By Paul Homewood
From AEP:
Love them or hate them, carbon contracts are the City’s hottest trade this year. Those hedge funds and eagle-eyed amateurs who track the EU’s regulatory flow have made windfall profits.
Permits for EU carbon emissions spiked to a seven-year high of €20.84 on Friday. They have risen fivefold since the spring of 2017, the best performing “commodity” in the world. The contracts have decoupled completely from energy prices and global raw materials.
Most commodities have been sliding jerkily for four months. Copper has fallen 17pc since mid-June and is flirting with a bear market. So are zinc and lead. Lumber and sugar have both dropped a third over recent months.
This tells us that something about the underlying health of the world economy. Trade volumes stalled even before Donald Trump launched his tariff wars. It is the result of two shocks: a fall in Chinese fixed investment growth to levels unseen since the 1990s amid the crackdown on China’s shadow banking; and stress in emerging markets as the US Federal Reserves drains global dollar liquidity.
Oil has held up better. But that is sui generis, a supply story mostly linked to politics. Venezuela’s output is in free-fall. Fresh sanctions against Iran will take at least a million barrels a day off the global market by November. A lack of pipelines in the US will hold back shale output from the Permian Basin until well into 2019.
Yet carbon permits are flying. The EU contract is the price that 11,000 power plants, steel foundries, and factories – covering 45pc of Europe’s greenhouse emissions – must pay for each tonne of carbon emitted under the “polluter pays principle”. Airlines have to pay for intra-EU flights.
What has changed is that Brussels is finally sorting out its cap-and-trade system, until now a byword for bureaucratic incompetence and market illiteracy. It issued too many carbon permits, with no way of adjusting when industrial output collapsed in 2008 and again during the eurozone’s double-dip recession.
The new regime approved by the European Parliament this year empowers a Market Stability Reserve (MSR) to soak up the 1.7bn tonne glut of contracts. “It is like a central bank doing quantitative tightening,” said Mark Lewis, former head of utilities at Barclays and now at Carbon Tracker. “The accumulated surplus is going to come down dramatically over the next five years.”
The MSR will remove 24pc of the market surplus each year between 2019 and 2023, with powers to cancel permits permanently. In parallel, the overall carbon cap will be lowered by 1.74pc a year from the start of 2019 and 2.2pc from 2021 onwards.
The price surge has become self-fulfilling. Industries with a stash of unused credits are hoarding them for gain rather than putting them up for auction.
“Financial players have been all over this,” said Mr Lewis. He estimates the price will double again to €40 by 2020, with surges hitting €50 that winter due to gas shortages in Europe. If so, this will vindicate the UK’s huge investment on North Sea wind power.
The German bank Berenberg thinks the carbon price could reach €100 by 2020, warning that companies cannot adapt in time. “There will be no natural carbon price that will clear the market,” it said. Sceptics might ask whether the EU authorities would allow a shock of this scale to occur. “We think there are political limits on how high prices can go,” said Mr Lewis.
Carbon pricing will simply push up energy prices, as well as costs for industry and consumers.
Facing a sclerotic economy, structural mass unemployment, massive public debts and a myriad of other problems, all the EU can think of is to hamstring its economy even further.
Meanwhile, the rest of the world will sit back and say “thank you very much”.
via NOT A LOT OF PEOPLE KNOW THAT
August 29, 2018 at 12:24PM
Iowa Climate Science Education 