Not Worth a Plug Nickel

Politicians and theoreticians say carbon must be priced so the market can efficiently sort out the problem of CO₂-induced climate change. But markets have already spoken and they don’t like what they see: collectively, they don’t think atmospheric CO₂ costs society much, if anything at all.

On October 21, the Chicago Climate Exchange announced that, due to lack of activity, it’ll “conclude” its CFI carbon contract (for the equivalent of 100 metric tonnes of CO₂). It had lingered at 5c for months, broadcasting to the world that "carbon trading" at an inter-continental level just won’t happen. Predictably, this event - so redolent in significance for "carbon pricing" - drew no interest from mainstream media: not until two weeks later was the story picked up - and then only by the obscure website Crain’s Chicago Business.

If CFI carbon flat-lined for months at 5c and then sank without trace, it can’t be worth a plug nickel. Securities markets may be fallible and can under-price or over-price paper for long periods. Nevertheless, they reflect the judgments of hard-bitten realists, who live in the real world and put their money where their mouth is. The story of CFI carbon is one of many price signals now surfacing that demonstrate the low market value of the presumed cost to society of CO₂ - because they reflect valuations, not by politicians or theoreticians, but by those who survive on the consequences of their judgments.

In a recent report, Melbourne’s Grattan Institute looked at price behaviour in six "green" trading schemes. They found that “Environmental markets routinely deliver substantially lower prices in practice than in forecasts”. This is true across all CO₂ trading schemes, as well as Australian Mandatory Renewable Energy Targets, Queensland Gas Targets and NSW’s Greenhouse Gas Abatement Scheme. In each case, real-world prices for emissions permits and clean energy certificates are far lower than forecast. The authors’ point is that “Markets may not be perfect, but they are consistently effective at identifying lower cost opportunities, promoting innovation, and responding flexibly to changes.” All good points, but nonetheless their results prove that those who live with the consequences of their price decisions are not as bothered about CO₂ emissions, and not as keen on paying over the odds for "clean" energy, as the rule-makers wish them to be.

The leading CO₂ emissions trading scheme is the EU carbon market, where the carbon equivalent of one tonne of CO₂ is traded as a European Union Allowance Unit. It started in 2005 and its results have been dismal: it hasn’t reduced the EU’s CO₂ output, which instead has grown; it has been plagued by fraud; and - most telling of all - the EUA price, which collapsed to zero in the market’s initial phase, is running at less than half of expected levels in its second phase. EUA contracts aren’t delivering the predicted results; if they weren’t artificially buoyed by government coercion, they’d await the same fate as that of CFI carbon.

The low value placed by markets on airborne CO₂ is proven by the need everywhere for tax breaks and subsidies for efforts to reduce man-made CO₂ emissions. Denmark, a leader in wind-farms supported by tax breaks, is also the leading maker of wind turbines outside China. In 2009, the Danish Centre for Political Studies reported that Danes pay the highest electricity prices in the EU - partly to subsidize wind power. The report concludes that 90% of wind industry jobs came from other hi-tech industries, and that only 10% were new jobs. Then, in October 2010, the market spoke: Vestas, the largest Danish wind turbine manufacturer, laid off 3,000 workers across all 5 of its Scandinavian locations due to high costs and collapsing demand in Europe.

Efforts of western governments to reduce their ‘carbon footprints’ emit an air of total unreality. A 2009 study by Spain’s University Rey Juan Carlos of the cost of creating "green" jobs showed that 9 real jobs were lost for every 4 "green" jobs created. The authors calculate that, since 2000, the Spanish government has spent over €570,000 to create each "green" job, including an almost unbelievable €1 million per job in the seriously problematical wind-farm industry. Meanwhile, in the US, the Obama Administration has channeled $90 billion into the "green" economy to create 224,500 "green" jobs - a far cry from the 5 million originally expected - at a cost of $400,000 per job. Governments can buck some markets for some of the time, but no market for long.

No large-scale renewable energy project would get off the ground anywhere without government subsidies or tax breaks. Spain’s effort to reduce CO₂ emissions led to a mandated feed-in tariff of A$0.59/kWh, while that in Germany is A$0.46/kWh, for electricity sold by consumers, if they generate solar power, to utilities who’d otherwise supply it to them at small fractions of those prices. Recently, NSW slashed its gross feed-in tariff for its solar bonus scheme from A$0.60 to A$0.20/kWh ("gross" means it includes the power they consume themselves) - and the NSW Premier admitted it would save the state an incredible $2.5 billion through 2016. One industry expert predicts that, due to long-needed investment in distribution, NSW domestic power prices “will rise 40% over the three years from 2008-09 to 2011-12 and still more if the federal government introduces a carbon tax.” It foreshadows the likelihood of a political firestorm over electricity prices that could well stop an Australian "carbon price" in its tracks.

Most people place little value on the cost to society of atmospheric CO₂ because they feel little concern about it. And why should they? Why should people worry about a theoretical doomsday scenario in 100 years’ time when they see many practical examples of environmental degradation that call for urgent action now?

It’s why the carbon equivalent of airborne CO₂ just isn’t worth a plug nickel.