The 21st Century climate challenge

3Avoiding dangerous climate change: strategies for mitigationallowance trading, prices climbed to €30/tCO 2(US$38/t CO 2) in April 2006, beforecollapsing and stabilizing at prices below€1/t CO 2(US$1.3/t CO 2) in 2007. 47 Thereason for the collapse: publication of datashowing that the cap had been set aboveemission levels. 48 Overallocation, the shorttime-horizon for the first phase, and uncertaintyabout allocations in the second phasehave fuelled price volatility and kept pricesdepressed though there are signs of recovery(figure 3.2).• Windfall profits for the few. Carbon tradingduring the first 3 years of the EU ETS did littleto reduce overall emissions, but it did generatevery large profits for some. In the power sectorin particular, companies were able to covertheir emissions through free quotas, pass oncosts to consumers and benefit from marketopportunities to trade excess quotas. 49 TheUnited Kingdom Government estimates thatlarge electricity generators gained £1.2 billion(US$2.2 billion) in 2005. 50 Estimates for thepower sectors in France, Germany and theNetherlands put the windfall profit generatedthrough emissions trading at around €6billion (US$7.5 billion) for 2005. 51• Lost opportunities for revenue mobilization.CO 2emissions permits have a real marketvalue. For their holders they are the same ascash-in-hand. Selling quotas through auctioncan enable governments to mobilize resources,avoid political manipulation and achieveefficiency goals. This has not happened underthe EU ETS. In the first phase, a ceiling of5 percent was set on the share of allowancesthat could be auctioned. In the event, just onecountry—Denmark—took advantage of thislimited opportunity. Allowances have beendistributed on the basis of historic emissions,rather than efficiency—an arrangementknown as ‘grandfathering’. The result is thatgovernments have foregone opportunities forrevenue mobilization and/or tax reductions,with the ‘rents’ from emissions tradingprivatized.Figure 3.2Carbon prices in the European Union have been volatileEU Emission Trading Scheme (ETS) permit prices ( /t CO 2)353025Information on oversupply of Phase 1permits becomes publicPhase 1 (spot price)Phase 2 (for delivery December 2008)201510501 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8200520062007Source: Point Carbon 2007.130 HUMAN DEVELOPMENT REPORT 2007/2008