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In the last month we’ve seen the release of the Stern Report by the United Kingdom Treasury. Sir Nicholas Stern in this report deals with the economic impact of greenhouse gases and global warming on the world economy. And he tells us that in 100 years time, the economic impact of global warming could be enough to reduce the world economy by 20 percent.
Stern says that we need to do three things. We need to have a market in carbon, we need to have more innovation for the production of energy in low carbon forms, and we need to remove all regulation that stops that happening.
Stern says that in order to stop global warming and reduce greenhouse gases, we need by the end of 2050 to reduce the amount of greenhouse gases being provided by electricity power generation, by as much as 75 percent.
To do that is an enormous task. We will need every form of low carbon, electricity generation that we can find. We would need every wind farm, every hydroelectric power station, and dare I say it, every nuclear power station.
The problem is, these forms of power generation – wind farms, nuclear power – are at the moment completely uneconomic. They are two or three times as expensive to install and to run as a current coal-fired power station.
And that’s why we need the market in carbon. Because if we have a market in carbon emissions and that market is operating efficiently, then what happens is, the price of coal-fired power stations rises above the cost of nuclear power stations and wind farms.
So what we need then is an efficient market in carbon emissions.
Now there has been an attempt to create an efficient market in carbon emissions in the European Union.
At the beginning of last year, a market in European carbon emission allowances, or EUAs, was set up by 25 countries within the European Union, and began operating in January last year.
Now Stern says if we’re going to reach our long term goals, we need to be pricing carbon at about $85, or 65 euros. But this market in EUAs started last year at about 20 euros, and gradually started to rise.
By about April this year, it went up to about 30 euros. But then what happened was, the market started to crash.
And within a month, by the end of May this year, it had fallen all the way down to around 10 euros – a crash of two-thirds. Now what had happened was, the market discovered that most of the countries within the European Union were providing more carbon allowances to their industry than their industry could possibly use.
The only countries that were running it honestly were Germany and the United Kingdom.
Clearly what this is is a very inefficient and not properly operating market.
Is there an alternative system of carbon markets? Interestingly, there is.
In Australia, Warwick McKibbin, who is a member of the Reserve Bank board, has produced together with a gentleman called Wilcoxen, the McKibbin-Wilcoxen carbon trading system.
Now I’ve seen simulations of this operating, and it is much more stable than the European system because it’s not an international system. It doesn’t allow foreign countries to compete to drive down the price of carbon emissions for their own national benefit.
The result of this is that the price of these carbon emissions under the McKibbin-Wilcoxen system rises gradually over time, and as a result provides an increasing benefit to move away from high carbon power sources towards low carbon power sources, which is what we need to reduce greenhouse gases.
It’s quite possible that this Australian-based system will be the system of carbon trading that will be used as the new international standard when the current existing arrangements under the Kyoto Protocol come to an end in 2012. And this may provide us with an eventual solution to how we can still have a strongly growing economy, a lower carbon level and deal with the problem of greenhouse gases.
Stern says that we need to do three things. We need to have a market in carbon, we need to have more innovation for the production of energy in low carbon forms, and we need to remove all regulation that stops that happening.
Stern says that in order to stop global warming and reduce greenhouse gases, we need by the end of 2050 to reduce the amount of greenhouse gases being provided by electricity power generation, by as much as 75 percent.
To do that is an enormous task. We will need every form of low carbon, electricity generation that we can find. We would need every wind farm, every hydroelectric power station, and dare I say it, every nuclear power station.
The problem is, these forms of power generation – wind farms, nuclear power – are at the moment completely uneconomic. They are two or three times as expensive to install and to run as a current coal-fired power station.
And that’s why we need the market in carbon. Because if we have a market in carbon emissions and that market is operating efficiently, then what happens is, the price of coal-fired power stations rises above the cost of nuclear power stations and wind farms.
So what we need then is an efficient market in carbon emissions.
Now there has been an attempt to create an efficient market in carbon emissions in the European Union.
At the beginning of last year, a market in European carbon emission allowances, or EUAs, was set up by 25 countries within the European Union, and began operating in January last year.
Now Stern says if we’re going to reach our long term goals, we need to be pricing carbon at about $85, or 65 euros. But this market in EUAs started last year at about 20 euros, and gradually started to rise.
By about April this year, it went up to about 30 euros. But then what happened was, the market started to crash.
And within a month, by the end of May this year, it had fallen all the way down to around 10 euros – a crash of two-thirds. Now what had happened was, the market discovered that most of the countries within the European Union were providing more carbon allowances to their industry than their industry could possibly use.
The only countries that were running it honestly were Germany and the United Kingdom.
Clearly what this is is a very inefficient and not properly operating market.
Is there an alternative system of carbon markets? Interestingly, there is.
In Australia, Warwick McKibbin, who is a member of the Reserve Bank board, has produced together with a gentleman called Wilcoxen, the McKibbin-Wilcoxen carbon trading system.
Now I’ve seen simulations of this operating, and it is much more stable than the European system because it’s not an international system. It doesn’t allow foreign countries to compete to drive down the price of carbon emissions for their own national benefit.
The result of this is that the price of these carbon emissions under the McKibbin-Wilcoxen system rises gradually over time, and as a result provides an increasing benefit to move away from high carbon power sources towards low carbon power sources, which is what we need to reduce greenhouse gases.
It’s quite possible that this Australian-based system will be the system of carbon trading that will be used as the new international standard when the current existing arrangements under the Kyoto Protocol come to an end in 2012. And this may provide us with an eventual solution to how we can still have a strongly growing economy, a lower carbon level and deal with the problem of greenhouse gases.
