HRG. 113-623. 2014-7-22. U.S. Security implications of international energy and climate policies and issues. U.S. Senate 113th congress
MARY HUTZLER, DISTINGUISHED SENIOR FELLOW, INSTITUTE FOR ENERGY RESEARCH, BERLIN, MD
EUROPEAN UNION EMISSIONS TRADING SCHEME
The Emissions Trading Scheme (ETS) was launched by the EU in January 2005 as an attempt to comply with the 1997 Kyoto Protocol. It was the world’s first cross-border greenhouse gas emissions (GHG) trading program, regulating more than 11,500 installations and about 45% of total EU carbon dioxide emissions. Under the ETS, European companies must hold permits to allow them to emit carbon dioxide. A certain number of those permits were distributed at no cost to the industries that must reduce their output of carbon dioxide emissions. If businesses emit less carbon dioxide than the permits they hold, they can either keep the excess permits for future use or sell the excess permits and make a profit on them.
The early results of the program were that EU emissions were not significantly lowered until the global recession hit in 2008, which lowered emissions for all countries.
There were also misuses and abuses in the system because of its complexity, politicized decision-making, and the incentive to manipulate it.
Before the global recession hit, some EU countries saw faster carbon dioxide emissions growth than the United States, which was not subject to the policy. From 2000 to 2006, the rate of growth of European emissions under the cap-and-trade policy was almost 5 times higher than the rate of growth in emissions in the United States. 1 After the global recession, however, EU carbon dioxide emissions in 2009 were almost 8% below 2008 levels. 2 Due to the global recession, carbon dioxide emissions, in many cases, were lowered below the targets set by the cap-and- trade policy, so companies did not have to take further actions to reduce their emissions. 3 Severe downturns in economic activity result in significant reductions in emissions.
Because the free allocation of permits was based on future estimates of higher emissions levels, which did not materialize, there were too many free government-issued permits. As a result, companies hit hard by the recession were able to make profits by selling the excess permits but chose not to pass those savings onto their customers. Consumers ended up paying higher energy and commodity costs; taxpayers paid for the program’s implementation; and a new middleman was created to run the carbon permit trading program. 4
Europe found the costs of the program to be large. In 2006, individual business and sectors had to pay $24.9 billion for permits totaling over 1 billion tons. In 2011, the global carbon markets were valued at US$176 billion, with 10.3 billion carbon credits traded.5
The World Watch Institute estimated the costs of running a trading system designed to meet the EU’s Kyoto obligations at about $5 billion. The costs of a trading system to meet the EU’s commitments of a 20% reduction by 2020 (against a 1990 baseline) were estimated to be about $80 billion annually. 6
Unlike traditional commodities, which at some time during the course of their market exchange must be physically delivered to someone, carbon credits do not represent a physical commodity, which makes them particularly vulnerable to fraud and other illegal activity.
Carbon markets, like other financial markets, are at risk of exploitation by criminals due to the large amount of money invested, the immaturity of the regulations and lack of oversight and transparency.
The illegal activities identified include the following :
- Fraudulent manipulation of measurements to claim more carbon credits from a project than were actually obtained
- Sale of carbon credits that either do not exist or belong to someone else;
- False or misleading claims with respect to the environmental or financial benefits of carbon market investments
- Exploitation of weak regulations in the carbon market to commit financial crimes, such as money laundering, securities fraud or tax fraud;
- Computer hacking/ phishing to steal carbon credits and theft of personal information.
German prosecutors searched 230 offices and homes of Deutsche Bank, Germany’s largest bank, and RWE, Germany’s second-biggest utility, to investigate 180 million euros ($238 million U.S.) of tax evasion linked to emissions trading.
The U.K., France, and the Netherlands also investigated carbon traders, who committed fraud by collecting the tax, and disappearing without returning the tax funds.
According to estimates from Bloomberg New Energy Finance, about 400 million metric tons of emission trades may have been fraudulent in 2009, or about 7% of the total market.8
Tax evasion linked to emissions trading is still a problem. This year Frankfurt prosecutors sought the arrest of a British national in connection with suspected tax fraud worth 58 million euros ($80 million).9
Another problem is the lack of predictability regarding the emissions permit price. Companies need to know the price for long-term planning to decide on what actions they should take. The EU permit price ranged by a factor of 3, but even at the higher price range, it was insufficient to meet the emission reduction targets before the global recession hit. 10
A cap-and-trade policy is a highly complex system to implement because there are a large number of participants and the components of the system are difficult to get right as EU’s experience has shown.
Last year, the EU commenced phase three of the ETS toward meeting their target of a 40% reduction in greenhouse gas emissions below 1990 levels by 2030.11 Phase 3, which has a number of significant rule changes, will continue until 2020. As of 2011, carbon dioxide emissions of the original 27 member EU were just 8% below 1990 levels, and the majority of the reduction was achieved by the global recession.
That means the EU has a long way to go to meet its target. In the meantime, energy prices have increased and more and more Europeans are facing fuel poverty, meaning they pay more than 10% of their household income for energy. For example, industrial electricity prices are 2 to 5 times higher in the EU than in the United States and are expected to increase more. Europe’s once comfortable middle class is being pushed into energy poverty as a result of the carbon reduction measures and EU’s renewable programs. According to the European Commission, electricity prices in the Organization for Economic Cooperation (OECD) Europe have risen 37% more than those in the United States when indexed against 2005 prices. By 2020, at least 1.4 million additional European households are expected to be in energy poverty. EU’s ETS and clean energy programs have not significantly reduced emissions, but rather have dramatically raised energy prices, increased national debt, driven businesses out of Europe, led to massive job losses and unemployment, greatly increased energy poverty, and have been plagued by fraud and corruption. This economic malaise, in turn, has made Europe less capable of expending funds for their national defense needs and has contributed to the weakening of multilateral defense organizations like NATO. The European members of NATO are now spending less than 2% of their GDP on defense spending, which is below NATO guidance. 12
AUSTRALIA’S CARBON TAX
Australia implemented a carbon tax in 2012. The carbon tax, which is currently set at $24.15 Australian currency ($22.70 U.S.) per metric ton, was initially implemented in July 2012 and was designed as a precursor to a cap and trade scheme, with the transition to a flexible carbon price as part of the trading program beginning in 2015. The tax applies directly to around 370 Australian businesses. But the September 7, 2013, election put a damper on the program. Australia’s new government wants to dismantle the legislation that levies fees on carbon emissions and replace it with taxpayer funded grants to companies and projects that reduce emissions. The Emissions Reduction Fund would be funded at A$2.55 billion ($2.4 billion U.S.). 13
Repealing Australia’s carbon tax on July 1, 2014, is estimated to :
- Reduce the cost of living of its citizens—the Australian Treasury estimates that removing the carbon tax in 2014 to 2015 will reduce the average costs of living across all households by about $550 more than they would otherwise be in 2014 to 2015.
- Lower the cost of retail electricity by around 9 percent and retail gas prices by around 7 percent than they would otherwise be in 2014 to 2015.
- Boost Australia’s economic growth, increase jobs and enhance Australia’s international competitiveness by removing an unnecessary tax, which hurts businesses and families.
- Reduce annual ongoing compliance costs for around 370 entities by almost $90 million per annum.
- Remove over 1,000 pages of primary and subordinate legislation.
Australia’s lower House of Parliament voted to scrap the carbon tax on July 14, and the Australian Senate voted in favor on July 17, 2014.15 According to Tony Abbott, Australian Prime Minister speaking at a news conference, ‘‘Today the tax that you voted to get rid of is finally gone, a useless destructive tax which damaged jobs, which hurt families’ cost of living and which didn’t actually help the environment is finally gone.’’ The repeal will save Australian voters and business around A$9 billion ($8.4 billion U.S.) a year.16 Australia’s residents found the carbon tax experience to include soaring electricity prices, rising unemployment, income tax hikes, and additional command-and-control regulations. Electricity prices increased 15 percent over the course of a year (which included the highest quarterly increase on record), and companies laid off workers because of the tax. Further, government data shows that the tax had not reduced the level of Australia’s domestically produced carbon dioxide emissions, which is not surprising, since under the carbon tax Australia’s domestic emissions were not expected to fall below current levels until 2045.17
To reduce greenhouse gas emissions to comply with the Kyoto Protocol, Europe (EU) set mandates for renewable generation (20% of its electricity to be generated by renewable energy by 2020) coupled with hefty renewable subsidies as enticements.
The Europeans have found that these subsidies have grown too large, are hurting their economies, and as a result, they are now slashing the subsidies, so enormous that governments are unilaterally rewriting their contracts with renewable generating firms and reneging on the generous deals they initially provided.
1 Energy Information Administration, International Energy Data Base.
3 The Wall Street Journal, Cap and Trade Doesn’t Work, June 25, 2009.
4 The Wall Street Journal, Cap and Trade Doesn’t Work, June 25, 2009.
5 Interpol, Guide to Carbon Trading Crime, June 2013.
6 The Wall Street Journal, Cap and Trade Doesn’t Work, June 25, 2009.
7 Interpol, Guide to Carbon Trading Crime, June 2013.
8 Bloomberg, Deutsche Bank, RWE raided in German probe of CO2 tax, April 28, 2010.
9 Reuters, Germany seeks arrest of Briton in carbon trading scam, April 10, 2014.
10 Bloomberg, Deutsche Bank, RWE raided in German probe of CO2 tax, April 28, 2010.
11 European Commission, The EU Emissions Trading System.
12 Defense News, U.S. Pushes NATO Allies to Boost Defense Spending, May 3, 2014.
13 Huffington Post, Australia’s Carbon Tax Set for Final Showdown, July 14, 2014.
14 Department of the Environment, Australian Government, Repealing the Carbon Tax.
15 ABC, Senate Passes Legislation to Repeal Carbon Tax, July 17, 2014.
16 Wall Street Journal, Australia Becomes First Developed Nation to Repeal Carbon Tax, July 17, 2014.
17 Australia’s Carbon Tax: An Economic Evaluation, September 2013.