This week the UK government has led the world and held the first auction of carbon credits. The British government has auctioned the right to produce 4,000,000 tonnes of carbon for £54,400,000. Using the British government’s DEFRA standard, that amounts to ±1,000,000 return flights London to Sydney.

 

DEFRA currently uses a Shadow Price of Carbon which they value at £26 per tonne.

In this week’s auction each tonne realised about £13.61 – so these permits to pollute went for a bargain price, although the auction price is very close to the current market price. €16.15 or £13.62. These permits to pollute have been sold to the intermediaries (Barclays Capital, JP Morgan, BNP Paribas and Morgan Stanley) at nearly half price - if the price was determined by the pollution caused. The market price is not currenly high enouth to reflect the damage caused by the pollution. If they had sold at DEFRA Shadow Price of Carbon, based on an estimate of the pollution cost, they would have raised an additional £50,000,000. Imagine if that had been used to fund investment in new technology for carbon reduction or sequestration.

 

As Mike O’Brien, the Energy and Climate Change Minister of State, explained

 

“Today’s first Phase II auction demonstrates continued UK leadership in reducing carbon emissions as part of the fight against dangerous climate change. The EU ETS is central to keeping the price of tackling climate change as low as possible to industry and the economy.

 

We want more auctioning in the future – and are already planning to auction 100% of the allowances needed by the power sector from 2013. This auction highlights the importance of using the market to drive down emissions and create incentives for the development of low carbon technology.” Emphasis added.

 

At these prices it is not self-evident that there is any incentive to reduce carbon emissions – business as usual is not so expensive.

 

The cash raised from a limited number of intermediaries who will sell the permits on is going to the Treasury and will not be ring fenced for climate change adaptation or developing new technology. As with Air Passenger Duty which doubled in February 2007 the Treasury is using “green taxes” to bolster government revenues.

 

The British Government is

  1. focussing on generating revenue for general government expenditure through green taxes.
  2. failing to implement the polluter pays principle – climate change caused by UK emissions is causing climate change which is impacting on primarily poor communities around the world. The money raised is not being used to compensate those suffering for droughts and floods caused by the UK’s green house gas emissions and contribution to adaptation and mitigation. The polluter should be paying for remediation – we are not.
  3. providing a license to pollute: carbon credits are being used to license – at a 50% discount – business as usual.

 

In 2009 the UK government plans to auction a further 25 million tonnes of pollution. This is part of the UK government’s plans for implementing the European Union Emissions Trading Scheme Phase II (2008-2012).  The EU ETS works on a “cap and trade” basis, EU governments will set a cap and then allocate allowances, the total allocations being limited by the cap. If installations exceed their allowance and cannot cover the excess pollution with allowances or permits to pollute, they will be face financial penalties currently set at €100 (£84) per tonne, the permits are cheap at £13.61.