Thursday, November 6, 2008

Carbon Traders Rejoice on News of Obama Win

If you thought the reaction in Kenya* was ecstasy, you should have been with the carbon traders on election night. From Climex:
...Market participants applauded this decisive win, predicting it will help ease the creation of a national cap-and-trade scheme. (Source~: Pointcarbon)

“We knew both candidates were for cap-and-trade; the real difference now is that there is a strong Democratic majority in Congress and a Democratic president so there is less likely to be gridlock,” said Lenny Hochschild, managing director of greenhouse gas services at environmental broker Evolution Markets.

The increasing likelihood of a cap-and-trade system in the US also lends credibility to the global carbon market, said Emmanuel Fages, a carbon analyst at Societe Generale.

“It reinforces that the carbon market is here to stay and that market mechanisms are key tools to the fight against climate change,” said Fages....

...Dwarfing the EU ETS

What market participants do project is that the US carbon market under Obama’s proposed economy-wide emissions trading programme could dwarf Europe’s existing market.

Hochschild predicted the size of the carbon market in the first year of the programme could be 5.75 billion tonnes of CO2 equivalent.

This is the size of the economy-wide cap-and-trade programme envisaged by Senator Joe Liberman and retiring Senator John Warner in their climate change bill, which failed to withstand a filibuster in June. Their bill covered nearly 80 per cent of all domestic economic sectors.

By comparison, the EU emissions trading system covers 2 billion tonnes per year from installations that produce energy, process ferrous metals, and the mineral industries and pulp and paper industries.

If the average carbon price is $20 per tonne, the US carbon market could be worth $600 billion, said Hochschild.

Aggressive auctioning

During his campaign, Obama also pledged to auction 100 per cent of allowances under a cap-and-trade scheme, which could potentially raise up to $300 billion in revenues, according to market experts.

But some market participants raised concerns that 100 per cent auctioning could hamper the effectiveness of a scheme.

Josh Margolis, co-chief executive officer of environmental broker CantorCO2e, said 100 per cent auctioning could dissuade regulated entities from reducing carbon emissions.

“It takes away resources for emission reductions. You need allocations to invest in emission reduction programmes,” said Margolis.

“It turns a cap-and-trade programme into a cap-and-fee programme,” he added....MORE

Didn't the Boxer amendments to Lieberman-Warner figure the auction proceeds would be large enough to provide "resources" for every politician's ulti-multi-wishy-listy, including "emission reduction programmes"?

(if memory serves there was $500 Billion allocated to the "National Wildlife Adaptation Fund")

The problem, from a carbon traders perspective, is that the auction creates a floor price, thus narrowing any potential spread and thus profitability. Heaven forfend a safety valve. That would set a ceiling price, carbon would hardly be worth trading.

*Some of the headlines on the reaction in Kenya:

In Kenya, Obama Win Sparks Celebration

A FAMILY FEST IN KENYA Obama's Granny Celebrates Victory

Kenya Declares Public Holiday Following Barack Obama

Glee overseas as Obama wins