As coal comes back into fashion, how serious are we about carbon reduction?

The Times
December 10, 2008
Carl Mortished: World business briefing

Peering nervously into the dark tunnel of climate change policy, Europe’s political leaders hesitate. Gordon Brown says he can see a chink of light in the distance and he stumbles into the gloom. Silvio Berlusconi says the British are silly and declines to follow. Angela Merkel, the German Chancellor, says she can see the dim glow but wonders whether it might be a train.
She is right; the light at the end of the tunnel is a coal train, a diesel juggernaut pulling 100 wagons laden with dusty, carbon-rich but very cheap fuel. Even as European Union leaders were preparing to meet in Brussels on Thursday for talks on cutting carbon emissions, the world’s energy marketplace was rushing towards them, pistons pumping and whistle blowing.
Can they hear it? Europe’s CO2 emissions are falling. Deutsche Bank is forecasting a 10 per cent fall in emissions in 2009 against last year’s level. The price of coal, gas and oil is cheaper by the day and, even more embarrassing, the price of a permit to emit a tonne of carbon has collapsed on Europe’s emissions trading system.
With fuel prices as they are, the margin from burning coal is unbeatable, even after adding the cost of buying carbon allowances at €14 a tonne. According to Deutsche Bank’s calculations, a fuel switch from dirty coal to cleaner natural gas would require a carbon price of between €25 and €30 a tonne. Estimates of the long-running carbon price needed to justify investment in carbon capture and storage technology vary between €40 and €50 a tonne.
Forget it. This much-lauded technology of stripping out CO2 and pumping it into spent oil wells is at the heart of many cherished plans and projections, but where is the full-scale demonstration plant? Where are the wagons of cheap coal being transformed economically into kilowatt hours with carbon dioxide piped harmlessly into subterranean pits?
For the next two or three decades, the picture is emerging of coal for the poor, more expensive gas and nuclear power for those on middle incomes and wind turbines for the super-wealthy. Wind is a fringe benefit for Britain: it works at the margins but it is too unreliable and expensive to replace the 22 gigawatts of baseload power that this country needs if it is to replace elderly power stations over the next 15 years. Nuclear will fill some of the gap but Europe’s nuclear industry is just recovering after decades of ruinous neglect. For an electricity generator, the market signal is absolutely clear: burn coal, make cheap power and speed the economic recovery.
The market wants to go with coal and there is the rub. Having erected this fantastic mechanism – the emissions trading system – and puffed its merit on political platforms worldwide, Europe’s leaders are now embarrassed, frantically brushing the coal dust off their cuffs. The original idea behind the scheme was that it puts a price on carbon by enabling companies to trade permits, known as EU allowances to emit CO2. These allowances were issued free by governments in the early stages of the ETS. Too many were issued and falling industrial output now means that companies need fewer of them. Unless governments drastically curtail the number of permits in the future by forcing companies to pay for them, the cost of carbon pollution will continue to fall. Deutsche Bank reckons a decline to less than €12 a tonne is possible. but the auctioning of permits will push up power prices as the recession deepens. A politically dangerous strategy.
The air is now fetid with antimarket sentiment. Poland wants the carbon price to be collared with a cap and a floor. Ed Miliband, Britain’s new Energy and Climate Change Secretary, was last month asking energy bosses about their plans for price reductions and yesterday he spoke of a “strategic role for government” in energy policy. The Government would take responsibility in “setting the carbon price”, he said. Why bother?
Carbon is now central to the pricing of energy, if we are to believe the EU target of reducing emissions by 20 per cent by 2020. So, when the minister talks of setting a carbon price he is talking about setting energy prices. Why not go all the way and regulate energy prices? Why not bring back the Central Electricity Generating Board?
It is easy to see where Mr Miliband’s thoughts are drifting. The carbon price is becoming an irritation rather than a useful tool by which the cost of pollution is calculated and priced into the cost of fuels. However, carbon is not a real market. No one wants carbon; it is not a commodity, like wheat or gold, to be hoarded or consumed. If its price is falling precipitously, it is because companies denied credit from banks and desperate for funds are selling their carbon permits for a bit of free cash.
Politicians invented the carbon market, but it is only a tax like any other. Instead of fiddling with carbon permits, Europe’s leaders should take a deep breath and make up their minds. Do they want cheap energy and a rapid recovery from this grim recession? If so, take the coal train and use the profits of recovery to build civil defences against climate change.
Or, are we sincere about carbon reduction? That road is harsh: it means taxing all hydrocarbons, doubling road fuel duty and raising domestic electricity bills as recession deepens. It’s a policy of more pain now in return for less pain tomorrow. It requires enormous political courage, a commodity that has been taxed almost to extinction.
carl.mortished@thetimes.co.uk