We can pretend that something was accomplished at Copenhagen last week, but the invisible hand of the market doesn’t b-s. After the close of talks at the Bella Center, with its watered down “accord,” the price to emit a ton of carbon plummeted 10%.
That crash could mean a dearth of investment in clean technology as well as — paradoxically — higher energy prices.
At the talks, the E.U. offered to reduce emissions 30% by 2020 compared to 1990 levels, 10% more than it had already agreed to. But when the offer failed to spur similar commitments from China and other nations, the E.U. dropped it.
Lower commitments means lower demand for carbon permits. After the talks, carbon permits were selling for less than €13, from a high of €30 ($43) last summer and over €15 just before talks started (the price of a ton of carbon emissions was already low before Copenhagen, because decreased economic activity has meant fewer emissions).
Absent extreme resource scarcity, or the sudden melting of the polar ice caps, clean technology relies on government action, like putting a price on carbon, to spur innovation and investment. According to Reuters, analysts say carbon permits need to sell for €25-30 ($36-43) a ton to sustain investment in such risky, expensive technologies as new nuclear generation and carbon capture and storage for coal plants.
In the U.K., which has its own aggressive goal of a 34% reduction in emissions below 1990 levels by 2020, some energy suppliers are demanding the government put a minimum price on permits, ensuring companies make a profit from building expensive, low-carbon power plants.
Cheaper Carbon = Costlier Electricity
Ironically, cheaper prices for carbon could mean higher electricity prices down the road for some European customers.
Here’s how it works: without the economic incentive to build low carbon power plants, European utilities may decide to allow older, dirtier plants to operate longer, and wait until energy prices skyrocket to build new plants.
“It is taking a hell of a risk of the lights going out,” he said. “Power prices would go through the roof – they would have to get at a level where we think ‘there’s money to be made’. But we will get very, very tight [on security of supply]. It’s the worst case scenario.”
Making Cap and Trade Look Bad
It’s a bit unfair, but with each failure of governments to enact firm carbon caps, the cap-and-trade naysayers’ argument, that government shouldn’t be regulating carbon, is strengthened.
Many companies in the U.S., which has only a small, voluntary carbon market, have supported cap-and-trade schemes precisely because they can provide certainty: “better the Devil you know.”
But with conferences like Copenhagen only adding to the uncertainty, the private sector is likely to feel jerked around by a political process that seems entirely uncertain.