"Carbon Trading is Insane" – Hugh Sharman
June 11th, 2009
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Yesterday I attended the UK’s Nuclear Industry Forum, an annual gathering of utilities, politicians, EPCs, NGOs, OEMs and auxiliary service providers, to discuss the prospects of a nuclear renaissance.
Vincent De Rivaz, CEO of EDF Energy (the British arm of the French state-owned utility) and new owner of nuclear operator British Energy, used his time on the platform to call for a debate into the different ways that the British government could give more support to his plans to build a fleet of new nukes in the UK.
Even though EDF can afford to build a fleet of new nukes, which are expected to cost in the region of €4m ($5.5m) per megawatt, either on or off its balance sheet, the French utility needs more certainty that it will eventually recover its costs and make a profit, which may take up to 35 years.
His main message was that the carbon market offers absolutely no incentive for utilities to invest in such projects, as it offers absolutely no certainty about the future price of carbon.The current price of carbon in the EU ETS is €13/tonne, far below the €50/tonne at an absolute minimum needed to give the right signals.
But, you see, even if the price was €150/tonne right now, it would still offer little practical incentive, because the carbon market is deeply flawed. It is exceptionally volatile, prone to collapsing prices, as we have seen in the past year, when EUAs fell below €10/tonne after reaching €30/tonne last July.
Carbon markets will always be prone to collapsing prices because it is trading in something with virtually zero practical use and traders have repeatedly sold off permits in a hurry when the market gets jitters. Carbon dioxide is a negative externality, not a commodity like coffee, or crude oil, or even pork bellies.
Such markets are no conduit for investment in a nuclear power plant with a lifetime of 60 years, and when it takes around half that to make a return. If mitigating climate change is a political objective, which it is clearly is, then why are we trying to achieve this by trading in the very negative externality that causes it? That is insane!
De Rivaz told me that a carbon tax would be a better solution, if not the optimal one, because he would know how much to pay each year, preferably many years in advance.
Sadly, the wind is blowing for ever more carbon trading, and the UN Climate Change Convention may agree to a global carbon trading scheme. This will be great news for the likes of Morgan Stanley, but perhaps not so great for developers of low carbon technology or, indeed, the planet.
Hugh Sharman www.incoteco.com
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