Thursday, December 10, 2009

The marvelous funny money of carbon credits

Normally an economy doesn't like it when a manufacturing plant is closed down and its industry is shipped to India. But a whole new calculus enters the picture when carbon credits are involved. Now an industry can shut down a plant, not because it wasn't making money, but because it was worth more in the carbon credits the company can get for shutting it down. Then it can move the factory to India and save money producing steel while earning money for the carbon it isn't producing in England, but now is producing in India. You and I aren't clever enough to come up with something so stupid. EU Referendum has the details of how this is working out with Corus to close down its Redcar steel-making plant. In the ordinary scheme of things, the company would keep the plant open.
Earlier this year, Corus – part of the Tata Group Europe - disclosed that its UK steel inventory was "close to exhaustion" and analysts are expecting improved earnings from second-half trading as production is increased to meet a rebound in demand.

Mothballing the efficient Redcar plant (with no expectations of its re-opening) thus fails to make obvious commercial sense, especially as Tata bought the plant only in 2007 as part of its strategy to give it better access to European (including UK markets).
But closing it and getting carbon trading allowances from the EU is worth more than keeping it open and making steel. It has 7.5 EUAs - the allowances given out by the EU. And by manipulating the system they can vastly increase the value of those allowances.
For Corus, the current value of its windfall is £100 million and, with an increased carbon price and its additional allowances, the asset value of its holdings could amount to £400 million.

To make up for accumulated and expected losses, though, the company says it is has identified £600 million "in savings and cash benefits" from its UK operation through to next March.

With redundancy and decommissions costs, very little of that can actually come from the process of closing down the Redcar plant. But, with a capacity of 3,000,000 tons of steel, closure of the plant will deliver further "savings" over 6 million tons of carbon dioxide, worth an additional £80 million per annum at current rates but around £200 million at expected market levels.

This, even for a company the size of Tara steel, is a considerable windfall, over and above the money it will already make from the EU scheme. But, with a little manipulation, the company can still double its money. By "offshoring" production to India and bringing emissions down – from over twice the EU level - to the level currently produced by the Redcar plant, it stands to make another £200 million per annum from the UN's Clean Development Mechanism.
This is so sweet! They get EUAs for both closing the plant and for opening it up in India.
Thus we see Indian plants being paid up to £30 a ton for each ton of carbon dixoide "saved" by building new plant, while the company which owns them also gets gets paid £30 for each ton of carbon dioxide not produced in its Redcar plant. That gives it an estimated £400 million a year from the closure of the Redcar plant up to 2012 – potentially up to £1.2 billion. And that is over and above benefitting from cheaper production costs on the sub-continent.
The new plant will produce no less carbon than the old plant, but the company will get a windfall in its carbon allowances. All brought to you by the EU paying one company to relocate from a European company, thus laying off European workers to move to India and employ Indian workers. Isn't that a marvelous idea? Only bureaucrats so totally enthralled with their schemes to address global warming could come up with such a convoluted and silly plan.

(Link via James Taranto)