McKinsey is back....version 2

No classes today, hence woke up at 9am and really lazing around...

It appears that due to the financial crisis, companies under the EU ETS will have surplus EUAs of up to EURO1 billion to sell in the market, due to decreased production and demand. Selling of these EUAs in the market is likely to lead to windfall profits as they were allocated EUA permits for free. The situation is shown in this Forbes report. The effect of this sell-off is that carbon prices have plummeted, most recently to EURO11 for an EUA.

There are some points worthy of note in this issue:

1) The surplus and sell-off does not hurt the cap and the environmental integrity of the scheme. The cap is still being met regardless because less fossil fuels are being burnt. In terms of the environment and the atmosphere, it doesn't care how it's done.

2) But windfall profits do bring into question the ambitiousness of the cap.

3) the windfall profits would not be there if the permits were auctioned instead of given away for free by government.

4) Even though there are suplus EUAs, they are being bought. Because EUAs can be banked into the third phased whether they are needed for compliance or not, the price will unlikely drop to zero like the first phase. Companies will likely buy "bargain" EUAs in anticipation that EUAs will be scarce in the third phase, thus pushing prices back up.

5) Some industrials whose existence may be threatened before compliance date 2012 may sell all the EUAs they have, even those they need to comply, especially if they will shutdown by 2012.

On another matter, McKinsey's long awaited and "infamous" cost abatement curve version 2 is here.

Personally I'm not a fan of this curve as it's overused by proponents of cleantech and dare I say academics without seriously thinking through all the intangibles such as incentives, inconvenience of installing new technology and equipment, political lobbying etc. It oversimplies the myriad of factors that need to be considered when talking about switching.

But I'll have a read of it and make some comments later ; p.