Count me in the crowd who think cap-and-trade as a method for cutting CO2 emissions is a bad idea. It gets gamed by industries that have the best lobbyists. Europe serves as a poster boy for how cap-and-trade leads to ridiculous outcomes. Powerful firms got more carbon emission permits than they needed and sold them for big profits.

PARIS—Europe’s system for industrial carbon quotas has enriched the continent’s biggest polluters, with 10 firms together reaping permits for 2008 alone worth $680 million, a new report revealed.

Dominated by steel and cement makers, the same “carbon fat cats” stand to collect surplus CO2 permits that—at current market rates—could be worth $4.3 billion by 2012, it said.

Of course, the whole point of the permits was to allow trading so that businesses that had a harder time cutting CO2 emissions could buy emissions permits from those who had an easier time cutting emissions. But some firms did an excellent job lobbying for more permits and so they have plenty to sell.

Meanwhile, government subsidies of solar and wind in Germany freed up permits so that some companies could get more CO2 permits from the government. (thanks "th" for this link) So the renewable power subsidies raised electric power rates while boosting profits of companies who got more CO2 permits.

Germany's renewable energy companies are a tremendous success story. Roughly 15 percent of the country's electricity comes from solar, wind or biomass facilities, almost 250,000 jobs have been created and the net worth of the business is €35 billion per year.

But there's a catch: The climate hasn't in fact profited from these developments. As astonishing as it may sound, the new wind turbines and solar cells haven't prohibited the emission of even a single gram of CO2.

In a more rational system I could imagine steel or cement makers subsidizing the construction of wind mills or paying for insulation in order to cut CO2 emissions from other sources. But no.

Even more surprising, the European Union's own climate change policies, touted as the most progressive in the world, are to blame. The EU-wide emissions trading system determines the total amount of CO2 that can be emitted by power companies and industries. And this amount doesn't change -- no matter how many wind turbines are erected.

We need cheaper cleaner energy sources so that market forces will push the shift to cleaner energy. Trying to this with government intervention leads to politically more astute firms making profit at the expense of everyone else.

On the bright side Germany's subsidies for solar panels (even though installed in a country with lower average insolation) have caused a scaling up of photovoltaics panel construction that has caused PV makers to go down learning curves that have cut PV costs for the rest of the world.

Share |      Randall Parker, 2010 March 08 06:51 AM  Climate Policy


Comments
JAY said at March 8, 2010 1:31 PM:

Proof, if you needed any, that AGW is a scam.

th said at March 8, 2010 5:02 PM:

parker, Der spiegel's cheerleading is just that, wind, solar, bio-rot etc., are not only at the bottom of the barrel for producing power, they are also right down there at both effectively and economically reducing co2 as the table illustrates.
For the green party to now favor dumping wind over simple building renovations, it kinda fits what the danes are saying, wind is a disaster.

rsilvetz said at March 8, 2010 7:03 PM:

""Germany's renewable energy companies are a tremendous success story. Roughly 15 percent of the country's electricity comes from solar, wind or biomass facilities, almost 250,000 jobs have been created and the net worth of the business is €35 billion per year""

Absurd. Unsustainable without massive transfers of wealth, eg subsidies, from other sectors of the economy. The only question is where and how, and of course, in what manner are the books being cooked.

Fat Man said at March 8, 2010 9:02 PM:

There can be little doubt that the structure of the so called "cap & trade" proposals currently being considered by Congress is intended to create a trading market in the permits issued by the government. The "Wall Street" and "LaSalle Street" firms backed the Democrats very heavily (almost 2 to 1 in dollars contributed) in the 2008 election cycle, with the hope that they would enact a C&T law. It should be noted however, that John McCain had sponsored similar legislation in the Senate over the years. However, McCain's Republican legislative colleagues showed less enthusiasm for the legislation than did the Democrats.

The virtue of C&T, is that it creates a market mechanism that will discover the the price of carbon at various emission levels. Other than the possibility of fraud that is endemic to all markets in intangibles, and of speculative bubbles that all markets suffer from, there are vices connected with C&T that derive from the structures proposed.

First, the original Waxman Markey proposal was to have the government require CO2 producers to buy the permits to release the gas into the atmosphere. On grounds of practicality, they would have exempted small producers (like you and me), and imposed the requirement on large producers (e.g. power plants). The moans were loud, so they mollified several interest groups, such as farmers, by agreeing to give away the permits. At that point they had created an ideal environment for crooks to run the market, as well as creating a mechanism to siphon small amounts of money from every electicity user in the country and use it to line the pockets of special interest groups.

Fortunately, WM was DoA in the Senate, and the administration is preoccupied with the health care bill, so we will be spared that stinker.

It is instructive to think about what the alternatives are, if you believe that it is important to control CO2 emissions.

The simplest would be a command and control system that would simply mandate certain technologies and ban others. The increased mileage requirements on cars are an example. Another would be imposing the death sentence on coal fired power plants. If you are familiar with the EPA's new source rule odyssey, you will understand that it might be very hard to make this really work. Just ask yourself what will happen when you try to shut down a 500 MW coal plant that is serving a depressed area represented in Congress by a very senior committee chairman. Similarly the CAFE rules will dig very deeply with a sieve. They may control initial mileage, but the do not control how many miles the car is driven.

The next simplest would be a carbon tax. C&T, is in economic effect, a carbon tax. The WM C&T was a carbon tax where all the money went to line the pockets of private persons. That is not a good idea. A straight tax would be fairly easy to administer, but it might be too low to have the desired impact on emissions, or it might be so high as to choke off economic growth. It could be low when imposed, and slowly ratched up, but even then it would be balancing act.

A simpler C&T proposal would be to limit the permit requirement to those persons who take first sell the fossil fuels after they are removed from the earth, or imported. That would be a much smaller universe than the end user requirement of WM. The government could sell the permits through periodic auctions. A secondary market, would be less necessary, and might even be dispensed with altogether. You now understand why such a proposal will never see the light of day.

I would say, that given the low quality of people we have in Washington that the least worst of the alternatives would be a gradually phased in carbon tax.

How ever, if you are tired of the lesser evil -- Vote Cthulhu in 2012.

Randall Parker said at March 8, 2010 9:37 PM:

Fat Man,

I think a carbon tax is much better than C&T and a carbon tax could easily be made revenue neutral with corresponding tax cuts in other areas. But a carbon tax is opposed because it is a tax.

My expectation is that US CO2 emissions won't go into a long decline until Peak Oil hits. Though already right now we are 2 barrels per day below where we were a few years ago. The US has been outbid for oil by China and other emerging markets.

Hong said at March 9, 2010 11:51 AM:

The problem with any tax is enforcement. Just how would we enforce non compliant states like China or Iran to do anything against it's interest? Including a tax on it's industry? The question remains unanswerable like the proverbial elephant.

Hong said at March 9, 2010 12:28 PM:

Someone tried to answer this by stating a global trade ban on non-compliant states would be effective in forcing their obedience. Strangely it hasn't worked well with relatively tiny Iran.

KTWO said at March 9, 2010 3:44 PM:

We are doomed to confusion and paralysis if we insist that other nations agree with us, that any new taxes be fair, or that more bureaucratic direction of every activity will improve matters.

Energy is perhaps our largest industry, but maybe it is medicine, or farming, or...... I venture to guess that government is our largest industry. And the true product of government is rewards for government employees. Nothing will reward them more than trying to enforce carbon fuel usage at the consumption point or by dictating each individual's usage. So that is what we should expect governments to propose at every opportunity.

The way to regulate and/or tax carbon fuels, if at all, is at the supply points.

A carbon tax is relatively easy to enforce when collected near the sources. And that bypasses the moral and undecidable arguments about what is fair or whether the world will end within a decade.

There aren't very many refineries in the US to monitor. As for imports, it is hard to slip tankers or coal tenders into ports unnoticed. Within our borders the railroads - and to a lesser extent barges - move coal to utilities. Rail traffic is easily monitored and so are pipelines.

IMO we should speak less about what China or India or other nations should or must do. They will do what they choose about CO2 emissions. And what they choose may not please us.

The great objection to the carbon tax in any form is that some industries can avoid it by moving overseas. Many cannot. But of those who can move many already have. Often they avoid high wages, government regulation, some tax, and other inconveniences.

And moving is not always about moving overseas. Look at the fierce bidding and favors given by states, cities, and counties to lure any companies who will bring jobs.

There is no free lunch here, but the quality of the foods offered ranges from relatively tasty to the utterly rotten.

nmg said at March 10, 2010 12:13 AM:

"Count me in the crowd who think cap-and-trade as a method for cutting CO2 emissions is a bad idea. It gets gamed by industries that have the best lobbyists."

You can apply that to just about any congressional scheme for controlling us. It only offers opportunities for the well connected to take even more advantage. To rephrase count me in the crowd who think {insert public policy scheme here} for {insert desired social outcome here} is a bad idea.

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