Germans REALLY Don't Understand Markets (part 94)

Now I know this becomes repetitive** …   and by “Germans” here, I mean … and their pocket euro-wallahs in Brussels: 

Europe Considers Steps to Curb Speculation in Carbon Market 

(Bloomberg). The European Union is considering curbs on speculation in the world’s biggest carbon market where record prices have lured hedge funds in search of profits. EU emission permits jumped to an all-time high of EUR 40.12 on Thursday, extending their gains to about 70% over the past year. That gain, in part, has been down to large-scale investors speculating in the market. Europe’s cap-and-trade program, started in 2005, is the region’s key policy tool to cut pollution. The European Commission, the EU’s regulatory arm, could introduce a limit on the number of CO2 allowances that can be held by investors in a central registry of the Emissions Trading System, according to people with knowledge of the matter. Doing this would prevent financial investors holding too much sway in the market.

Sheesh.  

(a) the record high prices this week have b*****-all to do with speculation, and EVERYTHING to do with very cold weather, and euro-policies that are SPECIFICALLY DESIGNED TO INCREASE THE PRICE OF CARBON.

Can I make myself plainer?  FFS!

(b) if you suppress spec interest in a market, you starve it of liquidity – the quickest route to the death of the market.

To give an example:  20 years ago, the Next Big Thing was going to be weather derivatives.  Oh, people said, this’ll be a tremendous market – loads of people want to hedge their exposure to weather: look, lots of people insure against it already – and lots more could benefit from the clever products you can design using derivatives. 

Well, the “market” was duly set up, and away it went.  Lots of capable banks and energy companies and trading houses and exchanges invested time & effort & people to become players.  But … nothing, much.  

Why?  Because nobody is willing to take the other side of the bet:  literally no punter is willing to gamble on what the temperature will be next July!  (Unlike the price of crude oil, or gold, or the FTSE, or Bitcoin etc etc.)  So – no speccies in the “market” … and no market.  Simples.

Left to their own devices, these euro-types are going to make some big, big mistakes.  Can a Tobin Tax be far behind?

ND 

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** For those who haven’t heard this story from me before:  When the EU Emissions (i.e. carbon) Trading Scheme was first mooted, the Germans insisted that the initial allocation of permits should be fairly lavish, and free (as opposed to auctioned).  In this way, they said, it would have no impact on German electricity prices (based, as they were, on coal).  I and others told them that, whatever became the price of carbon when trading started, the price of electricity would increase by exactly that amount, free allowances or not.  Oh no, they said – how could that be?  All our generators have sufficient free allowances.  Yes, Jürgen, but as soon as there’s a market price on them, they have an opportunity-value … 

A lo!  When market trading of carbon commenced, the price of electricity in Germany (as anywhere else where prices were set by fossil fuels), went up by exactly the coal-equivalent amount!  Teuful! – how can this be?!  And the Bundestag held a parliamentary inquiry!