Cheap carbon makes it tough to keep the world from warming

Bloomberg

Carbon markets, the free-enterprise solution to saving the world from global warming, are now in danger themselves.
The idea was simple enough: Set a cap on carbon emissions, issue enough permits to allow power plants, refineries and the like to stay within those limits and then shrink the cap over time to achieve reductions. The companies whose emissions fall fastest can sell their permits for a profit to slower responders — call it a reward for good behavior.
The reality, though, is more complex. Undercut by a lack of political will on the size of caps and overtaken by costly new environmental mandates, carbon markets in the U.S., Europe and Asia are collapsing, with prices so low they’ve become virtually valueless. The credits auctioned in the U.S. Northeast in June, for instance, sold for just $4.53 a short ton, a 40 percent drop from December.
“Climate policy has been muddled and messy,” said Michael Grubb, a professor at University College London’s Institute for Sustainable Resources who has advised the U.K. energy regulator. “Governments have set inadequate targets due to lobbying pressures and because they didn’t think carefully enough about overlapping efforts. That has destroyed investor confidence that carbon prices will rise.”
The idea of a carbon market originated 20 years ago with Richard Sandor, an economist who also pioneered interest-rate futures and derivatives at the Chicago Board of Trade. Today, there are 38 countries, cities, states and provinces using pricing systems in an attempt to put a lid on greenhouse gases, according to the World Bank.
In California’s market, all 23 million allowances sold in an auction in 2014. In May, 7.3mn permits found buyers, only 11pc of what was put up for sale.

‘EXTREME PARANOIA’
The markets are crumbling just as the U.K.’s vote to leave the European Union throws into question the future of the world’s largest market by threatening to shrink demand. Nor does the collapse bode well for China, as the world’s top greenhouse-gas emitter prepares to start its own next year.
Alex Rau, a principal at the carbon-trading advisory group Climate Wedge Ltd., chalks up the downfall largely to “an extreme paranoia” that the price of carbon will rise too high. So instead of strengthening caps unpopular among some oil companies, polluting factories and consumers who ultimately shoulder costs, politicians around the world have stitched together a patchwork of overlapping measures that are less vulnerable to lobbyists.
‘INSANELY EXPENSIVE’
Policies are undercutting the markets in some places. “Some of the renewable-energy subsidies are stupidly, insanely expensive per ton of carbon dioxide saved,” said Louis Redshaw, who has his own emissions-trading company, Redshaw Advisors Ltd. in London, and was previously head of carbon at Barclays Plc. “Politicians are not only failing to deliver a comprehensive carbon price for the economy, they are busy undermining them where they exist.” In California, the state Air Resources Board still has the authority to pull excess permits from circulation to avoid a glut, said Dave Clegern, a spokesman for the agency. “One auction tells us very little,” he said. “We’re in the long game here.”
Anna-Kaisa Itkonen, a spokeswoman for European Commission in Brussels, noted that its emissions targets under a climate agreement hammered out by leaders in Paris last year were among the most ambitious in the world. EU carbon allowances fell 0.7 percent to settle at 4.55 euros ($5.03) a metric ton on ICE Futures Europe in London on Friday, the lowest since June 30.