I am a frequent visitor to the European Commission’s Energy Directorate in Brussels, and have a high regard for most of the EC oil & gas officials I work with.
The directorate has done some excellent work over the last decade, and there are some very intelligent and diligent individuals there.
However, as a professional economist, I have not had a high regard for the European Commission per se, and probably never will until the ludicrous Common Agricultural Policy (CAP) is scrapped.
This still accounts for about 50% of the EC’s annual spending and has resulted in an incredible mis-allocation of agricultural resources, within and outwith the European Union, for many years.
The Common Fisheries Policy (CFP) also has many critics. I have mixed feelings about it. The basic objectives are sensible but some of the measures used are not, as illustrated by the ongoing issue of wasteful discards. But at least the bureaucrats in Brussels are now trying to reform the CAP.
Unfortunately, the Energy Directorate is currently damaging its reputation with another badly devised policy, the Emissions Trading Scheme (ETS), of which the UK Government has also regrettably been an enthusiastic supporter. The ETS was introduced six years ago as one of a number of policies intended to reduce greenhouse gas emissions – particularly carbon dioxide (CO) in the EU.
CO is now widely regarded as a pollutant and one of the main causes of global warming. The government and other EU governments are committed to reducing emissions of this culprit gas. There are various ways of doing that and the Energy Trading Scheme is the flagship EC policy in that regard. However, it is fundamentally flawed from an economic perspective.
In economist’s jargon, we have a polluter pays principle. In other words, whoever is responsible for creating the pollution – such as power stations – should pay the costs of the problems it creates.
However, in this case it is very difficult to calculate the costs of CO pollution, for example, in relation to global warming. Indeed, what are the real costs of global warming?
Most economists would agree with me that the simplest and best policy is to fine or tax the polluters. However, for reasons I do not understand, the EC devised the bizarre Emissions Trading Scheme (ETS), also known as cap and trade. I am also surprised that the UK Government supported this policy and continues to do so despite the shambles it has become.
The EC allocated carbon quotas or permits to individual member states that in return reallocated them to businesses such as oil & gas companies and power stations. The first mistake was that far too many permits or allowances were allocated, which relieved the pressure to reduce emissions.
The second fundamental mistake was to allow unregulated trading in the carbon permits. Companies can buy allowances from elsewhere if they exceed their quotas or sell them if they have a surplus.
Traders and speculators soon found many loopholes and were quick to exploit them for their own financial gain. In January, cyber-thieves stole allowances worth at least 50million euros (43.9million) in the Czech Republic and Austria, forcing the commission to halt spot trading.
It later announced that the most common type of carbon offsets would be banned from January 1, 2013; 30 minutes later rescinded that statement and then three hours later changed the end date to May 2013.
One trader was quoted as saying: “If I want a Mickey Mouse market I’ll go to Disneyland.”
The oversupply of permits has caused carbon prices to fall. That also reduces the incentive for companies to reduce their CO emissions and the current carbon price is about 15euros (£13) per tonne.
A more sensible EC policy is to encourage carbon capture and storage projects. In Scotland there are proposals for both the Peterhead power station – linked to the disused Goldeneye field – and the Longannet power station in Fife. The technology has still to be proved, however, as well as the economics of such projects.
The EC and the UK government are offering financial assistance for demonstration projects, which is to be welcomed, because the estimated cost of 75-125 euros (£66-118) per tonne is much higher than the current market price of 15 euros.
I had hoped that the EC would learn lessons from the fiasco that is the Common Agricultural Policy, but the Emissions Trading Scheme is another example of bureaucratic mismanagement. It should be replaced by a simpler and more effective system of taxes on carbon emissions.
Tony Mackay is MD of economists Mackay Consultants
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