Obama’s Race Against Time: The Climate Action Plan, and its impact on biofuels

“Taxing” Carbon Using a Carbon Credits Trading Scheme

In 2003, participating EU member countries agreed to in effect “tax” carbon emissions from companies each country designated as being “energy-intensive”. These designated firms were each given “carbon credits” for expected annual amounts CO₂ emissions they were allowed to produce. If individual companies exceeded their CO₂ emissions allowances, they were then required to purchase carbon credits from an exchange run by the EU. If they produced less carbon, they could sell excess credits on this exchange to companies who were forced to buy.

Observation: This approach differs from cap-and-trade schemes, where the amount of tax paid for each ton of CO₂ produced is set by government regulators.

When this carbon credit trading system began, the value of a each carbon credit was substantial, but this value has fallen to new lows, due in part: to lower electricity demand; to lower overall CO₂ emissions; to increased amounts of power being supplied to Germany’s grid from renewable sources; and to the government’s issuance of too many CO₂ emissions permits.

As a consequence, the glut of carbon credits available for sale has caused the value of such credits to fall. In Germany, this has led to such unintended consequences as: 1) Having energy-intensive companies who are subject to buying carbon credits, build their own bio-mass fueled generating capacity to avoid paying this “green-levy”, while adding to the carbon credit glut; 2) Having some of the largest German companies who are energy-intensive, pursue expansion in North America where prices for natural gas and electricity are low; and, 3) Re-instituting the accelerated phase-out of nuclear power while keeping high  feed-in-tariffs in place for solar and wind energy.

Observation: It appears that these policies will continue to contribute to the glut of carbon credits and to even higher energy costs.

Proposed Changes to Germany’s “Energiewende”

One proposed change to Germany’s Energiewende is to have electricity rates set based on each power producer’s installed capacity, not on the amount of power being generated. This change is expected to eliminate electricity price distortions now occurring in Germany.

Observation: How this would work is still unclear. 

Other remedies call for government incentives to encourage conservation and more efficient use of energy. Government supported investment is also needed for development of energy storage, for  expansion of the grid, and for the creation of new renewable energy generation capacity.

Observation: Hopefully some support will be directed toward bio-coal plant development as well.

But Energiewende policy changes are also needed: to reduce the excess number of exemptions being issued to energy-intensive users; to lower the CO₂ emissions ceilings; to lower the feed-in-tariffs for renewables and in phasing them out. In its place German policy makers may want to consider using “floor price guarantees” to developers of renewable energy projects. If intelligently implemented, such guarantees would lower the risk threshold for would-be investors in renewable energy projects.