Carbon traders bet on Bali climate talks' success

NUSA DUA, Indonesia, Dec 7 - Traders are already betting on a new global climate deal to succeed the Kyoto Protocol, as talks in Bali on Friday inched towards a two-year negotiating agenda for an expanded global climate pact.

Financiers are buying rights to emit planet-warming greenhouses gases after present Kyoto commitments expire in 2012, hoping that countries will agree new, tougher emissions limits -- and drive demand for such permits.

"It's a great bet," said one trader attending the talks on the tropical Indonesian island. The new, more speculative offsets came at a substantial discount, the trader, who declined to be named, added.

The Kyoto Protocol allows 36 rich countries to meet limits from 2008-12 on their production of greenhouse gases by buying emissions rights from developing nations.

About 190 countries attending the Dec. 3-14 meeting in Bali are edging towards launching negotiations on a successor deal to Kyoto, which is deemed too weak to win the battle against climate change.

Delegates were expected to draft on Saturday the first details of a negotiating agenda.

"You're seeing the hedge funds come in and say this is a great gamble," said Odin Knudsen, managing director of environmental products at JPMorgan Chase and former head of the World Bank's carbon finance unit, which pioneered carbon trading under Kyoto.

It's not just a new climate deal that bankers are betting on, said Knudsen, who highlighted the growing prospect of federal U.S. caps on greenhouse gas emissions, as well as continuing emissions limits for European companies after 2012.

A U.S. Senate committee voted 11-8 on Wednesday for legislation backing a federal U.S. cap-and-trade system, an early stage in passing a climate change bill.

"If the U.S. does approve cap and trade it won't be just for two years, it'll drive credits after 2012," said Knudsen.

Specialist speculators EcoSecurities sets up emissions-cutting projects, earning emissions rights in return. These projects and the carbon offsets they generate theoretically extend into the future long after 2012.

In this way the company has developed a pipeline of nearly 100 million tonnes of these carbon offsets for delivery after 2012, guaranteeing to buy some -- although only at a lower price if there's no new global climate deal.

"It would be a remarkable political turnaround to have got this far and see the whole thing disappear," said EcoSecurities' founder Marc Stuart, referring to a global carbon market.

One banker put the price range for the more speculative offsets at 2 euros to 7 euros per tonne of avoided carbon dioxide emissions, versus Kyoto prices of 10-18 euros.

Santayana looks more like Sisyphus everyday:

“Enron Sought Global Warming Regulation, Not Free Markets
Georgia Op-Ed in The Roanoke Times
by Paul J. Georgia
February 3, 2002

It’s not surprising to most people that Enron delivered truckloads of money to politicians in an attempt to influence the political process. What may surprise many, however, is that Enron believed that one of its main opportunities to make money by gaming the political system was global warming.

Enron became one of the biggest corporate boosters of the Kyoto global warming treaty, which would require huge reductions in energy use by consumers and industry. According to an internal Enron memo, quoted by The Washington Post, the Kyoto treaty would “do more to promote Enron’s business than almost any other regulatory initiative outside of restructuring the energy and natural gas industries in Europe and the United States.”

In addition to all its political lobbying and contributions, Enron became a founding member of the Pew Center on Global Climate Change’s Business Environmental Leadership Council, a leading industry front group pushing the Kyoto agenda. Enron chairman Ken Lay also served on the board of the Heinz Center for Science, Economics, and the Environment, along with Fred Krupp of Environmental Defense, and former Alcoa CEO and current Treasury Secretary Paul O’Neill.

Even after President Bush decided to withdraw the U.S. from the Kyoto treaty, Enron continued to push for a domestic regulatory scheme known as cap-and-trade, whereby the government would set a cap on the total amount of carbon dioxide emissions allowed in the U.S.

It would then distribute permits or allowances to companies affected by the cap giving them the right to emit a certain amount of carbon dioxide. Those allowances could then be traded in the open market.

Enron executives believed that a cap-and-trade program would put them in a position to dominate the U.S. energy market. Electric utilities, required to reduce emissions of carbon dioxide, would be forced to switch from coal to natural gas as the only practical alternative to electricity production. As a leading trader of natural gas, Enron would be the recipient of a huge financial windfall.

Moreover, Enron is already a major trader of carbon dioxide emissions throughout the world, making it similarly positioned to take a fee with each and every ton of carbon dioxide traded within the United States.

The potential redistribution of wealth involves more than just energy companies. As noted by Ross McKitrick, an economist at The University of Guelph in Canada, “If emissions are controlled by tradable quotas, this creates a new, artificial scarcity in something that hitherto had been free: the right to release carbon dioxide.”

He also explains that the value of this newly created asset “represents the capitalized value to existing users of fossil fuels of the right to emit carbon dioxide at no charge. This value is already counted into balance sheets, investment portfolios, collateral for loans, etc., all through the economy.”

Putting a price on carbon dioxide emissions, says McKitrick, “extracts that money from its current use and hands it over to the beneficiaries of the policy.”

One of the main selling points of a cap-and-trade system is that it is allegedly less costly than other policy options, because trading allows reductions to take place where it is least expensive. But when uncertainty, which is pervasive throughout the economy, is taken into account, costs have been shown to be significantly higher.

When government caps emissions, there is really no way to forecast future permit prices. Mistakes in forecasting lead to large social costs. The emissions trading program to reduce sulfur dioxide has been plagued by wildly fluctuating prices, making it difficult for businesses to plan long term, thereby creating large costs that trickle down to the consumer.

A study by Resources for the Future found that given uncertainty about costs and benefits, emissions trading is about five times costlier than a carbon tax. Moreover, revenue collected from a carbon tax could be used to at least partially offset the higher energy costs. This isn’t the case with emissions trading.

If Enron’s lobbying efforts had succeeded, the United States would have ended up with a costly regulatory scheme designed to redistribute wealth from the American people to politically powerful companies like Enron.

So why would elected officials pursue such wrongheaded policies? Because cap-and-trade is a complex regulatory scheme that hides the true costs of compliance from taxpayers. Politicians can regulate energy use through the hidden tax of cap-and-trade to avoid accountability, creating the perfect cover for vultures like Enron to swoop in and capture the rewards.

Enron is gone, but the threat of energy rationing lingers on. Other companies are waiting in the wings to fill the political void. For example, on the day that the Pew Center on Global Climate change took Enron off its business council list, 29 major corporations were still listed. If these companies are successful, the cost in terms of money and jobs would dwarf anything seen since the reckless energy policies of the 1970s.”

However, we may live to see Al Gore go down the same path as Ken Lay.

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