Disappointment about the carbon price does not stack up

There is something strange about people’s disappointment at the low carbon price.

People disappointed at the low carbon price say they are disappointed because the carbon price – being low – is not acting as a signal to long-term investment in low-carbon infrastructure.

But the current carbon price should not be expected to act as a signal to long-term investment in low-carbon infrastructure.  How could it?  The carbon price can be one thing one day, and another thing another day.  Imagine an investor is planning a power plant which will be commissioned in 2025 and will last to 2075.  How could he take the cost of a commodity today to be a guidance as to the cost of a commodity over the 50 years from 2025 to 2075?  He would be mad to.

So when people say that the current carbon price is failing to signal to investors to invest into low-carbon technology, they are right.  It does not act as a signal.  But it never should and should not be expected to!  So they are wrong to be disappointed that the price does not signal, since they should not even expect it to signal.

Long-term investors need crystal clarity as to political targets decades ahead.  Board members making decisions need a very clear and simple message.  Something like this: The cap in 2030 shall be 50% of the 1990 level.

With a simple statement like that, investors will be motivated and begin to commit to low carbon investments, irrespective of the current price.

But do not expect this to result in consistently high EUA prices.  Why should it?  If these investors make their investments then emissions will remain below the cap.  So once there is a clear motivation for investors, we should assume that the price will remain low.  Ironically, the success of the scheme guarantees low prices.

Having spoken to professionals who deal with investing in power plants, I believe that the argument is correct.  So how come there are people who say that the current price should be high because it should act as a signal to long term investment?  How come the CEO of a power company says this?

One answer is that some people might not have thought it through and might be speaking hastily.

Another answer is this.  The current carbon price does influence one thing: the merit order of power plants.  If the carbon price is high, then gas-fired power plants are preferred; if the carbon price is low, then coal-fired power plants are preferred.  So the people who are disappointed in a low current carbon price are perhaps the people who operate gas-fired power plants or other lower-carbon power plants which operate in a competitive market (i.e. do not benefit from feed-in tariffs independent of market prices) – because the low carbon price means they lose out to coal-fired plants.  But the viability of low-carbon operations today is not connected with investment into low-carbon infrastructure in the future.

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