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Fiddling While Europe Burns

August 29, 2018

By Paul Homewood


From AEP:



Love them or hate them, carbon contracts are the City’s hottest trade this year. Those hedge funds and eagle-eyed amateurs who track the EU’s regulatory flow have made windfall profits.

Permits for EU carbon emissions spiked to a seven-year high of €20.84 on Friday. They have risen fivefold since the spring of 2017, the best performing “commodity” in the world. The contracts have decoupled completely from energy prices and global raw materials.

Most commodities have been sliding jerkily for four months. Copper has fallen 17pc since mid-June and is flirting with a bear market. So are zinc and lead. Lumber and sugar have both dropped a third over recent months.

This tells us that something about the underlying health of the world economy. Trade volumes stalled even before Donald Trump launched his tariff wars. It is the result of two shocks: a fall in Chinese fixed investment growth to levels unseen since the 1990s amid the crackdown on China’s shadow banking; and stress in emerging markets as the US Federal Reserves drains global dollar liquidity.

Oil has held up better. But that is sui generis, a supply story mostly linked to politics. Venezuela’s output is in free-fall. Fresh sanctions against Iran will take at least a million barrels a day off the global market by November. A lack of pipelines in the US will hold back shale output from the Permian Basin until well into 2019.

Yet carbon permits are flying. The EU contract is the price that 11,000 power plants, steel foundries, and factories – covering 45pc of Europe’s greenhouse emissions – must pay for each tonne of carbon emitted under the “polluter pays principle”. Airlines have to pay for intra-EU flights.

What has changed is that Brussels is finally sorting out its cap-and-trade system, until now a byword for bureaucratic incompetence and market illiteracy. It issued too many carbon permits, with no way of adjusting when industrial output collapsed in 2008 and again during the eurozone’s double-dip recession.

The new regime approved by the European Parliament this year empowers a Market Stability Reserve (MSR) to soak up the 1.7bn tonne glut of contracts. “It is like a central bank doing quantitative tightening,” said Mark Lewis, former head of utilities at Barclays and now at Carbon Tracker. “The accumulated surplus is going to come down dramatically over the next five years.”

The MSR will remove 24pc of the market surplus each year between 2019 and 2023, with powers to cancel permits permanently. In parallel, the overall carbon cap will be lowered by 1.74pc a year from the start of 2019 and 2.2pc from 2021 onwards. 

The price surge has become self-fulfilling. Industries with a stash of unused credits are hoarding them for gain rather than putting them up for auction.

“Financial players have been all over this,” said Mr Lewis. He estimates the price will double again to €40 by 2020, with surges hitting €50 that winter due to gas shortages in Europe. If so, this will vindicate the UK’s huge investment on North Sea wind power.

The German bank Berenberg thinks the carbon price could reach €100 by 2020, warning that companies cannot adapt in time. “There will be no natural carbon price that will clear the market,” it said.  Sceptics might ask whether the EU authorities would allow a shock of this scale to occur. “We think there are political limits on how high prices can go,” said Mr Lewis.


Carbon pricing will simply push up energy prices, as well as costs for industry and consumers.

Facing a sclerotic economy, structural mass unemployment, massive public debts and a myriad of other problems, all the EU can think of is to hamstring its economy even further.

Meanwhile, the rest of the world will sit back and say “thank you very much”.

  1. Athelstan permalink
    August 29, 2018 7:37 pm

    Again, the rampant stupidity of rigging the system through means of selling carbon dioxide indulgences leaves me speechless at the insanity but the inevitable ‘killing’ and hedge fund vultures making money on it, akin to someone rubbing poisoned shards of sand onto a persons fresh abraded skin.

    • August 30, 2018 12:34 pm

      Bet Pope Francis likes these indulgences.

    • Russ Wood permalink
      September 2, 2018 11:00 am

      “Indulgences” – yet more indications that the modern “ecology” is a religion rather than a group of sciences. And doesn’t that make all of us skeptics “blasphemers”?

  2. John Scott permalink
    August 29, 2018 8:08 pm

    We all know the outcome of the indulgences peddled in the Middle Ages bu the Catholic Church (now read EU) its pardoners (read the Eurocracy) for the temporal sin of using carbon. Of course everyone with an iota of intelligence knows that CO2 is not the cause of AGW, however, it is a great excuse for enriching the shysters selling the credits. The eco industry led by Gore, who us now just a useful idiot who has served his purpose while pocketing millions. California is making milllions selling the same tree many times over to the gullable govrtnments who think they are saving the planet.The whole scheme will blow up like any Ponzi scheme and the general public will bear the costs

  3. Bruce of Newcastle permalink
    August 29, 2018 10:16 pm

    Industries in the EU should buy UN carbon credits instead.

    Current price 29 euro cents per tonne of CO2.

    How could Eurocrats, who love all things UN possibly, refuse to accept UN carbon credits?

  4. August 29, 2018 10:22 pm

    An entire fake economy conjured up out of nowhere. What could possibly go wrong?

    • Sheri permalink
      August 30, 2018 12:35 am

      Reminiscent of the game “Monopoly” and the Monopoly money, useless outside the game.

  5. Saighdear permalink
    August 29, 2018 10:54 pm

    Too much wringing of hands and doing nothing.
    Why why why dont “we” do what the French skippers have just been up to?
    By the way, pity out fishermen HAVE to go there “out of season” to plunder the stocks – if it’s good enough for the French, why not for them too – don’t they know enough about Biology of Sea creatures which they harvest ??

    • Curious George permalink
      August 30, 2018 2:04 am

      How about a Brexit?

      • Saighdear permalink
        August 30, 2018 8:52 am

        ‘Off-course’ …….. ov or aff “course it is ! “

  6. markl permalink
    August 30, 2018 3:16 am

    This smells like Bitcoin except the losers will be all the people paying more for energy.

  7. Immune to propaganda permalink
    August 30, 2018 7:37 am

    In reality you couldn’t get something so stupid as an ‘invisible’ commodity but carbon trading is an example of the surreal world we now live in.

  8. Henning Nielsen permalink
    August 30, 2018 9:32 am

    Polar bears KILLS climate deniers! Hugs climate savers!
    (though the embrace can be a bit…bracing)

  9. Europeanonion permalink
    August 30, 2018 10:29 am

    There is a niff of something not quite right going on here. The Germans seem to have some sort of unholy alliance with the Russians and can dispense with nuclear and support schemes such as this with impunity, as they are getting preferential rates from the Great Bear, they are driving the rest into potential impoverishment in fuel while secure in their sourcing. Another article here features the German leader and her indifference which gives extra focus to German thinking (as in their wars they always focused on taking the high ground, this time they have contrived it to be moral). The Germans are running rings around Europe and any financial penalty they pay for their membership is more than compensated for by special rates with Mr rasPutin.

  10. Derek Buxton permalink
    August 30, 2018 10:34 am

    That is the Germans we all know and don’t love, they have not forgotten that they lost!

  11. saparonia permalink
    August 30, 2018 12:01 pm

    “Government will not go quietly into the light. They will rage against any reform whatsoever. This is not going to end nicely. They are on a collision course to destroy civilization as we know it. This is the eternal battle – PUBLIC v PRIVATE. It always unfolds because government keeps consuming larger and larger portions of the productive capacity of the people (GDP) until it kills the economy. Detroit collapsed because pensions exceed 50% of the budget.”

  12. August 30, 2018 12:36 pm

    As with so many things, follow the money.

  13. Gerry, England permalink
    August 30, 2018 2:03 pm

    They are lucky that Africa remains an unstable basket case rules by tyrants and despots, not safe for large scale investments or companies would be moving production from the EU to a super cheap location.

  14. August 30, 2018 11:00 pm

    It’s “that” picture again – pretending that water vapour is soot-laden pollution!

    • August 31, 2018 10:34 am

      Whenever such photoshopped sunset pics appear – think ‘fake news ahead’.

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