“Nothing is so beautiful as spring –
When weeds, in wheels, shoot long and lovely and lush;
Thrush’s eggs look little low heavens, and thrush
Through the echoing timber does so rinse and wring
The ear, it strikes like lightnings to hear him sing;
The glassy peartree leaves and blooms, they brush
The descending blue; that blue is all in a rush
With richness; the racing lambs too have fair their fling.”

Hard work, but he’s right.

The same day the World Bank said: “Natural resources such as farmland, biodiversity and forests should come with a price tag in order to encourage governments to make their economic growth plans more environmentally sustainable.”

So that’s two different views of how to protect nature.  Gerald Manley Hopkins says love  it.  World Bank says put a price on it.

Gerald Manley Hopkins has understood the issue more thoroughly than the World Bank, which is not surprising since he was a poet and the World Bank is just made up of economists.  But why didn’t the World Bank say “love it”?

If someone loves nature, then they will respect it and look after it.  If someone doesn’t love nature, then pricing or not, sooner or later they will chop it up and turn it into real estate and roads.

I would add to “love” that people need to “understand” nature; understand the complex umbilical links between nature and ourselves.  That blend of passion and reason will save nature.  Putting prices on things might help a tiny bit, but by definition pricing has no defence against money.  Love and intelligence have.

I sat him down, poured him a drink, and prepared to listen.

“Zo…” he began.  “Let’s say that Germany, for example, has agreed to lend to Greece, the sum of 8 billion euro.  It’s nothing in the world of global debt crises.  It doesn’t need to be the Germans.  It could be the Chinese-“

“The Chinese?  With the aviation pickle?” I said.

“Ok, not the Chinese.  The Germans.  Happy?”

I nodded.

“So then we hold an auction of EUAs.  And we auction a billion units.  Now, the Germans bid top prices.  Let’s say they bid 8 euros and take the lot.”

“Ok,” I said, dipping a sugar cube into my coffee.  ”You mean, it’s been pre-arranged?”

“Now, the EU then has 8 billion euro in its pocket.  It then lends this on to Greece.”

“Aha!” I said.

“Now what do we have?” asked Günther.  He didn’t wait for me to answer.  “Well, you see, Greece has its money.  Gut.  The EU has a loan note from Greece.  Gut.  And German is holding one billion over valued EU allowances.”

“Gut,” I agreed.

“Now, here’s the trick,” he smiled to himself.  He tapped his little cheroot case.  “Germany swaps the EUAs for the loan note.  So now Germany holds the loan note from Greece and the EU holds the EUAs.”

“And th- th- then what?” I stuttered.

“Then we can do what we want with the EUAs.  They have already been auctioned, so we’ve done what we were supposed to do.  The EUAs are ‘out in the market’, so to speak.  Only, we are holding them.  We don’t need to do anything.  You see, it’s magic.  And then we just sit on them.”

I gasped.  I spilt my coffee.  I blinked.  Open mouthed, in awe at Günther’s cunning.

“But don’t you have to give the proceeds over to the member states?  And doesn’t it have to be reinvested in renewable techhnology?”

“Mere technicalities, my friend.  Welcome to realpolitik,” said Günther, refilling his glass.

“Who’d have thought that the Greeks would help us solve the set-aside crisis?” he chuckled.

Just then Archimedes arrived with a bag of fresh donuts.

“Timeo Daneos…” smirked Günther, flaunting his classical education and his yellow corduroy waistcoat.

Trevor Sikorsky of Barclays Capital argues in Barclays’ Quarterly Carbon Standard (26^th March 2012) that:

“It is expectations that drive such investment [in clean technology] … not current prices.”

That is, energy investors do not look at the miserably low EUA price today but they look at what the EUA price will / would / might be in the future.

In the other corner are the august officers of no less than E.On (no, not the people who produce the James Bond films; that would be far too exciting for this blog) and Statoil and big investors.  These gents and ladies argue that:

The EU ETS is bust.  It gives no signal for new investment in low-carbon technologies (Johannes Teysson, CEO of German utility reported in Point Carbon, 8^th Feb)

At under seven euros per ton, the carbon price is not even high enough to support a switch from coal to gas (IIGCC Executive Director Stephanie Pfeifer reported by Bloomberg, 18^th April)

Europe’s low carbon price is incentivising coal-fired power generation over cleaner gas-fired generation (Rune Bjørnson, senior vice-president of natural gas at Statoil reported by EDCM, 18^th April)

They are looking for a high EUA price to stimulate clean tech investment.  Mark Lewis of Deutsche Bank in their special report of 12^th April 2012 backs the side of people calling for reform of the EU ETS to ensure that there is a price signal.

We are seeing two different concepts of what the EU ETS is for.

The purist camp, where Barcap sits, sees the EU ETS as a pure cap-and-trade scheme whose job is one thing: to reduce emissions to a cap at lowest cost.  The purists are agnostic as to how we cut emissions, even if it happens by way of economic decline. This is a free-market view.

The techno camp, which includes the European Commission itself, sees the EU ETS as not just a cap and trade scheme.  It also sees it as a vehicle for promoting investment in clean technology.  This is an interventionist view, where there is second goal to the scheme: the interventionist does care how we cut emissions.  He assumes that clean technology is the right way to cut emissions.  Technologists don’t like the Bustard’s beer, football and gardening approach.

Barcap’s view is that the headline carbon price is not so important.  Investors, they would argue, are cannier than that.  Investors know that sooner or later the carbon price will be high, and act on that expectation.  Investors are big boys and they know there is a huge fine for non-compliance, so they’ll make sure emissions are cut.

But some investors, it seems, think that the headline carbon price is important.  From what Mr Teysson says, you’d think that E.On has no intention to invest in renewables until the current carbon price goes up a bit.

Suddenly this gets a bit too complicated.  Four thoughts:

1.       Lobbying

The purist view ignores the power of lobbying.  Say people don’t invest in clean technology, and, as a result, the carbon price gets really high.  Does that necessarily mean they’ll start making the required investments?  There is no guarantee.  They might just lobby to get the cap loosened so the price goes down again.  Investors know how they will behave if they are pushed into a corner with a 40 euro carbon price.  Perhaps they want to avoid that by being forced to make clean tech investments now.

2.       Game theory

If you think about the Barcap position, you can see that there’s something going on which looks a bit like game theory.  The future carbon price will be high if people don’t take abatement measures.  But if people do invest in low-carbon technology, then the carbon price won’t be high, because emissions will be beneath the cap.

Archimedes, an investor who owns a coal-fired power plant (in Greece, obviously), thought about this.

“Hey, coal is cheaper than wind and sun,” he said.  “If I am cunning and wait for lots of other people to invest in wind and sun, then emissions will go down under the cap.  That means that the carbon price will be low and I can continue to make money running my coal-fired plant, as long as there is enough demand for people to need my power as well.

“Now, if I invest in wind and sun and everyone else does, then I’ll look like a right fanny because I argued to the board that the carbon price would be really high, and look at it: it’s down at 5 euro (because emissions are so low), so I should have stuck with my coal-fired plant.”

“What happens if I wait and everyone else also waits, and we are still all running our coal-fired plants come 2020?  Well, then the carbon price will balloon and we’ll all be in an unseemly scramble to cut emissions and there’ll be spikes in the power price and power cuts.”

As you would expect of a Greek, he found a stick and started to draw something in the sand.  A table!

“Look!” cries Archimedes.  “See how the smart money does the opposite of what everyone else does.  If everyone invests in green energy and I don’t, then I am laughing.  If no-one invests but I do, then I am also laughing.  So I have to the opposite of the mainstream.  Given that the mainstream, like E.On, say they are waiting for a signal which will never come, I will crack on with my windmills.”

“But hold on,” I said.  “They say the carbon price isn’t working as a signal, but Barclays points out that in 2010 to 2011 50GW of renewable capacity was installed in Europe, able to meet up to 2.5% of EU demand.  It can’t be just because of the feed-in tariffs.  How do you know that they aren’t saying one thing and doing another?  After all they are Germans.”

“By gum,” said Archimedes (his father, a shipping magnate, had sent him to boarding school in northern England).  “I see what you mean.”

A game theory situation can be very complex.  But if we force the carbon price up to 20 euro or so we can get rid of that complexity.  The high price takes away some of the uncertainty of whether it will or won’t be worth it, and what happens if I do and he doesn’t or he does and I don’t.  There is less jigging about with complex models or speculating about our competitors’ behaviour.  Life is simpler.  You can see the pragmatic attraction of price intervention.

3.       Communication

I wonder if there is also a problem of communication here.  A current headline carbon price is easy to communicate.  An argument that the carbon price might be high in the future is very hard to communicate.

Energy investors know the game very well.  They know that it’s about the future carbon price and what the carbon price will be very high if people don’t cut emissions.  But they have to be seen to convince their boards with spread-sheets (and power point presentations).  It’s easy to do a spread-sheet which shows a high carbon price in, thereby justifying the renewable investment.  But if you have to explain in your spread-sheet that, “well the carbon price isn’t going to be high, but if we don’t do this it will be high … and our game theory expert Professor Heinz Wechselstube-Schrimpf argues that …” then you will have lost the attention of the board and it’ll start raining outside and you won’t get the investment approved.

We all know that clear communication is critical, and for that we need a high, headline carbon price.

4.       So what is the EU ETS?

It helps our understanding if we see a distinction between the EU ETS and a pure cap-and-trade scheme.  Under pure cap-and-trade the quantity of reduction is fixed, and the price is volatile.  (With a carbon tax, in contrast, the price of carbon is fixed and the quantity of reduction is uncertain.)

It looks like the European Commission takes a slightly different view of the EU ETS.  It is a cap-and-trade scheme but one with an additional technology goal.  That is: they are prepared to create some quantity uncertainty beyond the original cap and at the same time some price certainty, in order to achieve specific technological outcomes.

It is tough for economic purists to swallow this piebald horse.  But, oddly, while it is less theoretically simple, it does make life easier for investors (well, for those investors whom the Commission wants to encourage).

“Here, have you ever been in a board-room presentation?” asked Archimedes, still thinking about the previous point.  “How do you know it’s a simplistic world?”

Luckily, just then the phone rang.  It was Günther.

“I’d like to discuss that idea of a compliance coefficient – you know, when we say 1.05 EUAs for one ton of carbon …”

“Ah, that old chestnut,” I said airily.

“Well, between you and me,  old chap,” he said in hushed tones, “we’re rather desperate.  To tell you the truth, we’ve made a bit of a hash on the old set-aside debate and we need something fresh.  Come on, old fellow.”

“Now is not the time, Günther,” I said, noting that when a German starts trying to speak old-school English, there is something fishy going on.  ”The Chelsea-Barcelona game has begun.  We will speak tomorrow.”

I put the phone down.  “Fancy an ouzo, Archimedes?” I asked.

Split personalities

We were standing in the James Hargreaves Lower stand of Turf Moor.  The home crowd had become angry. ManchesterCitywere visiting and at half-time they were three nil up.  Joe was beside himself and showing off the best of his vocabulary. Doris was transformed into an Amazon warrior.  She led the war cry, her back to the game, looking up the rows of anxious, impassioned faces.  She whipped the crowd into a frenzy, arms waving wildly as she conducted their chant.  They screamed for the Claret and Blue army, stamping the ground, all standing, waving their scarves and banners.

Igor remained quiet.  He turned to me: “See how she is behaving?  Not the quiet, patient mum in the living room at home.  It’s almost as if she has two persona.  Look, the players are coming out for the second half.  We must discuss this further in the Bridge.  Meanwhile I will place a bet now on a Burnley recovery and a 3-3 draw.  Barry has been taken off and the Manchester midfield looks vulnerable to McCann.”

It was scarcely any easier to hear ourselves speaking in the Bridge.  Almost the entire population of Burnley was squeezed into the bar to celebrate their famous come-back.

“Why is it that we’re different people, depending on the circumstances?” asked the Professor.

“How do you mean?” asked Joe.

“Look at how fierce everyone was at the game.  They’re not like that at home.”

“It’s called beer,” said Uncle Frank.  “They were well tanked up.”

“It’s the situation, isn’t it?” said Joe.  “You get drawn in.  You’re not yourself.”

“Well, look at Joe at work.  He’s forever cleaning up the workshop and repainting the vans.  But he never does any washing up at home,” said Doris.

“And that is one of the things which stops us doing something about greenhouse gas emissions.  We are different at work from how we are at home,” said Igor.

“Oh yeah?”  Joe wasn’t happy at Doris hanging out the washing.  I mean in a figurative sense of course.  Otherwise he was very happy for her to hang out the washing and do the ironing for that matter.

Igor hurried on.  “I remember the head of a coal-fired power-plant saying: ‘As a grandfather I am worried about climate change and its impact on my grandchildren.  But as an employee of a very large German power group I have a big problem with regulating emissions.’  He admitted that we are two people in one.”

“He was just bullshitting,” said Frank.

“I don’t think so.  It happens all the time.  The last twenty years, while the USA held up progress on cutting greenhouse gas emissions, is littered with professionals, possibly decent men and women with families, who put loyalty to their employer before loyalty to their loved ones.  Remember, they all say that Stalin was fond of children and small animals.”  Igor’s glass wobbled.

“Weird that,” said Joe.  “Do I put Mr Trew before Doris and the brats?”

“Nowt wrong with that,” said Frank.  “Just ordinary people doing their jobs.”

“Just doing their jobs, I see,” said Igor.

“Yep, just doing their jobs.”

“Just as Joe changes from being a quiet chap at home to being a furious martyr at Turf Moor, so the professional negotiator switches between personalities like Mr Jekyll and Mr Hyde.  At home he’s a loving father, and at work an indirect killer of children.  How does this work?”

“He who pays the piper.”

“But can it be that so many professional people with wealth and intelligence are just clowns acting out the script of a paymaster?”

Frank said that’s the professional contract – you lose the right to speak your mind.  You do what you’re told, not what you think.  Unconditional loyalty.

After a swig of beer he continued.  “But that’s what gets things done.  You don’t win wars without that.  And you don’t win football matches either.  What the Gaffer says goes,” he insisted.  “Look, it’s the only way to survive.  You need people who can do stuff they don’t believe in.  What about lawyers defending criminals, or bankers giving loans?  People don’t have a choice.  They just have to live their lives.”

But Joe didn’t agree.  “They’re bloody rolling in it, them tossers in the City.  Of course they have a choice.”

“A choice between the mortgage and Igor’s penguins?  When you’ve got a high maintenance wife and a couple of birds on the side and a mortgage on a place in London?”  Frank downed his pint.  “Dream on,” he said, wiping his mouth with the back of his hand.  “Integrity is a luxury.  More expensive than platinum.”

“And easier to fracture than a Faberge egg,” remarked the Professor.

“So no-one sticks to what they believe at home,” concluded Joe.  “But still, I mean if you’re on a few hundred grand…”

“If you’re on a few hundred grand of course you don’t walk away,” said Frank.  “You’ve more to lose.”

We finished up our beers while the celebrations continued around us.

Petitioning for winding up seems like a fantastic tool for dealing with climate change.  The government could petition for a whole range of enterprises to be shut down on the grounds of public interest: power plants, cement plants, steel mills and so forth.  Why use the EU ETS to do the dirty work?  But that wouldn’t be fair.  After all, they are just the symptoms.  Let’s get to the causes: advertising companies, television broadcasters, fizzy drinks manufacturers and fast foot merchants could all be struck off.

“Lightweights,” muttered Sir Godfrey Wolfram-Harbinger.  He savoured the memory of the early days of the Great Reforms, when he extended the public interest consideration to people as well as to companies.  He fondly recalled the very first two cases.  “Now who was it we first shut down?” he asked Dame Daphne.

“George something, dear,” said Dame Daphne looking up from her knitting.

“Ah yes, that’s right … George it was.  George…”

“Osborne, dear.”  Tickerty tack, tickerty tack.

“And Cowell.  I’m sure there was a Cowell.”

Tickerty tack.

“On the grounds of public interest.”

This is the true free-market response to climate change.  We don’t need laws.  We just need courts and wise judges.  Isn’t that how justice has been done since the very first tribesmen took their disputes over goats to village elders?

Eventually one case will hit.  A renegade judge, approaching retirement, and seeing his chances of celebrity trickling away like sand through the hour glass, will give the nod.

Instantly a great thundering will be heard from the heavens, clouds will blacken, crows will swarm in ugly and fearful formations, ants will stand ominously on their hind legs, dogs will whimper, and our two gods, Justice and Enterprise, will draw their daggers and tear, in blind fury, at each other’s throats.  Our whole civilisation will clasp at its ears to block off those horrible sounds of hot flesh being ripped and bones being snapped.  For that judgment will make our existence untenable.

The defendant utility will collapse like a house of cards under a tsunami of claims.  Then all other utilities will.  Heavy industry will follow.  Their bonds and loans worthless, their covenants stripped bare, the banking sector will disintegrate.  The printing presses of governments will heave into action again.

As the plaintiffs rejoice, dancing on the mangled corpses of coal-fired power stations and oil refineries, others, more daring, will start to sue private individuals for driving cars too fast and over-heating their homes.  Then, as we collapse into a beastly, gristly orgy of litigation, we will sue ourselves, since we, ultimately, are the ones at fault.

Everyone eventually owed himself or herself millions of dollars.  Overnight we became billionaires and bankrupts and the workings of our society ground to a halt … dandelion and knapweed encroached into places they hadn’t seen for decades.

One person who survived the frenzy was Dame Daphne Bulge [1].  It all happened when she was a young girl; she had hidden under the kitchen table – in those days she fitted there quite neatly.  And that was the first time that Godfrey Wolfram-Harbinger set eyes on her.  As a first-year trainee at leading law-firm, Herbert and Herbert, he had been sent out to search for survivors of that legal Armageddon, and had found Daphne cowering under the table, a frightened yet shapely filly, all trembling.  Godfrey, who decades later would be Sir Godfrey, Minister of Justice, took charge of the situation. Not one to take advantage, he did. They never looked back.

===

[1] See, for example, http://www.thebustard.com/?p=354

There are two separable problems.

1. They are funding a lignite-fired power plant.  But there are reasons which can justify that – for example, they claim that the new plant will be more efficient than the old one.

2. The EU is overriding the very legal and economic principles which it has itself implemented!

The EU ETS signals to the market that coal-fired power generation is undesirable.  As the EU ETS is a market mechanism it will only work if matters are left to the market.  The market needs to decide on its own that it does not want to fund coal-fired plants.  If a non-market institution intervenes in financing of a power plant, and, moreover, requires a non-market government guarantee for the financing, the EU is saying loudly and clearly: “We are happy to override the very mechanisms which we have implemented.”  When a government wilfully overrides the principles it embodies in its own laws, you start to get all sorts of problems.

Public funding of a lignite-fired power stations with a public guarantee seriously undermines the credibility of the EU’s faith in the market mechanism of the EU ETS.  It says that the EU’s own institutions do not accept the principles upon which the EU ETS is based.  This could have repercussions for how investors consider the EU, as its institutions are sending conflicting and dangerous messages.

What is going on?  The EIB proudly tells us that it is at the forefront of creating the low-carbon economy and so gets to handle the sale of 300 million EUAs for financing research and development into carbon capture and storage technology.  The EBRD tells us that it “is committed to promoting environmentally and socially sound and sustainable development in the full range of our activities here at the EBRD.”

Quite.  So now these people are funding a 600MW lignite-fired power station.

First, why should EU state institutions be funding a coal-fired power station when there are dozens of banks who don’t know where to put their cash?  I have no idea.

Second, why would they require a Slovenian government guarantee?  They require a guarantee because they know that otherwise coal-fired power is not viable because of the EU ETS and their policy to cut CO2 emissions.

The EU has an avowed intent to cut fossil fuel use.  So they create, with the EU ETS, a market incentive to make coal-fired power less appealing and make low-carbon power generation more appealing.  So far so good.

As a result of this the private sector says: “We don’t want to finance coal-fired plants because it is too uncertain.”  Good.  That’s what the scheme set out to achieve.

So now they want to build a coal-fired power plant in Slovenia.  And the private sector says: “That’s too risky.”

Instead of saying “Great, our EU ETS scheme is actually working,” the European bureaucrats rub their sticky hands with glee and say: “Great, we’ve managed to squeeze out the private sector, so now we can fund the plant ourselves, but because we’ve made coal-fired power unviable, we’ll require a state guarantee.”

You can’t get more crooked than that.  Creating a law which forces your clients to accept your own terms of business is what happens in a kleptocracy.

But then Günther calls.  “Hold on, “ he pants.  “Don’t publish that.  You are jumping to conclusions.  You’ve only got half the story there.  This project is making the plant far more efficient.  They are using supercritical technology.  Surely it’s better to introduce this highly efficient technology than let the plant carry on as it is.”

“Ah,” I say to Günther.  “Stop right there.  It’s a pity that it’s only the technology that is supercritical.  If you were supercritical, you’d see the holes in your argument.”

“Holes in my argument?” snorted Günther.

“Indeed,” I replied, offering him a glass of his favourite whisky.  “You see, the point of a cap and trade scheme is that it does not matter where reductions happen.  You make reductions in emissions where it costs least.  In theory, all power could be generated in one country, if it had immense hydro or wind resources, and then exported to the rest of Europe.  So for the EU ETS to work effectively you have to accept that not all countries will produce electricity and that electricity will be transferred between countries effortlessly.”

“Ja,” nodded Günther.  “Genau.”

“So, if Slovenia can’t generate enough green power, then it needs to import it.”

“Richtig,” agreed Günther.

“So the financing effort should be not directed towards prolonging the life of lignite-fired power plants, but towards improving Slovenia’s capacity at importing electricity,” I said.

“Yes but,” said Günther.  “What about Slovenia’s strategic need for its own power generation?”

“Ah,” I said.  “You’re right.  The EU ETS forgot about that.  It assumes one big happy EU, where national interests no longer exist.”

“You see,” said Günther.

This whole episode is so fraught with contradiction, that Connie Hedegaard and the people at Climate Action must be wondering what they are actually standing for.  It raises fundamental questions about the theory and practice of the EU ETS.  Connie Hedegaard and her people need to make a noise about this.  They should put the EIB and the EBRD in their place and certainly strip the EIB of its role in the NER300.  It is wrong for the EIB to be able to flaunt “green credentials” as a CCS financier while it is funding lignite-fired power generation.

If Slovenia wants lignite-fired power for strategic reasons, that’s fine.  It’s up to Slovenia.  But it shouldn’t be funded by the European project.

“Günther,” I cry, “where are you when I need you?”

Yet even as the stench of burnt lignite spreads across southern Europe, and the beaches of Croatia are darkened by toxic clouds, Günther has flown to Lesotho to judge a low-carbon knitting competition organised by the Lesotho International Women’s Club and held in the calm, colonial splendour of the Maseru Hilton.

I imagined a car driving into a wall, say, in a film. In one film the car hits the wall and it’s written off. That’s the recession. In another, less plausible, thriller, the car smashes through the wall and carries on on the other side, with some modifications to the bumper and bonnet.

The outcome seems to depend on the momentum of the car and the strength of the wall. If the car is a little Fiat tootling along at 30mph it will end up under a pile of bricks. A Hummer going at 80mph might make it through.

So probably if the economy is febrile, high energy prices cause recession and if it is robust then high energy prices will divert investment towards cleantech.

This is scary because we know for certain that economists and politicians don’t know how to make the economy robust. So the pre-condition for energy taxes or carbon pricing to work looks like something over which policy makers have little control and about which our understanding is still patchy.

Since the effects of climate change are bigger than the economy (they are expected to affect adversely well being inside and outside of the monetary economy) we should be looking hard for climate change policies whose effectiveness is not dependent on the state of the economy.