Emissions trading: for better or for worse

Bill Eggertson

Bill Eggertson looks at a number of hiccups in the Emissions Trading System (ETS) that must be overcome to ease the way for renewables.

A number of recent issues have underscored the need for advocates of the renewable energy sector to remain aware of many eclectic issues in the global carbon market.

Emissions trading is the sale of environment attributes from low-carbon technologies and it is a procedure that is used to ‘penalise’ high-carbon emitters. As the energy sector is a main culprit behind the high levels of greenhouse gas (GHG) pollution around the world, the quest for lower emissions makes it clear that wind turbines, solar panels, geothermal heat pumps and the entire arsenal of renewable energy products will become one of the key sets of technology ‘silver bullets.’ To date, most of the market in offset trading has centred on the capture and destruction of nitrous oxides (NO2) and hydrofluorocarbon (HFC) refrigerants from industrial operations, but those options are expected to start declining soon as they become less accessible and as other sources (notably renewables) become more widespread and lower priced.

The combined value of both mandatory and voluntary offsets is currently estimated at US$60 billion a year, and the market is expected to continue skyrocketing as a result of the growing number of renewable portfolio standards around the world, the anticipation of more measures under the post-Kyoto framework, and the emergence of more national trading regimes such as the European Union Emissions Trading Scheme (EU ETS). The EU ETS was the first system off the block and recently connected with the UN carbon credit tracking system, meaning it can be involved in Clean Development Mechanism (CDM) and Joint Implementation (JI) offset projects under the UN process.

During each issue of Renewable Energy Focus (2008) and finishing in this issue, this column has noted the significant potential for renewable energy technologies to become a key commodity in the global offset market, and November 2008 noted the trade of the first Gold Standard CER (Certified Emission Reduction) from the People's Republic of China. That transaction by Essent Trading was derived from a 45 MW windfarm in Fujian Province, and is the first CDM project in China to reach the Gold Standard registration phase.

One thing is certain. It is important to remember that this is a fast-evolving sector, as noted by the election in the USA (where a new President has pledged his support for a cap-and-trade system, while the Western Climate Initiative and Regional Greenhouse Gas Initiative continue to expand their presence). And the profile of carbon cap and trade will be raised even higher as we move towards next December's COP 15 summit in Copenhagen (where nations will agree on the second phase of the Kyoto Protocol).

It is, therefore, important to draw attention to some potential hiccups in the path forward, which need to be overcome if the global vision is to include renewables to the degree which it must.

The current economic crisis has already had wide-reaching impacts on investment plans and decisions around the world, and many pundits have predicted a curtailment for renewable energies as limited capital funds are directed to conventional recovery methods. For years, our sector has called for ‘Apollo-like’ campaigns to spur the inevitable transition to renewables, which result in higher job creation than any other investment option, even if one overlooks the extremely high environmental benefits and energy security facets. It has been argued that any fundamental rejigging of the free enterprise system should include a significant focus on renewable energies as a new economic underpinning, on the assumption that, well, the time is right and we have no choice in the long run.

Assuming the world order returns to its pre-meltdown status quo, the UK consulting firm CarbonFree believes that the renewable energy sector is facing a crisis similar to the one it experienced 20 years ago, but with a difference. The industry of the 1980s was in its infancy while, today, some of the companies have achieved the scale which is required to survive a downturn. “Just as the Dot Com crash did not totally destroy the IT and communications sector, so companies with robust business models will survive the bursting of the Green Tech bubble,” it predicts, adding that renewables can compete and displace most other energy sources, even at US$30 for a barrel of oil.

Another warning sign for renewables in the carbon market has also come out of Britain, which recently held its first auction for four million permits under the EU ETS, and then announced that the £60 million of revenue would be absorbed into general Government coffers. Environmental groups were quick to demand that the money be earmarked for renewables, energy efficiency and other green projects, either in the UK or abroad, in order to adhere to the underlying philosophy of carbon trading. They contend that a low-carbon future demands significant levels of investment, and that the ETS (or similar offset auctions) is a logical source for money which is derived from companies that are unable to reduce their GHG emissions in a sustainable way.

But be thankful for small mercies – at least there was an auction – further disappointment in this regard arrived recently in the final version of the EU's climate change Bill – recently rubber stamped in Brussels. In a U-turn from earlier versions of the Bill, industrial sectors such as cement, chemicals and steel will now receive free carbon emission permits at least up to 2020, instead of having to buy them under an auction scheme, as previously planned.

The concession represented a victory for Germany, by far Europe's largest manufacturing nation. It means that revenues from the EU's auction procedures – once forecast to hit €50bn a year by 2020 – are now expected to be closer to €30bn. This will minimise the incentive for cleaner technologies, effectively punish companies that have already invested in clean technology, not to mention give a huge windfall to recipients of the free permits, argue many experts.

Renewable energy advocates must also monitor how the eligibility criteria are set for offset trading, as any technology which emits less carbon than an old coal-fired plant can claim to be ‘clean’ – by comparison. If the definitions become too obtuse, it will be difficult to ensure that the commonly-accepted emerging renewable energy technologies are at the front of the line.

There are many critics of emissions trading, including those who see it as a commercial licence to pollute and others who fear that its success will result in a transfer of economic benefits to other regions, as well as the basic climate change deniers and those who do not believe that the trade of pollution offsets can be taken seriously.

But the market does take emissions trading very seriously, and it is a growing reality in jurisdictions around the world. To deny its need or the existence of the market would be folly; to deny the economic benefits which can accrue to the renewable energy sector would be to lose a major business opportunity.


About the author
Bill Eggertson is a freelance correspondent for renewable energy focus, and has written on a variety of renewable energy topics for the magazine – including “Green Heat”. He is based in Canada.


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