EU cap-and-trade system left to die by EU parliament

The ETS is dead, long live climate change.

The European Union has voted not to limit the supply of carbon permits, in a move that's widely thought to have dealt "a near-mortal blow" to the EU's Emissions Trading Scheme, according to Alphaville's Kate Mackenzie.

The ETS is supposed to limit the amount of greenhouse gases pumped into the atmosphere, by requiring permits to pollute. The idea was that companies who needed to release greenhouse gases would have to buy the right to do so from companies which had managed to cut their emissions, and a market-based solution to climate change would be found.

Unfortunately, the way the permits were allocated was to give them to companies based on their emissions in year zero, and then only increase the quantity by a little bit each year, limiting growth in emissions. Unfortunately, the global financial crisis came along and did that for us: output fell, and with it, so did emissions. But the number of permits available kept increasing, and now the EU faces a situation where they are basically worthless.

The initial sticking-plaster solution was to "backload" the permits, delaying the scheduled releases by a few years, in order to bring supply back down to a level where it would start constraining carbon emissions again. But on Wednesday evening, the EU parliament voted against the backloading, sending prices tumbling:

Iza Kaminska draws parallels with the Bitcoin crash:

All in all this is yet another valuable lesson in what happens when you make asset classes out of nothing. Unlike with Bitcoin, the cyber-spawned crypto-currency based on nothing but black market interests, the lesson here is not the fact that there is no authoritative mandate, mutual interest or even value — but rather that there is no central authority on standby to flexibly adjust and regulate supply.

But looking at the ETS in terms of its efficiency as a market is somewhat missing the point. The aim, after all, isn't to provide a stable investment vehicle or create an asset class for the sake of it – it's to reduce carbon emissions. The problem is that political constraints were never going to allow the EU to make a carbon market which would actually have a chance of doing that.

The IEA reports that a carbon price of €50 a tonne – ten times the price of an ETS permit at its peak yesterday – is needed just to encourage a switch in the short term from coal to gas generation. The price – and stability of price – required to encourage investment in completely carbon-free generation is likely to be higher still (although renewables advocates disagree). In that context, whether the ETS permits are trading at €3 or €5 is almost irrelevant. Neither price will have anywhere near the required effect.

In that context, maybe the damage done to the ETS is a good thing. Now that it's fairly conclusively demonstrated to be doing nothing to cap emissions, the EU could start getting moving on a genuine market based solution to climate change – a carbon tax, or a cap-and-trade program which actually pays attention to the "cap" part. Either way, it's going to be a while yet.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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The tale of Battersea power station shows how affordable housing is lost

Initially, the developers promised 636 affordable homes. Now, they have reduced the number to 386. 

It’s the most predictable trick in the big book of property development. A developer signs an agreement with a local council promising to provide a barely acceptable level of barely affordable housing, then slashes these commitments at the first, second and third signs of trouble. It’s happened all over the country, from Hastings to Cumbria. But it happens most often in London, and most recently of all at Battersea power station, the Thames landmark and long-time London ruin which I wrote about in my 2016 book, Up In Smoke: The Failed Dreams of Battersea Power Station. For decades, the power station was one of London’s most popular buildings but now it represents some of the most depressing aspects of the capital’s attempts at regeneration. Almost in shame, the building itself has started to disappear from view behind a curtain of ugly gold-and-glass apartments aimed squarely at the international rich. The Battersea power station development is costing around £9bn. There will be around 4,200 flats, an office for Apple and a new Tube station. But only 386 of the new flats will be considered affordable

What makes the Battersea power station development worse is the developer’s argument for why there are so few affordable homes, which runs something like this. The bottom is falling out of the luxury homes market because too many are being built, which means developers can no longer afford to build the sort of homes that people actually want. It’s yet another sign of the failure of the housing market to provide what is most needed. But it also highlights the delusion of politicians who still seem to believe that property developers are going to provide the answers to one of the most pressing problems in politics.

A Malaysian consortium acquired the power station in 2012 and initially promised to build 517 affordable units, which then rose to 636. This was pretty meagre, but with four developers having already failed to develop the site, it was enough to satisfy Wandsworth council. By the time I wrote Up In Smoke, this had been reduced back to 565 units – around 15 per cent of the total number of new flats. Now the developers want to build only 386 affordable homes – around 9 per cent of the final residential offering, which includes expensive flats bought by the likes of Sting and Bear Grylls. 

The developers say this is because of escalating costs and the technical challenges of restoring the power station – but it’s also the case that the entire Nine Elms area between Battersea and Vauxhall is experiencing a glut of similar property, which is driving down prices. They want to focus instead on paying for the new Northern Line extension that joins the power station to Kennington. The slashing of affordable housing can be done without need for a new planning application or public consultation by using a “deed of variation”. It also means Mayor Sadiq Khan can’t do much more than write to Wandsworth urging the council to reject the new scheme. There’s little chance of that. Conservative Wandsworth has been committed to a developer-led solution to the power station for three decades and in that time has perfected the art of rolling over, despite several excruciating, and occasionally hilarious, disappointments.

The Battersea power station situation also highlights the sophistry developers will use to excuse any decision. When I interviewed Rob Tincknell, the developer’s chief executive, in 2014, he boasted it was the developer’s commitment to paying for the Northern Line extension (NLE) that was allowing the already limited amount of affordable housing to be built in the first place. Without the NLE, he insisted, they would never be able to build this number of affordable units. “The important point to note is that the NLE project allows the development density in the district of Nine Elms to nearly double,” he said. “Therefore, without the NLE the density at Battersea would be about half and even if there was a higher level of affordable, say 30 per cent, it would be a percentage of a lower figure and therefore the city wouldn’t get any more affordable than they do now.”

Now the argument is reversed. Because the developer has to pay for the transport infrastructure, they can’t afford to build as much affordable housing. Smart hey?

It’s not entirely hopeless. Wandsworth may yet reject the plan, while the developers say they hope to restore the missing 250 units at the end of the build.

But I wouldn’t hold your breath.

This is a version of a blog post which originally appeared here.

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