Can we ignore the ‘trade’ part of ‘cap and trade’?

Mention ‘EU Emissions Trading Scheme’ to any carbon capture professional and you hear a big groan. The scheme made big promises of driving investment in carbon capture and other low carbon technology and failed to deliver. Meanwhile wind and solar managed to get their funding via other government routes and carbon capture didn’t.

Many people have explained why they think Emissions Trading can never work. The “trading” is a government allocated permission to permit – so you need a lot of trust in government’s ability to restrict the emissions to people who hold the certificates. The more successful the scheme is in driving low carbon emission, the less valuable the ‘trading certificates’ are, so the market is moving in the wrong direction (for a successful market, the price should surely rise the more popular the product being traded is).

These are fair points. But the Emissions Trading Scheme is about “cap” as well as “trade”. If we ignore the trading part of it, we have a cap on emissions – which, according to EU ETS Wikipedia page, will reduce by 1.74% a year from 2013 to 2020, and by 2.1% a year from 2020 to 2030, driving emissions from the ‘ETS sector’ (power generation and heavy industry, basically) by 43% by 2030.

Now we have something very different – a market for low carbon electricity.

How far can we quantify this market, in order to give security to a carbon capture investor?

If we assume that EU electricity consumption is constant until 2030, we can get a good idea of how much “low carbon electricity” will be required in Kwh.

If investors have a focus just on meeting this market demand at minimum cost, they can calculate that CCS can provide electricity at a lower cost per Kwh than other forms of low carbon – so CCS can earn revenue for electricity at the price of the next highest option (probably wind).

In other words, invest in a carbon capture power station now, for operation in (say) 2020, you can get as much revenue from your carbon capture plant as you could if you had to generate the power using wind turbines, but make much more profit since CCS is cheaper than wind.

There must be a flaw in this logic, since investors have looked at this in much greater detail but come to a different conclusion. Can anyone say what it is?

Or are investors too focused on the ‘trading’ part of ‘cap and trade (and disappointed at its results so far) to take anything associated with ETS seriously?

Our basic idea with Red Hydrocarbon is that the climate problem is best solved by the market – but based on a new market for ‘zero carbon energy’ (driven by regulatory caps) not with Emission Trading Scheme. This could be done by regulatory limiting of fossil fuel production – which would be a completely new scheme. But could it also be done with the EU ETS cap?



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