Carbon Trading: Irrelevant Now, Immaterial Later

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There’s nothing like sky-high fuel prices to make carbon prices look irrelevant. That’s doubly true if, as now, the steep energy prices bring heightened government involvement in decisions on fuel use. It doesn’t matter much whether carbon prices are hefty, as under Europe’s carbon-trading system. Or low, as in nascent Asian cap-and-trade systems. Or regionalized and marginalized, as in the US and Japan. The fossil fuel price surge may be temporary, of course. Once the tumult stemming from Russia’s energy-market split with the West passes, carbon pricing could again become a vital tool for propelling a transition to carbon-free energy. Certainly, the EU establishment and many other governments remain wedded to cap-and-trade and/or carbon taxes. But it seems possible — if not likely — that the transition may soon have moved beyond a stage when carbon pricing matters much, as renewable costs fall and electric vehicles (EVs) increasingly dominate transportation.

Europe: No Time for Details

After the better part of two decades of practice, Europe had what was looking to be a reasonably effective carbon-trading system, with prices high enough to influence fuel decisions in power generation, and moves underfoot to expand the scope of its Emissions Trading System (ETS) — until Russia invaded Ukraine. From that point on, the EU and many member governments’ top priority became reducing and soon eliminating reliance on Russian coal, oil and natural gas, while minimizing the inevitable economic damage.

Carbon pricing clearly wasn’t going to be a usable tool for accomplishing this in the short time frames set for phasing out Russian fossil fuels. It isn’t that carbon emissions don’t matter to European officials. They matter a great deal, especially in a summer in which European rivers are running dry. But given the mind-boggling complexity of Europe’s ETS, it simply has no role to play, even with prices at recent levels of around $80 per ton.

Governments are prioritizing energy conservation and renewables installation, and deciding how much coal and nuclear capacity to retain or turn back on in order to keep factories running and houses warm without Russian gas. Debate continues on another round of reform and expansion of the ETS, targeted for completion by year’s end, but attention is focused more on whether and how power prices should be cut to ease the pain, and whether to raid carbon trading system reserves to help pay for getting off Russian gas.

Asia and America: Scant Interest

Asia has a number of carbon markets in various phases of start-up, but prices are too low to matter when it comes to deciding how to generate electricity, and delays keep piling on. As the world’s largest carbon emitter, China is evidently a key test case. Rhetorically, it leans heavily on the concept of carbon trading as a way to efficiently meet its emission reduction targets, but after 10 years of “pilot” studies in individual cities, an admittedly nascent national market started operating barely over a year ago, and prices are hovering around a meager $8.50/ton. No dates have been set for extending the ETS beyond the power sector.

The government, meanwhile, is intent on preventing a repeat of earlier electricity shortages amid flakey international fuel markets and Covid-19-related uncertainties about demand at the national level. It is going full-tilt on domestic coal and also on solar, wind and battery installations, while taking relatively minimal volumes of pricey gas. If carbon prices have factored in any of these decisions, nobody mentioned it.

South Korea’s emissions market looked promising for a while and covers a relatively large share of the economy, rather than being focused on power generation alone, like most such markets to date. But with prices hovering around $14/ton, carbon isn’t the deciding factor in anybody’s decision on what fuels to use at this historically high-price point. Like so many countries, it is turning back toward coal in the short term — hardly what carbon markets would encourage.

Japan has a way-too-low-to-be-noticed carbon tax of just over $2/ton and, like the US, isn’t talking much about national carbon trading. India’s parliament is debating a renewable energy bill that contains provisions for trading of emission rights by industry, following up on the government’s belated submission to the UN of updated targets for cutting greenhouse gas emissions. But a meaningful carbon emissions market is still years away, if the experience of the rest of the world is anything to judge by.

The US just passed its most important renewable energy legislation in years with scarcely a mention of carbon taxes, much less trading. California and some likeminded Western US states and Canadian provinces have a carbon price of not quite $30/ton, and some eastern US states have a carbon market with pricing around $13. But neither is a primary determinant of fuel-use decisions. Australia’s new Liberal government may move that country back toward carbon trading at some point, but for now, its attention is on more immediate coal and gas production and pricing issues.

Does It Matter?

Even if carbon pricing isn’t doing much right now, many still see it as a vital tool in the energy transition kit of the future. To do quite what is less clear. The oil industry is hoping to use some form of carbon offsets under net-zero-emissions mandates in order to continue some burning of fossil fuels, but that is a separate issue from economy-wide carbon pricing.

Gasoline and road diesel taxes have been widely used for decades to try and reduce fossil fuel use through pricing. Such taxes are less a factor when fuel prices are high, as now, and they have been temporarily lowered in some places to ease consumer pain. In any case, fuel taxes are quickly ceasing to be a determining factor in car purchases or road fuel use. Emission and mileage standards, sometimes backed by zero-emission-vehicle mandates and approaching bans on internal combustion engine vehicle sales, have pushed the global auto industry into a high-speed dash to EVs. Soon, this will make gasoline taxes irrelevant.

When it comes to carbon trading, electricity generation has been the overwhelming focus. With solar- and wind-generated power already cheaper than electricity from any new fossil fuel plant in most places — and set to become cheaper than power from existing gas- and coal-fired plants — carbon pricing won’t matter much longer for baseline generation decisions, if it does now. It can remain a source of funding for somebody, but won’t affect decision-making. The only question is what backup gets used when solar and wind are not available.

Carbon charges can give batteries a needed boost for short-term storage and backup for a while longer. Once battery costs get back on a downward price track, the decision field potentially affected by carbon trading will narrow further, however, to generating capacity for longer periods when solar, wind and battery power aren’t to be had. As long as some fossil fuel emissions are still allowed, such pricing could influence decisions between coal and gas in places where both forms of generating capacity exist and where the government doesn’t mandate which should be used.

That definition fits much of the central US — California and some other coastal states do already or soon will prohibit coal burning — but the US isn’t actively considering carbon trading and probably won’t. Europe is on track to impose a no-coal policy, and China will probably continue to favor domestic coal over imported gas for the declining fossil fuel portion of its power supply.

What does that leave as a task carbon pricing can realistically be expected to accomplish, especially pricing established through the slow, convoluted path of carbon trading? Nothing big it would seem.

Sarah Miller is a former editor of Petroleum Intelligence Weekly, World Gas Intelligence and Energy Compass.

Carbon Markets , Carbon Prices, Low-Carbon Policy
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