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CARBON MARKET
SEVERY year the average sow and her piglets produce 9.2 tonnes of
carbon-dioxide equivalent through the methane emissions from their
effluent. In the past, that has been a problem both for the
environment and for pig-farmers. In developing countries the
pig-effluent collects in open lagoons which smell bad and get infested
with flies. Sometimes it flows straight into nearby water systems. Now
this problem has become an opportunity. Bunge, an
agricultural-commodities business based in America, builds lined and
enclosed pools to collect the effluent and captures the methane that
it emits. The farmer can use the gas to generate electricity. By
preventing methane from escaping into the atmosphere, Bunge creates a
credit which it can sell on the carbon market. The farmer gets to keep
20- 30% of the value. Bunge has 40 such projects operating in Brazil
and is planning to expand into Mexico, Guatemala, Peru and the
Philippines. The carbon market is truly innovative. Although it works
like any commodity market, what is being bought and sold does not
exist. The trade is not actually in carbon, but in not-carbon: in
certificates establishing that so many tonnes of carbon dioxide (or
the equivalent in other greenhouse gases) have not been emitted by the
seller and may therefore be emitted by the buyer.
The purpose of setting up the market was, first, to establish a price
for carbon and, second, to encourage efficient emissions reductions by
allowing companies which would find it expensive to cut emissions to
buy credits more cheaply. It has had some success on both counts—some
would argue too much on the second.
A carbon price now exists, established by the European
Emissions-Trading Scheme (ETS). In its first phase it has been
volatile (see chart 2) because information about Europe's industrial
emissions was poor, so the market got a shock in early 2006 when it
emerged that the European Commission had been
too generous with the allowances it handed out to industry. Phase one
allowances (2005-08) are now virtually worthless. But the commission
has learnt its lesson and got meaner with allowances, thus pushing up
the price in phase two.
The supply of carbon credits comes principally from two sources. The
first is the allowances given to companies in the five dirty
industries covered by the ETS (electricity, oil, metals, building
materials and paper). The second source of carbon dioxide lies outside
Europe. The European Commission linked the ETS to the
“clean-development mechanism” (CDM) set up under the Kyoto protocol.
This provides for emissions reductions in developing countries—such as
those on the Latin American pig farms—to be certified by the UN. Such
“certified emissions reductions” (CER) can then be sold. The demand
for carbon credits comes mostly from within the ETS, from polluters
who need certificates allowing them to emit carbon. There is some
demand from Japan, which has a voluntary scheme, and from companies
and individuals elsewhere in the world who want to offset their
emissions for moral reasons, or to make themselves look good. The
trade is now sizeable. Some €22.5 billion-worth ($30.4 billion) of
allowances were traded last year, according to Point Carbon, a
data-provider, representing 1.6 billion tonnes of CO2—a huge increase
on the €9.4 billion traded in 2005. Europe's ETS made up about 80% of
the total value.
Developing-country CERs accounted for about €4 billion of last year's
trade: 562m tonnes of CO2. According to New Carbon Finance, a research
company, carbon funds worth $11.8 billion have been raised so far.
Half of that total is managed from London. Climate Change Capital, a
niche investment bank, raised $130m for its first carbon fund,
launched in July 2005; its second, launched a year later, is now worth
around $1 billion. According to Tony White of Climate Change Capital,
all the money for the first came from hedge funds, which like risk. By
the time the second fund was established, more cautious
investors, such as pension funds and banks, were prepared to put money
into it. The money has gone mostly into projects in developing
countries to produce CERs. Bunge's Brazilian pigfarmers are making
CERs out of their animals' effluent. But the bulk of the investment
has gone into greenhouse-gas capture in China.
Cheap and cheerful
The most potent greenhouse gas is HFC-23, a by-product of HCFC-22, a
chemical used in, among other things, fridges. It is now mostly banned
in the developed world. Its global-warming effect is, tonne for tonne,
11,700 times greater than that of carbon dioxide, so it is good to get
rid of it, and cheap, too; capturing it and burning it off costs less
than €1 for the equivalent of one tonne of carbon dioxide. These
days China produces most of the world's HFC-23. That—along with the
fact that the Chinese government is efficient to deal with—explains
why 53% of the total volume of CDM projects in 2006—worth around €3.5
billion in total—went to China.
The very cheapness of cutting emissions of HFC-23 makes the trade
controversial. Credits costing less than €1 to produce have been sold
on the market for up to €11. Factories have found that their damaging
by-product, HFC-23, can be more valuable than their main output. The
Chinese government, realising how much money there is in this
business, has imposed a tax of 65% on revenues from it, and in
February this year it launched its own $2 billion CDM fund. So
European consumers, who are paying for greenhouse-gas abatement
through their electricity and other bills, are contributing billions
of dollars to the Chinese government's coffers via the CDM. Easy
options—HFC-23 and other fabulously dirty (ie, profitable) industrial
gases—will soon run out. Guy Turner at New Carbon Finance reckons that
the days of the CER that costs less than €1 to produce are over, and
that the range is now more like €1-5. But there is plenty of scope at
that level. China's industrialisation is a fast and dirty business,
and there will be no shortage of greenhouse gases produced there for
rich-country money to clean up.
That is part of the problem. Of the 65% of companies surveyed by Point
Carbon earlier this year which claimed that the ETS had led them to
abate their emissions (up from 15% the previous year), most were
planning to buy credits rather than cut their own emissions. Yet the
ETS was intended to cut European emissions as well as Chinese ones.
This is happening on a small scale. At times the carbon price has made
it worth power companies' while to switch from dirty fuels to cleaner
gas. “We massively reduced our lignite production when the CO2 price
was at its height,” says Alfred Hoffmann, head of portfolio management
in Scandinavia and Germany for Vattenfall, a Swedish power company.
Lignite is dirtier than black coal. But then gas prices rose, making
switching less attractive.
The carbon price has delivered some of the innovation
that it was supposed to generate. Shell, for instance, is pumping CO2 from a refinery in the Botlek
area of the Netherlands into 500 greenhouses producing fruit and
vegetables, thus avoiding emissions of 170,000 tonnes of CO2 a year and saving the greenhouse
owners from having to burn 95m cubic metres of gas to produce the CO2 they need. Alcan, an aluminium
company, is planning to use the heat from one of its smelters to
increase the efficiency of its power-generation plant at Lynemouth in
Northumberland in Britain. Wyn Jones, managing director of Alcan's
British smelting and power-generation operations, says this will save
150,000 tonnes of CO2 a year (€3m if the price of CO2 is around €20 a tonne, as Alcan
expects) and 60,000 tonnes of coal (£2.1m, or $4.2m, at around £35 a
tonne). He is not sure how much the project will cost, but is
reckoning on a payback period of around five years. But European
emissions overall are not falling, which suggests there may not be as
much switching out of coal, or as much technological innovation, as
had been hoped. Chinese CERs are too cheap and the carbon price is too
low and too volatile. Even when it was bouncing around at €15-25, it
did not seem to encourage much new investment. According to Bjoern
Urdal of Sustainable Asset Management, who took a detailed look at the
effects of the carbon price on the German electricity market last year,
replacing old coal-fired power stations with gas-fired ones became
worthwhile only at a carbon price of €33. He has not done the sums
since last November, when the European Commission chucked out Germany's
“transfer rule” (which would have exempted new coal-fired stations
from the ETS for 14 years), but reckons the break-even point will have
come down to more like €25. That helped raise the carbon price. So did
the commission's decision to slash national governments' planned
allocations to industry for the period 2008-12. The price of phase two
allowances has risen to a level high enough to get some power
generators to switch from coal to gas at the margin when the gas price
is moderate; but not high enough to get them to replace coal-fired
power statios with gas-fired ones—nor to encourage much of the
innovation that carbon trading had been expected to spawn. |