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Europe’s $287 Billion Carbon ‘Waste’: UBS Report

SWISS banking giant UBS says the European Union’s emissions trading scheme has cost the continent’s consumers $287 billion for “almost zero impact” on cutting carbon emissions, and has warned that the EU’s carbon pricing market is on the verge of a crash next year.

In a damning report to clients, UBS Investment Research said that had the €210bn the European ETS had cost consumers been used in a targeted approach to replace the EU’s dirtiest power plants, emissions could have been reduced by 43 per cent “instead of almost zero impact on the back of emissions trading”.

Describing the EU’s ETS as having “limited benefits and embarrassing consequences”, the report said there was fading political support for the scheme, the price was too low to have any significant environmental impact and it had provided windfall profits to market participants, paid for by electricity customers.

The report’s criticism of the EU’s ETS follows Barack Obama’s confirmation last week that the US would not have a cap-and-trade scheme and Canada’s refusal to implement an ETS.

The opposition last night seized on the UBS report, with climate action spokesman Greg Hunt saying it destroyed the Gillard government’s argument that pricing carbon was the lowest-cost way to cut emissions and that “the world’s biggest carbon tax just got bigger”.

Mr Hunt last night demanded the government release the assumptions underpinning the Treasury modelling used to assess the impact of the carbon tax. The move follows repeated demands from Coalition senators Mathias Cormann and Ron Boswell for the modelling to be released after official evidence to Senate hearings that the underpinning data was not publicly available.

A spokesman for Climate Change Minister Greg Combet said that, by starting with a fixed price, the carbon price mechanism would give businesses certainty over their obligations and time to gain familiarity with the system before it moved to a flexible price from 2015. “All the advice from leading economists and respected institutions like the Productivity Commission, the OECD and the IMF is that market mechanisms to price carbon are the lowest-cost and most efficient way of reducing carbon pollution,” he said.

In the November 17 report, UBS forecast the EU carbon price would average €5 a tonne for 2012-13 with a floor of €3, attributing the slump to a large surplus of permits. “We see few buyers of the surplus until after a ‘crash’,” the report said.

It argued the surplus could continue until 2025 when the ETS would work as it was supposed to.

If the forecast came to pass, the Australian fixed carbon price of $23 a tonne, to be paid by the nation’s 500 biggest polluters from July 1 next year, would be more than three times the average of the EU price for 2012-13.

Both the Business Council of Australia and the Australian Industry Group have called for a lower starting price of $10 a tonne while the Australian Chamber of Commerce and Industry has opposed a carbon price in the absence of an international agreement.

European carbon prices have already been under pressure as part of the market turbulence triggered by the European debt crisis. Analysts are predicting EU carbon permits may fall to a record low €8.60 this week on a “future supply glut”.

UBS said sources of the oversupply of permits include the European Investment Bank, EU governments, Russia and Ukraine.

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