Block’s Indicator of Sustainable Growth

By Ray Block

The change over from the Bush years of negativity over global warming to a new positive administration are only a few months away. I can hardly wait for the January 21 change over.

Despite the Bush White House inaction, a lot of work has already gone into an emissions trading scheme in the US. In fact, there is already one in existence.

As Business Green, the online environment newsletter reported on August 22 2008, RGGI, the regional greenhouse gas initiative, set up under joint state legislation, which will be mandatory in 2009 is a cap and trade scheme for sulphur dioxide (SO2) emissions involving nine US northeastern states, with a combined population of 50 million. At this stage, RGGI is confined to power stations in the nine states.

In the meantime through the Chicago Climate Exchange (CCX), a subsidiary of the European Climate Exchange (ECX), futures trading will commence on 70,000 emissions allowances on September 25, to be auctioned by RGGI. Auctions are to be held four times a year. The initial traded price is between $5.25 and $5.70, roughly a fifth of the equivalent price on the ECX.

The cap on emissions is higher than emissions have typically been in the region, although this will drop after 2015. The likelihood is that a similar experience will happen to that of the EU emissions trading scheme during its first phase (2005-2007). That is the price will drop dramatically encouraging the power stations to simply buy extra allowances, rather than install expensive SO2 capture equipment.

In 2006, California passed its Global Warming Solutions Act setting a mandatory target for the state to reduce emissions to 1990 levels by 2020. A mandatory emissions trading scheme is to be set up from 2011, the details of which have not yet been released. California will join up with Oregon, Arizona and Washington in the Western Climate Initiative, which is proposing a cap and trade system comparable to RGGI.

California has also passed legislation to reduce the carbon intensity of the state’s passenger vehicle fuels by at least 10 per cent in 2020. Transportation fuels are responsible for more than 40 per cent of California’s greenhouse gas emissions.

Even among the more conservative southern states, there is a movement towards a regional cap and trade scheme. Virginia governor Tim Kane, in taking the chairmanship of the Southern Governors Association (SGA) in August 2008, said he would be encouraging the need to have an economy wide cap and trade scheme. There are 16 states involved, which are collectively the largest emitters of carbon dioxide equivalent in the US.

Point Carbon News says that in 2004 comparable data for US regions in terms of carbon dioxide emissions in million of metric tonnes according to Tim Kane was southern states 2,347; Midwestern states 1,397; western states 1,002; north eastern states 837. Point Carbon adds that “the southern states released only slightly less CO2 equivalent than the 3,115 million tonnes released by the European Union during the same year.

SGA states produce 57 per cent of the nation’s conventional oil, 56 per cent of its natural gas, 33 per cent of its coal, and refines more than half of the petroleum consumed in the US.”

At the US Congressional level, at least eight bills were introduced in 2007 and 2008. The Lieberman-Warner Climate Security Act narrowly failed to pass the Senate in June 2008 because of a filibuster by Republican Senators.  It would have provided for a cap on about 87 per cent of US emissions, and there would also have been complementary policies, including a low carbon fuel standard and energy efficiency standards. The positive achievement is that 48 of the 100 senators voted to move forward with the legislation, and this is encouraging for more comprehensive legislation in 2009.

A tougher bill styled Investing in Climate Action and Protection Act (iCAP) introduced in the House of Representatives by Ed Markey (June 4 2008) would provide for cutting carbon emissions by 85 per cent in 2050, a moratorium on traditional coal plants, auction 100 per cent of pollution permits by 2020, and invest in green workforce training. This bill is unresolved, as is a similar bill introduced in the House on June 19 by Lloyd Doggett. The bill is styled Climate Matters Act of 2008.

The newsletter election 2008: What’s at stake- News 21 blog (August 7 2008) suggests that while Senators McCain and Obama are both in favour of a cap and trade emissions system, they differ on the issue of whether the US would issue permits (presumably free to the heaviest carbon emitters), or auction them all. McCain goes for the first alternative, while Obama is in favour of the latter. There is a world of difference between the two positions and hopefully they will fight it out next year.

It will be fascinating to see what policy directions finally emerges, bearing in mind that any legislation Congress finally passes, subject to presidential veto, will end up being a compromise.

Posted under Carbon Abatement Scheme, Climate Change, Economies, World Inflation

By Ray Block

The World Bank has estimated that the global trade in greenhouse emissions, which was $64 billion in 2007 is likely to grow to $3 trillion (that is $3,000 billion) by 2020.

The European based carbon consulting group, Point Carbon has made a similar projection out to 2020, with an expected volume of 38 billion tonnes traded, on the assumption that the US begins to participate. The consultants are assuming a carbon price of $78 a tonne, more than double the current price.

The US based carbon consulting group, New Carbon Finance is estimating for the domestic American market alone a 2020 trade of $1 trillion ($1,000 billion), assuming that a carbon price of $40 a tonne would apply as soon as 2015, which would result in increases in electricity prices of about 20 per cent and in gas prices by 10 per cent in inflation adjusted prices.

Fiona Harvey (Financial Times May 23 2008) says that the carbon trade last year was worth about $64 billion, with $50 billion coming from the European Union’s emissions trading scheme, and the rest under the Clean Development Mechanism (CDM) of the UN’s Kyoto protocol.

The CDM allows industrialised countries to invest in emission reduction projects in poorer countries, principally Africa. The EU commission agreed to allow companies within its borders buy CDM credits to help meet their targets under the emissions trading scheme. But long running controversies over the CDM’s environmental integrity have existed since the beginning.

CDM projects from solar panels to systems that capture methane from pig farms are awarded carbon credits for every tonne of carbon dioxide avoided. Fiona Harvey says that the international trade in credits was worth about $14 billion in 2007. In that year, China, the largest manufacturing centre in the world gained most of the CDM carbon credits-73 per cent in fact. The next two largest beneficiaries under CDM in 2007 were Brazil and India, each with a 6 per cent share.

Only around 5 per cent of the carbon emission reduction (CER) credits have been directed to Africa. There is a strong suspicion that projects were getting carbon credits unfairly, in that they would have been developed anyway without the financial benefit of the CDMs, and that they are not being directed to the poorest countries. Mark Gregory of BBC World Service in India (June 4 2008) said that in India, carbon credits had been paid to projects that would have been realised without external funding.

A tightening of the CDM rules by the United Nations now requires that projects entering the scheme have to prove they were additional to projects that would have been developed otherwise.

Posted under World Inflation

by Ray Block

The European Union may have become a cumbersome grouping of 27 countries with an over zealous bureaucracy in Brussels, but its energy challenge to the rest of the world is quite daunting.

We intend, the EU says, to increase our renewable energies to 20 per cent of total energy consumed by 2020, and at the same time reduce greenhouse gas (GHG) emissions by 20 per cent from 1990 levels by 2020. This is only an interim step in the carbon abatement stakes, but it’s a good start to a much more ambitious carbon reduction target by 2050 and beyond.

Another requirement, less admirable, is to have all 27 countries achieving by 2010, a 10 per cent level of biofuels in the transport fuel mix, so as to reduce dependence on Middle East oil.

The European Union’s renewable energy targets started off with a big advantage in having large resources of hydro power, particularly in Scandinavian countries and in Austria, with a lot of small hydro projects scattered in the other countries.

At December 2006, the EU had reached a renewable energy level of 6.92 per cent. The make of renewables at that time was hydro 66.4 per cent, wind power 16.3 per cent, biomass 15.8 per cent, geothermal 1.3 per cent, and solar 0.3 per cent.

The goal for 2010 was to reach a 12.5 per cent renewable energy level. But this is proving unattainable, given that in 2008 only about 8.5 per cent of EU energy consumption currently comes from renewables. So the revised figure is to reach 12.5 per cent by the end of Phase 2 of the emission trading scheme in 2012.

To move to the 20 per cent renewable energy target by 2020 may prove more difficult, as the period of the soft entry into carbon abatement, that is from 2005 through to 2012, when heavy industrial emitters received free emission allowances comes to an end. From 2013, the emission allowances are to be auctioned and rationed at the same time to cope with the goal of reducing greenhouse gases.

From 2013 onward, the heavy emitters will have it much tougher. Andrew Bounds in Brussels for Financial Times (January 8 2008) says that some heavy industrial users are unlikely to be able to absorb increased costs from the proposed changes, which if implemented, would see a forced reduction in sulphur, nitrogen and dust emissions.

The draft directive would include carbon dioxide emissions of nitrous oxide from the production of nitric, adipic and glyoxalic acids, and perfluorocarbon, a greenhouse gas produced by some aluminium producers. No wonder some heavy industries are wondering whether it is worthwhile remaining as producers in the EU, in what could become a hostile atmosphere in directives from Brussels.

The new changes come into effect in 2013. They are aimed at closing loopholes that allowed power generators to make billions of euros in windfall profits from the over-allocation of free emissions permits in the 2005-07 first phase of the emission trading scheme.

The EU has cut national allocations of emission permits by 6.5 per cent for 2008-2012 compared with 2005, as it attempts to meet the 20 per cent cut in emissions from the 1990 level by 2020.The 10,800 installations covered by the emissions trading scheme account for 41 per cent of the EU’s carbon emissions.

At risk are producers of aluminium, steel, cement and chemicals, who apart from being forced to increase prices are unlikely to remain competitive with imports. How many companies may need to shift plants offshore to remain competitive is going to become a major concern, with consequent job losses in the EU?

The Financial Times says that the “commission wants to set an EU-wide emissions cap from 2013.” This will replace a more politically elastic system, whereby member states set their own cap, which are approved by Brussels. The free emission allocations for the energy sector and refineries will be no more.

“Overall, it is estimated that at least two-thirds of the total quantity of allowances will be auctioned in 2013. Today’s level is less than 10 per cent.” The newer members of the EU, the former Soviet satellites will receive disproportionate amounts of permits to allow them to catch up in economic terms, and they will receive the auction proceeds towards reforestation projects and investments in renewable energy technology.

The larger and richest economies are required to reduce emissions up to 20 per cent below 2005 by 2020, while the newcomers to the EU, the mainly agricultural countries with the lowest GDP per capita levels would be allowed to increase emissions compared with 2005, capped at +20 per cent for the poorest.

The EU ignored the large volume of lobbying from the richer countries, particularly the UK. To make matters worse for the laggards in renewable energy projects, such as the UK, they are almost certainly going to miss their EU targets by 2020.

There remains a possibility that major changes to the EU energy road map could happen, as a virtual deadline for parliamentary approval of the whole scheme will depend on elections to the new European Parliament, and subsequently a new Commission installed in mid 2009. As a study by Green Prices said: “the Commissioners might have new plans.” The consultant group went on: “there is still a danger that the proposal will be watered down during the tortuous negotiation process of the coming months.”

EU table of renewable energy competitiveness by 2020

countries which will get close to, or exceed the 20 per cent renewable energy target

2005 renewable level               2020 expected level

%                               %

Sweden         39.8                             49

Latvia         34.9                             42

Finland        28.5                             38

Austria        23.3                             34

Portugal       20.5                             31

Denmark        17                               30

Estonia        18                               25

Slovenia       16                               25

Romania        17.8                             24

France         10.3                             23

Lithuania      15                               23

Spain           8.7                             20

Germany         5.8                             18

Greece          6.9                             18

Italy           5.2                             17

Ireland         3.1                             16

Bulgaria        9.4                             16

The three laggard larger economies, UK, Netherlands and Poland are unlikely to meet their EU renewable targets.

UK               1.3                             15

Poland           7.2                             15

Netherlands      2.4                             14

Slovak Republic aims to get a 14 per cent renewable level by 2020, Belgium, Czech Republic and Hungary to a 13 per cent renewable level, while the other three EU members are all tiny economies- Luxembourg, Malta and Cyprus, with renewable targets ranging from 10 to 13 per cent.

One of the many problems in harnessing the differing renewable energy platforms in the community has been a lack of transparency and blocked access to energy grids. David Adam, the Guardian environment correspondent (July 24 2008) quoted Prime Minister Gordon Brown as saying the government would remove “without delay the barriers that currently prevent renewable generators connecting to the national grid.”

The current draft renewable energy directive provide for the virtual trading of renewables between member countries involving Guarantees of Origin (G0s), which certify the renewable origin of electricity produced. Under the system, member states may invest in renewable energy production in another member state in exchange for GOs, which can be counted towards the renewable target.

Posted under Climate Change, Economies, European Emission Trading Scheme, Food, Renewable Energies, World Inflation

BY Ray Block

The Dow Jones-AIG Commodity Index lost 11.9 per cent in July 2008, the largest monthly drop since the index was first published in 1991. But even so, the 12 month return in the commodity index to end July was still an astonishing 21.5 per cent. 33 per cent of the Dow Jones-AIG index consists of components in oil and gas.

The fall in both agricultural commodities and in oil reflects partly at least the sharp decline in economic growth in Europe, North America and Japan. This is shown up in the Baltic Dry Index, a measure of the cost of shipping raw materials, which plummeted 37 per cent since hitting a record on May 20 2008.

The Baltic Dry Index tends to swing widely, rising 110 per cent between June and November 2007, then falling 49 per cent through January 2008, and later recovering 110 per cent through May, prior to the most recent fall.

But how much of the volatility in commodity prices is due to financial speculation, as distinct from the normal movements in demand and supply? That indeed is the $64,000 question, but there are clues.

Four US Senators- Ron Wyden of Oregon, Byron Dorgan of North Dakota, Maria Cantwell of Washington and Bill Nelson of Florida in a August 14 2008 letter to the Inspector General of the Commodity Futures Trading Commission (CFTC) asked for an investigation into a flawed report on oil prices released by the Commission. The July 2008 interim report was prepared by economists from a number of government agencies, especially co-opted at the request of the Futures Commission to give an air of gravitas to the oil study.

Democrat Senators are convinced that there is too much financial speculation in the setting of oil and agricultural commodities, while Republican Senators disagree. The July report goes out of its way to declare that the rapid increase in institutional purchases of commodity index funds and the commodity swap dealers, who act as their intermediaries were not responsible for the sharp rise in oil speculation leading to large price rises. The institutions involved are mainly the large pension funds and endowment funds, while the dominant commodity swap dealers are from the Wall Street investment banks and other financial groups.

As Senator Joe Lieberman, the one time Democrat and now Independent Senator for Connecticut and chairman of the Senate homeland security and government affairs committee, and two other Senators-one Republican the other Democrat in an article in the Financial Times in London (July 25 2008) pointed to the giant rise over the last five years in institutional investment in commodity index funds, swelling from $13 billion to $260 billion.

Over the same five year period, commodities tracked in these funds rose 200 per cent. The Senators said that more than 71 per cent of the commodity futures contracts are owned by speculators, compared with 37 per cent in 2000. There may be a case for some speculation, such as providing liquidity. “But speculation at this level wreaks havoc on the economy-unnecessarily driving up prices and threatening both businesses and household budgets.”

“Combine the increasing commodity investments from private, state and local government pension plans, university endowments, insurance companies and other institutional investors, and the result is clear. Speculators are overwhelming our commodity markets and leading to substantial increases in food and energy prices for years to come.”

“In a series of hearings held by the homeland security and governmental affairs committee, we heard testimony that this kind of excessive speculation in the commodity markets may be adding as much as $40 to $60 to the cost of a barrel of oil.”

“Unfortunately, the CFTC has ignored its mission as our front line defence against rampant and unmanaged speculation. To this day, the commission has yet to recognise that speculation affects commodity prices.”

What is needed at all times is transparency, and this is the missing element.

18 months ago, the CFTC decided to suppress the data on the activities of speculators trading in commodities. The only group who applauded that decision was the International Swaps and Derivatives Association, which lobbies on behalf of Wall Street firms. Yet remarkably, the former chief lobbyist from the swaps and derivatives association has been appointed a member of the CFTC.

Hopefully, 2009 will see reform, but I’m not confident.

Ray Block
economies, food, inflation

Posted under Economies, Food, World Inflation

by Ray Block

It is far too easy to be a professional global warming sceptic, particularly if you are paid to be, or want the fashionable exposure and publicity, which goes with the ranters of denial.

But it takes much greater discipline to accept that with global population expected to rise to 9.2 billion by 2050, without carbon abatement schemes in operation, planet earth will be in serious crisis, keeps the rest of us committed.

I remember back to the days when putting fluoride in public water systems attracted a brigade of sceptics, but you won’t find any young person complaining about how superior their dental health is compared to their parents.

With the encouraging belief that 2009 will finally see United States, the lone outsider among the developed industrial countries still outside the Kyoto club finally signing up to the benefits of an emission trading system, rapid progress will eventuate.

There is no doubt that an emissions trading scheme will lead to a rise in global inflation, as re-priced energy will cost a great deal more. But it will also lead to an unparalleled acceleration in research and development on renewable energy and clean coal technology. In turn, it will attract the leaders of the BRIC countries (Brazil, Russia, India and China) to eventually join the carbon abatement countries.

The European Union (EU) emissions trading scheme (ETS) Phase 1 January 2005- December 2007 based on a cap and trade led to an oversupply of units. The cap had been set too high, which led to an eventual collapse in the price of traded CO2. As a result, the commercial incentive to reduce emissions was largely destroyed.

The mistakes of Phase 1 based on giving away free credits to the heaviest polluters have been corrected in EU Phase 2 (January 2008-December 2012). The cap has been set at a level 6.3 per cent less than the verified emissions in 2005-06.

The EU planners expect that CO2 prices during Phase 2 will trade between Euros 20-30 per tonne rising steadily thereafter. The EU planners hope that over Phase 2, there will be a reduction in greenhouse (GHG) emissions by 11.4 per cent by 2010 from the 1990 base year. This would be making good progress towards the EU target of reducing emissions of 20 per cent by 2020.

With Australia also joining the Kyoto club with a cap and trade emissions trading scheme in 2010, nearly one half of the 50 states in the US have similarly ambitious plans, which have already been passed into legislation. All of the US states’ schemes are fashioned on the Californian model, initiated by Governor Arnold Schwarzenegger in 2005-07. These include a EU style cap and trade model with commencement of the scheme by 2012, and reductions in greenhouse gases (GHG) to reach 1990 levels by 2020.

In real terms, this means reducing GHGs 30 per cent from business –as-usual emission levels projected for 2020, or approximately 10 per cent from today’s levels.

The most dramatic element of the Californian plans affect transportation fuels, which are responsible for 41 per cent of the state’s GHG. California has more than 24 million registered motor vehicles. The intention is to replace 20 per cent of on-road gasoline consumption with lower-carbon fuels, the equivalent of taking 3 million cars off the road. The size of California’s renewable fuels market would more than triple during this time, and the state would become home to more than 7 million alternative fuel or hybrid vehicles.

It will be up to the market to decide whether to expand ethanol production, grow the market for hybrid and electric cars, hydrogen or other fuels to achieve the government standard, or alternatively go for all these projects.

The green energy gold rush, as it has been called, is the rush of R&D to take advantage of demand from the new energy trading systems. The United Nations Environment Program reported on July1 2008 that global investment in renewable energy rose 60 per cent in 2007 to a new level of $148 billion. This compared with the 2006 total of $92.6 billion spent on clean energy projects. Wind power attracted the most capital at $50.2 billion, compared to $28.6 billion in solar energy, and only $2.1 billion in the bio-fuel sector. Solar power investment has increased annually at the rate of 254 per cent since 2004.

Most of the clean energy investment has been in Europe and United States, with Brazil, India and China reporting clean energy projects in 2007 of $26 billion, up 14 times new renewable investment of $1.8 billion in 2004. China now has the largest installed capacity of solar power in the world.

Investment in 2007 is only the tip of the expected R&D volume in green gold renewable energy projects, with the United Nations agency estimating investment rising to $450 billion in 2012 and $600 billion in 2020.

Of the new investment, my favourite pick is new advancements in solar thermal electric technology (STE), also known as CSP, or concentrating solar power. Solar thermal electric options are being used experimentally not only in peak power, but more importantly in base load power as well, to a point that eventually it could replace most fossil fuel electricity generation.

David Mills and Robert Morgan in Renewable Energy World (July 3 2008) report that STE options are dropping in price and some companies are introducing thermal storage to match power demand. With thermal storage much cheaper than electrical, mechanical or hydrogen storage, solar electricity will be predominantly in STE with thermal storage, rather than photovoltaic solar electricity with electric or mechanical storage.

carbon emissions, global warming, greenhouse gases

Posted under World Inflation