In search of credibility

The suspension of spot trading this week in the main European carbon markets undermines the credibility of a system that is still finding its place in the financial world. 

The theft of 1.6m EUA owned by a Swiss cement company from a carbon registry in Romania shows that a lot of work needs to be done to strengthen the system so that it can be taken more seriously. The European carbon market is worth an estimated £80bn a year and growing, and it deserves a more credible process of checks so that the ultimate consumers of carbon credits can have faith that the trading exchanges and all the agents involved from project origination to retirement of credits deliver a credible product with the equivalent assurances of other commodity markets.

Obviously the weakest link in the process are the 30 national carbon registries, and the centralized registry to be introduced in 2013 cannot come soon enough.

Getting Feed-in Tariffs Right

Feed-in tariffs are a wonderful incentive to decarbonise the economy through local micro-generation of clean electricity. Individual households and companies can generate electricity and get paid for feeding it into the National Grid and therefore cut their bills as well as receive a net payment for the effort. 

However in the long-term feed-in tariffs will have function alongside the markets and nothing can successfully live in a parallel universe without a reality check of market prices. In France EDF (Electricite de France) has promised unrealistic feed-in tariffs to solar energy providers, at around 10 times the wholesale price per megawatt per hour produced, which is obviously not a sustainable business model for the company.

(The spot price is about 55 euros per MW/h and EDF pays 546 euros to small-scale suppliers. It is costing £1bn of losses a year).  

It has led to an extraordinary escalation of supply, leading to farmers covering barns with solar panels and concentrating more on generating electricity than their own farming business. EDF receives 3,000 applications a day to connect to the grid.

The forecast is that by the end of this year France will have met its solar energy target for 2020.

In the UK,  feed-in tariffs are at the other end of the spectrum, with payments set at £4.13 per megawatt per hour, far below the spot price. Therefore the utilities get much better value for the solar energy (or the supplier is short-changed, depending of how one looks at it). 

Clearly the long-term sustainable model will be one where feed-in tariffs converge closer to the spot price and vary accordingly.  www.carbonica.org

The physical reality of the carbon credit

By B Bell

My eye caught an exchange in the Letters section of the FT where two readers write in about the problems in the carbon markets.

One said that the reason why the concept fails is because a carbon credit has no physical reality attached to it. Another replies today saying that financial instruments lack a physical reality but that the carbon markets failed because credits were designed to be used (or retired as they say in the industry), like fishing licences, not traded endlessly for profit.

I think both readers miss the point.

Carbon credits do have a physical reality. They enable compliance buyers to emit a set amount of CO2 that in the manufacturing process does have a very tangible physical form. Just like a financial instrument such an insurance policy does not have any physical reality until it is activated in the form of a claim for a loss, which is when it becomes connected to the real world, in the same way a carbon credit connects directly with GHG emissions and our impact on our climate.

At the point of origination, they provide the funding for a very physical reality, say in the form of a renewable energy project, that would not happen without those funds.

The present problems are not caused by the fundamental concept of the credit, they are due to the poor security of some of the national registries. It is true that carbon credits do not lend themselves to trading as much as equity for example. Equities can go up in value fairly linearly over the long term, whereas carbon credits are more likely to coast around reasonably fixed values so the amount of speculation that can go with it is more limited.