carbon-taxCarbon Tax – Fail. Back in 2005, the European Union launched its Emission Trading Scheme (ETS), in an effort to tackle climate change, and it is failing miserably. It is the largest of its kind. Too high of prices will hurt business, but too low of prices will undermine the entire point of the scheme. It’s supposed to cost money to emit CO2, but if carbon is cheap, then there is no incentive to reduce emissions. And that’s exactly what happened.

The ETS has long been a mess. It is a cap-and-trade scheme in which permits to emit carbon—about 16 billion tonnes-worth in 2013-20, or roughly half the European Union’s total carbon emissions—are allocated to firms and can then be traded between them. Partly because recession has reduced industrial demand for the permits, and partly because the EU gave away too many allowances in the first place, there is massive overcapacity in the carbon market. The surplus is 1.5 billion-2 billion tonnes, or about a year’s emissions. Prices had already fallen from €20 a tonne in 2011 to €5 a tonne in early 2013. The EU came up with a plan to save it, but the European Parliament rejected by 334 votes to 315, sending the price lower still to just €2.75.

Adding insult to injury, the ETS is a magnet for tax fraud on a grand scale, costing government coffers around €5 billion euros. Europol, Europe’s criminal intelligence agency, said that as much as 90 percent of the entire market volume on emissions exchanges was caused by fraudulent activity centering around tax avoidance schemes.

So the carbon tax is dead – so what? Some 19 factories, 11 in China, making HCFC-23, have been receiving climate credits under the UN’s Clean Development Mechanism for installing and operating incinerators to burn HFC-23 that is created during the manufacturing process, instead of venting it into the atmosphere. However, since the ETS market has dried up, these credits are now vanishing. With out the climate credits it is no longer financially viable to destroy the gas – so looks like we just got a lot more HCFC-23 into the atmosphere. HCFC-23 is 15,000 times more problematic than normal CO2. Just how big of a problem would this be?

The EIA said that if all of these facilities started to vent their HFC-23, they will set off a climate bomb emitting more than 2bn tonnes of CO2 equivalent emissions by 2020, per year. The average EU inhabitant emits about 8 tonnes per year, so this is like adding 250 million more carbon producing people to the EU !!!

Putting aside the seriousness of climate change and the potential dangers and costs to the global village, this story just shows what happens when bureaucratic best minds with the best of intentions get a hold of something. It turns into a disaster. The EU started with the idea to try to reduce carbon emissions, and end up increasing them by more than 50%. You begin to see why the financial system is in trouble as well.

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Blue Point Trading Market View – June 26, 2013

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