So the German government thinks it has a grasp on a key negative externality of producing a product. But do they have a grasp on positive externalities that may not be reflected in the value of a business, and also shrink with its CO2 emissions? For example, producing inertia on a grid, supply chain stability, the advantages of people being fully employed, etc? They create a liability for their healthy businesses by penalizing all their stakeholders for emitting the same gas we all exhale. I grasp to understand all this complexity but it seems like a limited store of anti value, the dark crypto currency.
Well in Sweden the ruling party (including the Greens) had carbon credits with a potential value for the Swedish taxpayers of 10 billion Eur.
They decided not to put them on the market thereby further shrinking the number of availsble carbon credits. The thought that was beneficial for the climate. Result = electricity prices rose for Swedish citizens, thereby being robbed twice.
What could be a possible solution to this problem?
Would it be possible for the EU to say that the emission credits need to be use within two years or they will expire and be auction off again?
This could remove the incentive to hold them. There would be one day every year in which someone needs to buy the credits they need to avoid the 110€ penalty and someone else would need to sell their two years old credits before they get voided.
What I think I understood (from this article and Lawson's discussion with Chris Dark) is that there is a deficit of allowances by about 24%. Allowances are to be purchased by carbon emitters by April 30, 2022 or face an additional 110 Euro penalty. The allowance deficit should result in a squeeze where emitters are theoretically forced to purchase at any price, pushing the price up to levels which will require political intervention, all by April 30, 2022.
Great stuff as always. It looks like the real game here is trying to figure out when The Narrative collides with Reality - then the Ruling Class steps in and the ripcord gets pulled.
The price of carbon credits has risen from €20 in 2019 to €85. The fine from EU is €110 per ton of emissions. Logically the carbon credits are valuable as long as they’re below €110 threshold. There’s not much upside left “compared to the price increase from 2019 to 2021”.
In the article and podcast it was mentioned that it’s just the tip of the iceberg. Am I missing something though? 🤔
The fine is for non-compliance, but it doesn't preclude the obligated company from still having to purchase the evidence. As the supply becomes ever tighter the risk that firms get caught up in non-compliance increases, but that means even more pressure to purchase, perhaps even at much higher levels.
If a corporation pays the fine but does not settle the requirement to purchase the credit (opting to carry it forward) does the outstanding credit purchase requirement show up in accounting statements as a liability that must be "marked to market" according to normal accounting practice? In other words does the need for carbon compliance really exert pressure this way or does it just lead to policy adjustment (via mechanisms like CBAM) and political change?
It seems like too obvious of an asymmetric bet to own carbon credits while EU industry searches for the Holy Grail of decarbonized energy before some arbitrary date. Does CBAM make the investment thesis presented by our green chicken friend more compelling, or less?
It's an annual fine, so the maximum price for the carbon credits is what it's worth to not have to pay the fine every year until the government fixes the situation (if ever).
Is it conceivable that carbon prices becomes so high, causing domestic instability/political crises in some EU countries that either results in the countries breaking out from the EU or the EU diluting or scraping the entire ETS altogether?
There is certainly pressure from some EU countries for reform. Poland for example is experiencing higher inflation, they rely on coal and they have elections coming up.
But the EC recognise that carbon prices have only been responsible for ~10-15% of the rise in power prices seen over the past year. The rest is down to higher gas prices.
Countries are also starting to compensate firms and households for high energy prices in other ways. This reduces the political pressure for reform of the EU ETS.
So the German government thinks it has a grasp on a key negative externality of producing a product. But do they have a grasp on positive externalities that may not be reflected in the value of a business, and also shrink with its CO2 emissions? For example, producing inertia on a grid, supply chain stability, the advantages of people being fully employed, etc? They create a liability for their healthy businesses by penalizing all their stakeholders for emitting the same gas we all exhale. I grasp to understand all this complexity but it seems like a limited store of anti value, the dark crypto currency.
Well in Sweden the ruling party (including the Greens) had carbon credits with a potential value for the Swedish taxpayers of 10 billion Eur.
They decided not to put them on the market thereby further shrinking the number of availsble carbon credits. The thought that was beneficial for the climate. Result = electricity prices rose for Swedish citizens, thereby being robbed twice.
Any change in your thesis given recent sell off?
What could be a possible solution to this problem?
Would it be possible for the EU to say that the emission credits need to be use within two years or they will expire and be auction off again?
This could remove the incentive to hold them. There would be one day every year in which someone needs to buy the credits they need to avoid the 110€ penalty and someone else would need to sell their two years old credits before they get voided.
Thanks for the great post - keep on scratching and pecking! 🐔
Wonder how long this will take to come to a manufacturing plant near you.
What I think I understood (from this article and Lawson's discussion with Chris Dark) is that there is a deficit of allowances by about 24%. Allowances are to be purchased by carbon emitters by April 30, 2022 or face an additional 110 Euro penalty. The allowance deficit should result in a squeeze where emitters are theoretically forced to purchase at any price, pushing the price up to levels which will require political intervention, all by April 30, 2022.
Is my understanding of Lawson's theory off base?
Why Banana? Shrug
thanks
"...as Lawson describes, there appears to be a significant flaw in the design of the EU ETS: emitters are net short and the free float is shrinking."
Quite a good succinct way to put it.
Great wotk
Great stuff as always. It looks like the real game here is trying to figure out when The Narrative collides with Reality - then the Ruling Class steps in and the ripcord gets pulled.
Yes. Buy carbon credit ETF units but maybe set a stop sell order in case the unicorn is too heavy for the parachute.
The price of carbon credits has risen from €20 in 2019 to €85. The fine from EU is €110 per ton of emissions. Logically the carbon credits are valuable as long as they’re below €110 threshold. There’s not much upside left “compared to the price increase from 2019 to 2021”.
In the article and podcast it was mentioned that it’s just the tip of the iceberg. Am I missing something though? 🤔
The fine is for non-compliance, but it doesn't preclude the obligated company from still having to purchase the evidence. As the supply becomes ever tighter the risk that firms get caught up in non-compliance increases, but that means even more pressure to purchase, perhaps even at much higher levels.
If a corporation pays the fine but does not settle the requirement to purchase the credit (opting to carry it forward) does the outstanding credit purchase requirement show up in accounting statements as a liability that must be "marked to market" according to normal accounting practice? In other words does the need for carbon compliance really exert pressure this way or does it just lead to policy adjustment (via mechanisms like CBAM) and political change?
It seems like too obvious of an asymmetric bet to own carbon credits while EU industry searches for the Holy Grail of decarbonized energy before some arbitrary date. Does CBAM make the investment thesis presented by our green chicken friend more compelling, or less?
It's an annual fine, so the maximum price for the carbon credits is what it's worth to not have to pay the fine every year until the government fixes the situation (if ever).
Is it conceivable that carbon prices becomes so high, causing domestic instability/political crises in some EU countries that either results in the countries breaking out from the EU or the EU diluting or scraping the entire ETS altogether?
There is certainly pressure from some EU countries for reform. Poland for example is experiencing higher inflation, they rely on coal and they have elections coming up.
But the EC recognise that carbon prices have only been responsible for ~10-15% of the rise in power prices seen over the past year. The rest is down to higher gas prices.
Countries are also starting to compensate firms and households for high energy prices in other ways. This reduces the political pressure for reform of the EU ETS.
Thanks for the interesting article.
It seems almost every developed region has backed themselves into an escape proof trap of their own design.
Great article, an eye opener for the average person!