Wednesday, September 01, 2021

Climate Change: The ETS is a farce

The third ETS auction happened today, and as predicted, the cost-containment reserve was triggered, flooding the market with an extra 7 million tons of carbon. But this didn't actually contain costs. Instead, the auction cleared at $53.85 a ton - higher than the pre-auction spot price of $52 a ton. So the result of this farce is more pollution, higher prices, and a billion dollar bill for the government to cover those emissions, without containing costs. Which makes you wonder why we have a "cost containment reserve" in the first place.

Which is actually a good question: why are we trying to constrain this market? We've seen this year that polluters can cope with the price doubling in a year, and that that results in decarbonisation as polluters either clean up or shut down. Which is what the ETS is meant to do. So why are we artificially slowing this process down (and committing to higher emissions in the process)? To riff on Napoleon, if you want to limit carbon, limit carbon. Repeal the CCR, let the price rise and find its level, and let decarbonisation happen.

The good news is that now the cost containment reserve is blown, that's what's going to happen for the next year. The only constraint is $70 trigger point for the CCR next year. The bad news is that judging from this year, the CCR trigger point has become a market expectation, meaning the government will end up flooding the market with another 7 million tons of pollution we cannot afford (at the cost of another billion dollars) next year. The only question is whether it will happen in March or June...

The government can stop this anytime it wants, by urgently legislating to repeal the CCR or raise its trigger point to a level which allows the market to function. If they refuse, it will be a clear signal that they are not actually interested in decarbonisation at all, but are rather just subsidising the status quo to destroy our future. And future generations should not forgive them for it.