Dow Says World Carbon Market Needs Less Intervention to Work

The world’s first global carbon market will need less intervention by regulators to succeed, Dow Chemical Co. said.

Politicians must avoid earlier missteps in Europe that included bans on imported carbon credits and a temporary cut of permits to curb a glut, said Russel Mills, director of energy and climate policy at the biggest U.S. chemicals maker. Such interventions need to be avoided in a post 2020 worldwide market presented by the European Union on Sept. 29 because both nations with mandatory limits on carbon and those without need to sign up, he said.

European Union leaders will discuss next week how to reform the world’s biggest emissions market and set targets for 2030 as part of a planned global accord. European industry, already battling with natural gas prices more than double those in the U.S., is seeking a cost-effective climate policy as the economy shows signs of slowing amid sanctions against Russia.

“Constant political interventions in the market dilutes the credibility, which in turn reduces the broader use of effective market approaches by other countries,” Mills said Oct. 13 by phone. “Concern on cost impacts is the single biggest factor slowing progress toward a global climate agreement, so it’s perverse that market approaches, the most cost-effective tool, are struggling to find more global market acceptance.”

Too Generous

The nine-year-old EU market has an unprecedented glut of permits because a cap set before the 2008 financial crisis proved too generous. Today’s surplus of 2.1 billion metric tons, or more than a full year’s supply, may widen to 4.5 billion tons by 2020, environmental group Sandbag said yesterday in a report.

The EU is withholding about six months’ supply of permits for return by 2020 under a policy known as backloading. Such “short-term fixes” rather than permanent repairs have damaged the market’s reputation, Mills said.

The European Commission proposed amendments to keep the market effective, Isaac Valero-Ladron, a spokesman in Brussels, said Oct. 14 by e-mail. The changes, approved by the European Parliament and governments, were “also supported by many other companies,” he said, without elaborating.

The EU distributes free permits to protect industrial companies from steel to paper makers from rising costs. Most utilities must purchase allowances.

Gas Prices

Benchmark carbon permits rose 25 percent this year on the ICE Futures Europe exchange in London. Front-month U.S. gas prices are 43 percent of those in the U.K., according to ICE and New York Mercantile Exchange data.

Midland, Michigan-based Dow has European units in nations from Germany to Italy. Its EU emissions were 3.6 million tons in 2013, against free allowances of 2.8 million, EU data show.

Metals and cement companies were given average surpluses of 20 percent or more last year, while factories with combustion installations and refineries had shortages of about 19 percent, according to data from Bloomberg New Energy Finance. Other industries had an average surplus of 7 percent, the data show.

Lawmakers’ efforts to withhold supply of some contracts may hand too much influence over prices in the carbon market to factories that are awarded free permits, according to Mills.

“Some industry sectors, but not the chemical industry, are sitting on large quantities of free allowances,” he said. “If they see political initiatives to take more allowances out of the market, they get tempted to wait for the price to rise, which creates a liquidity squeeze for buyers like the power producers.”

UN Credits

The EU has intervened in its market before, barring the use of UN carbon credits from emerging countries in the bloc after 2020. The price of Certified Emission Reductions, as the UN credits are known, plunged 99 percent since the end of 2008.

“Carbon markets are an elegant tool when they are kept simple,” Mills said, endorsing Europe’s insistence that all major economies gain coverage under the new climate deal. “When you introduce complications like banning international offsets or over-restricting liquidity, they can quickly get ugly.”

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