At the time of writing, events in the Ukraine had taken a rather dramatic turn. Russia had sent a 270 vehicle “aid” convoy to the Ukraine claiming that it is providing humanitarian assistance with the aid of the Red Cross. Red Cross spokespersons were saying that the Russians had barely mooted the project with them and they were certainly not on board, or not yet, anyway.

At the time of writing, events in the Ukraine had taken a rather dramatic turn. Russia had sent a 270 vehicle “aid” convoy to the Ukraine claiming that it is providing humanitarian assistance with the aid of the Red Cross. Red Cross spokespersons were saying that the Russians had barely mooted the project with them and they were certainly not on board, or not yet, anyway. The Ukrainian government is convinced the whole thing is a pretext for Putin to send in armed troops to “protect” the humanitarian mission of the convoy – and no one is too sure how things will pan out.

What is certain, however, is that the Russian rouble is again nudging the lows set back in March and could well see further declines. From mid-March onwards, the Russian stock market has been the worst performing out of the larger emerging markets. There was a sharp upward correction through July from the March lows, but by mid-August the market was almost two thirds of the way back to those lows. According to a Reuters report, the Russian bond market has performed equally badly. Anyone who bought rouble-denominated debt in 2014 would be down 14%, according to the JPMorgan GBI-EM index.

The sanctions imposed by Europe, the UK and America on targeted individuals and institutions in Russia are taking their toll, as is the flight of capital out of the country. On top of this, Putin’s retaliatory measure, imposing a food ban on products from countries supporting the sanctions measures, is already escalating food price inflation in Russia. However, the pain is not only being felt by Russians. A recent Bloomberg article points out that the former Soviet satellites are getting caught in the crossfire of sanctions, which is hurting their economies and adding to months of sagging Russian demand for their exports. Finland, Poland, Greece and France have already submitted claims to the EU for compensation and a Hungarian official is cited in the Hungarian press as saying that small to medium sized Hungarian businesses stand to lose around £340 million and that Hungary too, should put in a claim for compensation for losses resulting from EU sanctions.

Another Bloomberg article cites Vladimir Tikhomirov, chief economist at BCS Financial Group in Moscow saying that there was a strong possibility that the fourth quarter of 2014 would see “a negative surprise” as far as the Russian economy is concerned, as there will be more significant effects from sanctions and an inflation jump due to food price rises as a result of Putin’s related food bans.

Currencies across the region are coming under pressure as a result of the troubles in the Ukraine. As well as the rouble’s woes, currencies from Eastern Europe make up five of the six worst-performing emerging market currencies through July, according to Bloomberg. At the same time, stock exchanges in Bulgaria, the Czech Republic and Hungary joined Russia in July as part of the world’s 10 biggest declining markets.

Despite Russia’s economic woes there is no sign that Putin intends to back down anytime soon. Nationalism is generally able to trump economics for a good while, but eventually Putin is going to have to find a way of restoring the Russian economy to health or face a backlash at home. The chance that he can solve Russia’s economic challenges while stirring the pot in the Ukraine have to be slim to vanishing.

The price of adventure – Russian counts the cost is republished with permission from Q Finance.

The post Russia Counting the Cost of Adventure in Ukraine appeared first on Economy Watch.

With its economy flat lining and being held up by oil and gas exports, Russia desperately needs to increase the scale of those exports. On the face of it the massive $400 billion deal Russia signed with China on 21 May, for a 30 year gas supply contract, looks just the ticket to deliver that increase over the long haul. However, the deal has a number of non-trivial obstacles to overcome, chief of which are disagreements between China and Russia over pricing and the difficulty Russia may find in funding the required pipeline.

With its economy flat lining and being held up by oil and gas exports, Russia desperately needs to increase the scale of those exports. On the face of it the massive $400 billion deal Russia signed with China on 21 May, for a 30 year gas supply contract, looks just the ticket to deliver that increase over the long haul. However, the deal has a number of non-trivial obstacles to overcome, chief of which are disagreements between China and Russia over pricing and the difficulty Russia may find in funding the required pipeline.

The stakes are high, and not just for Russia. A Reuters article argues that the deal could well bring down gas prices across Asia, pointing out that this would be a huge plus for Japan, China’s long time rival and the world’s biggest buyer of liquefied natural gas (LNG). To make the deal work, Russia will need to build a new pipeline linking its Siberian gas fields to Chinese cities. The idea is for gas to start to flow through the pipeline from 2018, building up to a steady 38 billion cubic meters per year.

Reuters quotes a possible price between the parties as translating to around $10.00 to $10.50 per million British thermal units (mbtu). If this is true, it will work out to around $3 less than the current average price for Asian gas, which is around $13.00 per mbtu, spelling the end for the so-called “Asian premium” on gas prices. Reuters comes at the deal from the idea that plentiful cheaper Russian supplies will put downward pressure on LNG pricing. Since Japan spent $70 billion in 2013 on LNG shipments to replace nuclear power generation after the Fukushima core meltdown, and currently has to pay top prices for LNG, the Chinese will in effect be extending a helping hand to one of their biggest commercial rivals.

However, in an insightful blog, the oil and gas expert Dr Kent Moors points out that while the Russia-China deal may well turn out to be everything Russia hopes it will be, there are issues. The deal, as is usual with Russian gas deals, is in the form of a take-or-pay contract. This means that China has to commit to taking a certain quantity of gas each month or pay as if it had taken the entire quantity. The problem with this, Moors points out, is that “China does not need, nor can it absorb, the volume called for in this deal”. He continues:

“At present, gas accounts for no more than 30% of China’s energy needs. What’s more, that total is already completely met for at least the next six years, with a combination of domestic production (which is going to increase – China has the largest extractable shale gas reserve in the world) and ongoing import accords with Turnkmenistan and Myanmar. Also, the infrastructure [in China] does not even exist to use what Russia expects to sell. It might in a decade, but Gazprom needs the revenue now.”

Then there is the fact that Russia is also in talks with Japan and Korea to provide them with major gas flows. Its most cost-effective way of doing this would be to have a single pipeline to China with branches off to Korea and Japan. But, according to Moors, China wants a dual pipeline all to itself, so Gazprom is probably looking at having to fund an exceedingly large capital expenditure program in order to turn all of this into a reality – all of this in a flat Russian economy.

To make matters even tougher, Moors’ recent blogs argue that, since Putin’s Ukraine adventure and the annexation of Crimea, Gazprom is now under attack from the West which is actively seeking to block Gazprom deals and pipeline routes any which way it can, in order to put pressure on Putin to rein in Russian nationalism.

What Moors feels is certain is that, as he puts it, “the fulcrum of the global energy trade is gravitating to the Asian and Pacific market”. The big unresolved question is whether this burgeoning demand – intensified by the continent’s drive to move away from the destructive use of inferior grades of coal – will be met with pipelined gas, or via LNG tanker transport. One to watch…

Huge $400 Billion Russia China Gas Deal a Tough Ask is republished with permission from Anthony Harringto at QFinance.

The post Huge Obstacles in $400 Billion Russia China Gas Deal appeared first on Economy Watch.

What we have seen post the 2008 global financial crash, as the US Federal Reserve, the Bank of Japan, the Bank of England and the ECB have sought to pump money into their respective real economies in order to get growth going again, is an absolutely enormous transfer of wealth from savers to borrowers.

What we have seen post the 2008 global financial crash, as the US Federal Reserve, the Bank of Japan, the Bank of England and the ECB have sought to pump money into their respective real economies in order to get growth going again, is an absolutely enormous transfer of wealth from savers to borrowers. Whether you are getting 0.2% nominal interest on your savings on deposit with a bank, or whether your bank decides to hit you with, say, a 0.1% “holding fee”, might be psychologically significant, but in reality the imposition of such a charge simply reinforces the idea that holding cash in a bank account is not a good idea right now, and hasn’t been since, oh, say 2008. This is not a terrible thing, since there are a huge number of alternatives to holding cash in a bank account.

Exploring the options here could take several (or even several dozen) blogs and is not my topic this go round, so I will pass over it lightly, except to point out that most of these alternatives involve assuming at least some level of risk. But since holding cash at negative rates, with the negative being amplified by whatever level of inflation might be around, is certain to generate a modest level of loss anyway (we are not yet, after all, in official deflation territory) there simply are not any risk-free alternatives around anymore. It may be, therefore, that the negative deposit rate fiasco, if it comes about, could have the positive effect of goading the general public into the realization that the time has come for them to get off their behinds and “wise-up” on investing. (I have a future? I need to invest? What is this…?)

For more than a decade, successive UK governments have been trying to get the public to realize that no government in any market with a declining ratio of workers to pensioners, can, over the medium term, afford the welfare and pensions promises its politicians have been making to voters in order to boost their own electoral chances. The logical corollary of finding out that the state simply will not be in a position to take care of you in your old age, is that you have to assume that responsibility for yourself – which means finding ways of generating a sufficient pot of money while you are able to work, to keep you in relative comfort when you can no longer work. It’s that simple. In this respect, negative rates for depositors, if they come, should simply stimulate an active financial services sector into offering more lucrative and relatively low risk alternatives to bank deposits. Negative rates should also prompt financially illiterate savers into becoming a tad more literate. “My bank is robbing me, what are my options?” is, after all, a fairly basic question.

It is also worth asking where negative deposit rates would leave the banks, given that banks were supposed to need to attract cash from depositors, aka savers, in order to lend? ECB banks also need new cash not to lend but to repay bond holders on maturing bonds. Their options here are to refinance by issuing new bonds, attract more depositors or borrow from the ECB.  Actually, of course, in the Brave New World crafted by that Italian master craftsman, Mario Draghi, president of the ECB, the EU’s established banks do not actually need to bother themselves with attracting new depositors or new investors. They can simply go direct to the ECB under its Long Term Refinancing Operation (LTRO) and borrow at ultra low rates and then lend out at commercial rates, if they so choose. (For a more detailed account of the workings of LTRO see this blog by Zero Hedge.)

This in itself begs the question of just how rubbish a bank’s credit committee has to be in order for it to lose money on commercial and private lending when it has the freedom to borrow low and lend high. This go round, Draghi has added the proviso that the ECB’s LTRO loans will only be available for lending to non financial institutions and will not be available for private mortgage lending, hence the new LTROs are being called Targeted LTROs, or TLTROs. The loans will only mature in September 2018 and will be worth some 400 billion euros in total. Oh, and one more thing, up until now, the ECB has “sterilized” all loans made under the LTRO by selling an equivalent amount of assets off its books. Draghi mentioned in passing that henceforth the ECB is suspending this sterilization. So Draghi and the ECB are now planning to pump 400 billion euros of new money into the EU economy, with further TLTRO tranches to follow. In effect the ECB has begun quantitative easing (QE), something its mandate is supposed to preclude it from doing. As I said, Draghi is a master craftsman…

The post ECB’s negative rates hammer savers but will it make banks lend? appeared first on Economy Watch.

Contrary to logic, resource-rich countries in Africa have tend to experience less economic growth in the long run than those deprived of natural riches. To reverse this trend, NGOs have been campaigning for greater transparency and accountability in the management of revenues from oil, gas and mining.

Contrary to logic, resource-rich countries in Africa have tend to experience less economic growth in the long run than those deprived of natural riches. To reverse this trend, NGOs have been campaigning for greater transparency and accountability in the management of revenues from oil, gas and mining.

One of the paradoxes of Africa over the last century has been the continuing crushing poverty that has afflicted – and continues to afflict – so many citizens in so many resource-rich African countries. The barriers that prevent the cash raised by the extractive sectors in those countries from genuinely flowing into development projects, particularly in the localities around major extractive operations, have been many and various, but chief among them has been the cloak of secrecy that has surrounded deals between African governments and multinational mining companies. This secrecy has allowed the blatant theft of natural wealth to go unchallenged, to the huge benefit of kleptocratic rulers and the mining companies themselves.

Not surprisingly, this cosy arrangement has come under increasing pressure, to the point where, at last, midway into the second decade of the 21st Century, the whole ghastly conspiracy that has kept so many in poverty is unraveling. NGOs have played a huge role in this. Three in particular come to mind: Publish what you pay(PWYP); the Revenue Watch Institute (RWI); and the Extractive Industries Transparency Initiative (EITI).

PWYP was founded back in 2002 by a small group of London-based NGOs who wanted to dismantle the “resource curse” by campaigning for greater transparency and accountability in the management of revenues from oil, gas and mining industries. (A report on its origins can be found here.) RWI was founded at the same time as PWYP as part of the Open Society Institute, becoming an independent organization in 2006.

The EITI is a more complicated entity, being a quasi-official, multinational response to the same problems addressed by PWYP and RWI. It has an overarching board, and countries join at the government level by applying to EITI and setting up EITI branches, which report according to the format laid down by EITI. Acceptance by EITI is conditional upon the countries concerned having what EITI calls “sufficient space in the civil society” to enable reasonable reporting requirements to be followed. There are currently 41 countries implementing EITI reporting, with their reports on the contracts and revenues stemming from the extractive industries in their particular countries, being subject to independent audit and verification.

We can see from this brief account that, while there are still a number of countries outside EITI – perhaps as many as 20 with strong extractive industries have yet to join – things have moved forward a very long way, giving considerable grounds for optimism that Africa’s “resource curse” may yet turn out to be the source of a huge leap forward for the continent in the decades ahead.

The work by the NGOs has changed the whole climate of resource exploitation across Africa. However, though change is in process, the obstacles are formidable. The African Union (AU) itself has taken up the challenge, famously formulating then publishing the Africa Mining Vision (AMV), which was adopted by African Heads of State at the February 2009 AU summit.

The aims of the AMV are very worthy. It seeks to integrate mining much more closely into development policies at local, national and regional levels. At the local level, the idea is to make sure that workers and communities see real benefits from large-scale industrial mining. At the national level, it is about “making sure that nations are able to negotiate contracts with mining multinationals that generate fair resource rents and stipulate local inputs for operations”; and at the regional level, it is all about integrating mining into industrial and trade policy.

However, it is one thing for African Heads of State to put their name to a document, and something else again for that document to be put into universal practice across Africa. We are still a long way from this.

There are a number of factors, however, that are very positive for change, not least among these is the fact that the public in a growing number of African countries is becoming much more assertive about their democratic rights and, in particular, about their right to challenge their politicians over the kinds of deals those politicians are making with mining companies. Many of the major multinational mining companies are themselves now much more wary of the kind of reputational damage that can result from having contracts shrouded in secrecy and are themselves pushing for more openness and for codes of conduct that align reasonably well with the AMV.

On top of all this, African nations are now much more “up to speed” with what they should be demanding by way of a fair share of the resources being mined in their countries. New contracts are much tougher and some are being drafted with the idea of transparency and even online publication in mind.

Related: Can Africa Break Its Resource Curse?: Joseph Stiglitz

Related: Liberia’s Historic Struggle To Escape The Resource Curse

Related: Resource Rivalries: Japan and China Race To Invest in Africa

In January 2013, RWI and the World Bank Institute launched ResourceContracts.org, a searchable database of oil, gas and mining contracts; agreements and key terms, including handbooks that explore the policy questions underlying mining and oil contracts; and the issues crucial to negotiating and monitoring agreements. Even the poorest and least developed African countries now have a head start when it comes to negotiating new contracts with multinationals.

On 15th February 2013, Guinea’s Technical Committee, in charge of reviewing mining titles and contracts, launched its website, www.contratsminiersguinee.org, which publishes a range of mining contracts online. The President of the Technical Committee, Nava Touré, commented: “The launch is a major step in creating the transparency we are seeking to develop in Guinea’s mining sector.”

He added that the site was the fruit of sustained collaboration between the government, the mining companies and international civil society organizations, with the support of the World Bank Institute and RWI.

Progress is being made, but this is certainly one to watch…

By Anthony Harrington

Anthony Harrington is an award-winning business and energy journalist, writing regularly for the Scotsman newspaper, the Glasgow Herald newspaper, Financial Director magazine, Pensions Insight magazine, CA Magazine, and a number of other publications. He won Business Finance Journalist of the Year 2006, Institute of Financial Accountants, and Journalist of the Year, State Street 2006 Institutional Press Awards, and was runner up in 2007 and 2008.

Africa’s mining sector: forcing change and fairness is republished with permission from the QFinance Blog.

Get the QFinance Dictionary of Business and Finance iOS app for a comprehensive guide to financial terms and expressions.

The post New, More Transparent, Contracts To End Africa’s ‘Resource Curse’? appeared first on Economy Watch.

The EU – whose most powerful members manifestly do not want to extend EU membership to Turkey – is once again going through the ritual of reconsidering the country’s application for membership. There are huge pluses and glaring minuses involved in any future Turkish membership; this dance still has a long way to run, it seems.

The EU – whose most powerful members manifestly do not want to extend EU membership to Turkey – is once again going through the ritual of reconsidering the country’s application for membership. There are huge pluses and glaring minuses involved in any future Turkish membership; this dance still has a long way to run, it seems.

Turkey’s economy is a classic glass half full/half empty, depending on your personal bias. It has growth that the EU would love, but it has inflation way above 8 percent on most counts. The country’s currency, the lira, got hammered in the recent emerging markets crisis, losing more than 10 percent of its value against the dollar, though the pressure is now easing again. Prime Minister Recep Tayyip ErdoÄŸan acquitted himself like a buffoon through the summer’s democratic protests over plans to give Instanbul’s Taksim Gezi Park to developers.

To add to his eyebrow-raising authoritarianism, and his determination to embed Islam more deeply into Turkish political life, ErdoÄŸan seems to have no problem allowing crony capitalism to thrive under his leadership – not that you would find more than the gentlest hint of this in the recent IMF Article IV report on Turkey, where the IMF gently suggests that some “structural reforms” would be helpful.

Then there is the fact that the EU – whose most powerful members manifestly do not want to extend EU membership to Turkey – is once again going through the ritual of reconsidering the country’s application for membership. There are huge pluses and glaring minuses involved in any future Turkish membership: one interesting collection of ‘for’ and ‘against’ arguments is presented with admirable clarity by Debating Europe.

Three main facts stand out:

1. Extending the EU by absorbing Turkey gives the EU a border with Syria, Iran and Iraq, none of which make for happy neighbors just at present. Having Turkey in its present state as a buffer between the EU and those (to European eyes) impossible, undemocratic and internally driven Muslim states is a very satisfactory state of affairs.

2. With a population heading for 91 million, Turkey would be the heftiest member of the EU (Germany, the current most populous EU country, has a population of a mere 80 million). Not exactly an easy morsel for the EU to digest!

3. Turkey, or at least parts of the Turkish middle and political classes, has/have ambitions to be “just like” a secular European country with a capitalist economy – but Turkey is an Asian country through and through and is Muslim to the core. Christian Europe and Muslim Asia have been like oil and water for 1000 years, and making an emulsion of the two – despite the finest liberal traditions diminishing the importance of historical accidents such as race, nationality and religion – has proved, er, difficult…

The majority – probably the overwhelming majority – of the Germans and the French absolutely do not want to see free movement of millions of Turks into their economies, despite the boost this would give to exports due to cheaper labor costs. Racism would soar, which would be a significant problem for EU democracies that are already lurching to the right. France’s Marine le Pen has never been so popular, even without the prospect of a near term Turkish entrance to the EU, while Greece’s ultra-far-right Golden Dawn party, now proscribed, would probably see support skyrocket if Turkey’s prospects of EU membership strengthened.

Against these negative arguments, there are a number of strong positives. Istanbul is a historic city: the ancient city of Byzantium was renamed Constantinople when it became the new capital of the Roman empire in 330 and has been an invaluable bridge between Europe and Asia ever since. The fall of Constantinople in 1453 brought an end to 1,500 years of Roman rule and placed the city firmly in the hands of the Ottoman Empire. Given the city’s Roman past, Turkey can claim a long history of being part of Europe, just as it has a long history of being part of Asia -making it an ideal crossing point for the EU to expand trade with Asia.

Debating Europe puts the positives well:

“As a member [of the EU], Turkey would re-invigorate Europe’s relations with fast evolving regions like the energy rich Caucasus and Central Asia [as well as] the new Middle East that [is] emerging from the Arab Spring. Turkey’s unique geo-strategic position plus the strength of NATO’s second-largest army would greatly add to European security.”
These are all key attractions, but the “second largest army” point is also a huge negative since Turkey’s economy and political structure is skewed way out of shape by its bloated military budget and the conspicuous influence of the Turkish military in politics. Just what Europe needs? Probably not, in the eyes of many of its citizens.

Joining the EU would also undoubtedly make middle class Turkey, which is the part that Europe is most attracted to, even more unpopular with fundamentalist Islam – but since fundamentalist Islam seems hell bent on the impossible mission of returning much of the world to a “perfect” medieval condition, it doesn’t really seem possible for a modern democracy to move forward without annoying the fundamentalists. Again, not a problem the EU is desperately keen to take on board.

Related: Why The World Must Learn From Turkey’s Economic Miracle: Jeffrey Sachs

Related: Turkey: The Big Winner In The Mediterranean Shale Game?

Related: “Democratic Values” Vital For Turkey’s EU Bid, Says Merkel

In fact, 2013 has been a real low in the long dance between Turkey and the EU. The heavy-handed crack down on protesters in Istanbul’s Gezi Park caused the Netherlands and Germany to block talks with Turkey in June, which would have mulled over where exactly Turkey stood in relation to a list of EU regulations that membership candidates must fulfill. Turkey’s chief negotiator, Egemen Bagis said recently that Turkey “would probably never join the EU”. The country’s more realistic hope, he suggested, was that it would be able to negotiate special access to the EU market, à la Norway. On the other hand, pushing continuously for membership does not do Turkey any harm with potential inward investors, almost all of whom see tighter integration between the EU and Turkey as highly business friendly.

This dance still has a long way to run, it seems.

By Anthony Harrington

Anthony Harrington is an award-winning business and energy journalist, writing regularly for the Scotsman newspaper, the Glasgow Herald newspaper, Financial Director magazine, Pensions Insight magazine, CA Magazine, and a number of other publications. He won Business Finance Journalist of the Year 2006, Institute of Financial Accountants, and Journalist of the Year, State Street 2006 Institutional Press Awards, and was runner up in 2007 and 2008.

Turkey: much to ponder as EU restarts membership talks is republished with permission from the QFinance Blog.

Get the QFinance Dictionary of Business and Finance iOS app for a comprehensive guide to financial terms and expressions.

The post Will Turkey Ever Join The EU? appeared first on Economy Watch.

The scale of China’s military build-up has raised flags among Western alarmists. Yet the focus of the military spending appears to be oriented more towards defending China’s periphery, rather than any expansionist plans. In fact, one common argument is that China’s growing military power is only meant to counter the force of the U.S., which has been increasing its presence in the region.

The scale of China’s military build-up has raised flags among Western alarmists. Yet the focus of the military spending appears to be oriented more towards defending China’s periphery, rather than any expansionist plans. In fact, one common argument is that China’s growing military power is only meant to counter the force of the U.S., which has been increasing its presence in the region.

There is an excellent saying that encapsulates the relationship between war and economics in the modern world. It goes something like this: when trade moves across borders, armies don’t. The European Union is, of course, the clearest modern example of the way in which trade encourages civilized bonds between countries who might otherwise be tempted to resolve differences through the exchange of bullets rather than goods.

China – as the world’s second largest economy, and as a country on course to become the world’s leading economy in twenty years or so – is at the heart of world trade, and is widely regarded as the engine that may yet prove sufficiently powerful to pull Europe out of its slow-to-no-growth quagmire. So, if our axiom has any basis in reality, it would seem wildly unlikely that China would pose a military threat to the West -or, indeed, to any region.

However, sometimes things just “happen”, and not for the better. The link between politics and the military in China is so strong that some overt glorification of military prowess, along mildly fascist lines, is probably inevitable – which doesn’t make it a smidge less dangerous.

China has already shown that it is prepared to counter Japanese nationalism over the Senkaku Islands, Diaoyu Islands if you are Chinese, with as much saber rattling as Japan wants to go in for. It is building up its naval capabilities in the South and East China Seas and that is a direct challenge to the U.S., putting the two largest economies in the world on something of a wildly unnecessary collision course. The new Chinese supremo Xi Jinping, or Head of the Politburo Standing Committee to give him his formal title, made the following point in his speech to the Chinese people: “To realize the great revival of the Chinese nation, we must preserve the bond between a rich country and a strong military, and strive to build a consolidated national defense and a strong military.”

Related: The China-Japan Rivalry Renewed: Will Asia’s Geopolitical Balance Shift Once Again?

Related: China Warns Asian Neighbours: Do Not Provoke

Related: China To Double Military Budget By 2015

There has always been an alarmist cohort in Washington, as the bogeyman of the West, ready to elevate Beijing to the position once held by the Soviet Union; there is no shortage of seemingly sensible US politicians who get drawn into that kind of utterance from time to time. However, the scale of China’s military spend and its enthusiasm for modernizing and extending its army is, at the very least, providing fodder for the alarmists and causing more than one otherwise well disposed commentator to pause for thought.

Wars Of Conquests Are Not In The Chinese DNA

China’s last military ‘adventure’ was the short border war with Vietnam in 1979. Its interest in preserving North Korea as a buffer against US interests is understandable, even if neither China nor anyone else knows what the barking mad regime in North Korea is going to do next.

And then there is the fact that the Chinese Empire, pre-Mao, had virtually no extra-territorial ambitions. Wars of conquest are not in the Chinese DNA. Plus, there is the obvious point that China’s trading power can get virtually everything it wants via trade partnerships, which are hugely more profitable than, for example, the kind of “let’s go grab their cattle, castles and land” wars that English Kings went in for time and again.

In an article in Foreign Policy, Drew Thompson came up with a title and catch line that says it all – “Think Again: China’s Military – It’s not time to panic. Yet.”

“… China’s leaders vehemently denounce any suggestion that they are embarked on anything other than what they have referred to as ‘a peaceful rise’ and haven’t engaged in major external hostilities since the 1979 war with Vietnam,” Thompson wrote. “But they also don’t explain why they are investing so heavily in this new arms race.”

“Beijing’s official line is that it wants to be able to defend itself against foreign aggression and catch up with the West, as it was famously unable to do in the 19th Century […] the first Gulf War served as a wake-up call in Beijing, raising concerns about how quickly an inferior army could be demolished by better-equipped Western forces […] US and allied forces made short work of Iraq’s Warsaw Pact military hardware, and the Chinese were duly shocked and awed.”

Hence the military build up, or so the theory goes. Of course, if one looks at things from China’s perspective, things look a bit different. A 2003 paper from the Cato Institute, Is Chinese Military Modernization a Threat to the United States, makes the following point:

[quote]”… the United States has ringed China with formal and informal alliances and a forward military presence. With such an extended defense perimeter, the U.S. considers as a threat to its interests any natural attempt by China – a rising power with a growing economy – to gain more control of its external environment by increasing defense spending. If US policy makers would take a more restrained view of America’s vital interests in the region, the measured Chinese military build-up would not appear so threatening.”[/quote]

Related: America’s New “Pacific Offensive” – A Strategy To Contain China: Sanjaya Baru

Related: Could Rising Tensions Over South China Sea Lead to Sino-American War?

China’s Military: Not As Scary As It Looks

Interestingly, according to an analysis by Eric Arnett entitled Military Technology: the case of China, prepared for the prestigious Stockholm International Peace Research Institute, while the bond between the party and the military appears to be working well for the military, in that the Party seems prepared to provide a handsome level of military funding – the Chinese Communist Party’s way of doing things is, paradoxically, stifling technological innovation for military hardware.

He argues: “China will not be able to take full advantage of what it has achieved unless the control of the Communist Party is relaxed, and even this will not be a sufficient condition for a better exploitation of technology.”
Nevertheless, Arnett cites Pentagon reports that confirm that:

“China’s A2/AD (area access and area denial) focus appears to be oriented towards restricting or controlling access to China’s periphery, including the Western Pacific. China’s current and projected force structure improvements, for example, will provide the People’s Liberation Army (PLA) with systems that can engage adversary surface ships up to 1,000 nautical miles from China’s coast.”

Related: Two Visions: US and Chinese Rebalancing in Asia

Related: Are Sino-US Ties Still The World’s Most Influential Relationship?

By Anthony Harrington

Anthony Harrington is an award-winning business and energy journalist, writing regularly for the Scotsman newspaper, the Glasgow Herald newspaper, Financial Director magazine, Pensions Insight magazine, CA Magazine, and a number of other publications. He won Business Finance Journalist of the Year 2006, Institute of Financial Accountants, and Journalist of the Year, State Street 2006 Institutional Press Awards, and was runner up in 2007 and 2008.

China and military muscle: a high wire act or a folly? is republished with permission from the QFinance Blog.

Get the QFinance Dictionary of Business and Finance iOS app for a comprehensive guide to financial terms and expressions.

The post Is The US Responsible For China’s Military Build-Up? appeared first on Economy Watch.

Can governments influence the decisions and actions of their citizens without the public’s conscious knowledge? Since 2010, the U.K. government has had a taskforce, nicknamed the “Nudge Unit”, which utilises behavioural economics to come up with policies that can “encourage and enable people to make better choices for themselves.”

Can governments influence the decisions and actions of their citizens without the public’s conscious knowledge? Since 2010, the U.K. government has had a taskforce, nicknamed the “Nudge Unit”, which utilises behavioural economics to come up with policies that can “encourage and enable people to make better choices for themselves.”

Anyone who studies markets, particularly anyone who trades, knows that human psychology plays a huge role in seemingly random market movements. The same line of thinking opens up the possibility that there might be smarter and more cost-effective ways for governments to interact with the general public on a whole range of issues. The obvious example of “behavioural economics,” often cited in the literature, is the different outcomes you get when people are auto-enrolled into workplace pension schemes, versus having the option to opt-in to those schemes. Many more people end up saving in pension schemes with auto-enrolment.

Why? Clearly inertia plays a huge role in human behaviour, meaning we are substantially more likely to continue sitting on our behinds than we are to get up and act, which is probably why the good Lord put a decent selection of carnivores into the world, to ensure that our ancient forebears stayed nimble and on their toes.

Alas, the sabre-toothed tiger is now long gone and we must make do as a species with behavioural economists, it seems, to nudge us along. However, keeping the debate at the effort-versus-inertia level would not produce a very rich inspirational source for government policy, so bringing economics into the frame looks promising.

One of the foremost theorists on this emerging intersection between government policy and behavioural economics is Cass Sunstein, a US law professor with an interest in the overlap between law, policy, and economics. He co-authored a book, Nudge: Improving Decisions about Health, Wealth and Happiness, with the economist Richard Thaler, and heads up the Obama Administration’s Office of Information and Regulatory Affairs.

In a recent paper, “Empirically informed regulation,” Sunstein draws on work designed to incorporate empirical findings about human behaviour into economic models, in order to suggest how regulation could be designed to be lower cost and more effective. Lawmakers can achieve this by going with the grain of predicable behaviour, rather than against it, so to speak. A general lesson, he argues, is that small, inexpensive policy initiatives can have large and highly beneficial effects.

For instance, the more complex the choice you lay before people, and the more perceived barriers they have to work through to enable that choice, the less likely you are to get them to move through that particular gate. “Complexity can have serious adverse effects by increasing the power of inertia,” Sunstein writes.

Simplifying choices and removing the amount of paperwork that people have to fill in, makes them much more likely to act. Obviously, if you are highly motivated to buy a house, you will battle through the mortgage application form, come what may, but if the form was simpler, the dropout rate would be lower. The same is true of loan applications and so on and so forth.

How The UK Government Helped Its Citizens Make “Better Choices”

Actually, of course, the British Civil Service has known about and exploited the power of inertia for decades, possibly centuries. When ministers come up with a plan of which the Civil Service disapproves, they smother it in paper.

Sunstein wants to go in the other direction, and one has to grant that, in the context of government bureaucracy, this kind of thinking is, if not novel (people have, after all, been banging on about cutting red tape for a very long time) at least helpful.

One of the main factors that Sunstein wants to take into account is the fact that people in fact tend not to behave like the ideal “rational citizen” upon which the rational model is predicated. People procrastinate and neglect to take steps that impose small, short-term costs but that promise large, long-term gains. They delay starting to exercise until they are so overweight they couldn’t start if they wanted to, or they delay seeing a doctor about a nagging cough until their lungs are beyond salvation with lung cancer. Many still smoke!

So what can government do? Government programs and funding should be channelled not just to informing people what they should do, but also towards designing programs that make it easy for people to act on the choices government wants them to make. The more specific and focused the message, the better.

The idea has caught on to the point where the UK Government now has a specific policy-making unit focused on behavioural economy and its implications for government policy.

In 2010 the UK Coalition Government, impressed by what it knew of behavioral economics, decided to set up a group of 13 academics as an adjunct to the Cabinet Office. Called the Behavioural Insights Team, or the Nudge Unit, this group was given the task of finding smart ways of “encouraging and enabling people to make better choices for themselves.” The Nudge Unit’s output was sufficiently impressive for Government to seek to make the unit the first policy unit to spin off from Central Government as a profit-making venture.

The whole idea initially was to use behavioral economics to improve the effectiveness of government programs and to find ways of getting more people “doing the right thing”, i. e. giving increased traction to public policy implementation. The list of ways in which citizens could be less of a drain on the public purse is fairly extensive. Refraining from binge drinking would be one example, taking more exercise and eating better would be another, and so on.

When the Government announced the spin off of the Unit back in May, it praised the Nudge Unit fulsomely:

“The team was established to find ways of encouraging, supporting and enabling people to make better choices for themselves. Since then it has delivered rapid results – identifying tens of millions of pounds of savings, spreading understanding of behavioural approaches within government, and developing a reputation as a world leader in its field.”

In other words, as far as the UK Government is concerned, behavioural economics works. One has to remember that this comment was made in the context of inviting bids from interested parties as the Government tries to spin out the Nudge unit, so a certain amount of egging the pudding is inevitable. But the Unit itself has a number of successful projects it can point to.

One of these was when it was tasked to help the government improve the take up of loft insulation by householders. The team found that one of the reasons for the slow take up was that lofts, as everyone knows, are wonderful places for storing all those things that you don’t really want to part with but are unlikely ever to want again. They are the archetypal “file and forget” zone. The Unit came up with the idea of providing householders with low cost labour to clean out their rubbish-filled lofts, which then made it easy for the householder to move to the next step, namely installing loft insulation.

The Unit has produced several research papers, which stand up to scrutiny. The team’s most recent paper, “Applying behavioural insights to charitable giving“, provides yet another example of how “nudge theory” works in practice.

The team started by focusing on understanding what the behavioural science literature suggests would work in practice by way of increasing charitable giving, and then conducted a series of trials and tests to see how these insights panned out in practice through the use of controlled randomised trials.

They identified four “behavioural insights”: People give more when you make the process of giving easy, as for example, building in an option to automatically increase future payments in line with inflation (you get increased giving without the need for the individual concerned to take additional action); using auto enrolment as a workplace mechanism for higher paid staff to donate, with clear opt outs (again this uses the power of inertia); drawing on beneficial peer effects by making acts of giving more visible to others in the same social group and fourthly, establishing group norms to provide an “anchor” for subsequent donors. Another point was getting the timing right for charitable appeals – timing matters, i.e. December is a better giving month than January, for obvious reasons.

Related: Rich Less Likely To Donate To Charity Than Middle Class: Study

Related: The Pursuit of Happiness – Will Economic Objectives Stand in the Way? : Jeffrey D. Sachs

Related: Development, But At What Price? Lessons from the Happiest Place in Asia

There is no space here to go into the results of the trials, but a quick summary is that nudging definitely works, not with everyone, perhaps, but given a reasonable population size for a trial, you get improved effects by doing things “smarter”, going with the flow of behavioural patterns, rather than ignoring them or unwittingly cutting across them.

Can we expect governments generally to start getting smarter about policy implementation? Definitely, I would say. The Nudge Team has already attracted international attention and they are not the only ones exploring this road. The advertising industry, of course, would say that they have been blazing the trail here for donkey’s years, since their whole game is to influence behaviour. One can only hope that government policy makers do not become as annoying as whole swathes of the advertising industry!

By Anthony Harrington

Anthony Harrington is an award-winning business and energy journalist, writing regularly for the Scotsman newspaper, the Glasgow Herald newspaper, Financial Director magazine, Pensions Insight magazine, CA Magazine, and a number of other publications. He won Business Finance Journalist of the Year 2006, Institute of Financial Accountants, and Journalist of the Year, State Street 2006 Institutional Press Awards, and was runner up in 2007 and 2008.

Behavioral economics: New trick for government financing? Part 1 & Part 2 are republished with permission from the QFinance Blog.

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While the United States had added more jobs in recent months than economists had been expecting, several studies suggest that the U.S. labour market has lost at least 3 million well-paid “good jobs” forever. The bulk of new jobs being created is in fact a huge swathe of part-time work which offers no long term security and is generally low paid work – nothing there to fuel a consumer-led recovery.

While the United States had added more jobs in recent months than economists had been expecting, several studies suggest that the U.S. labour market has lost at least 3 million well-paid “good jobs” forever. The bulk of new jobs being created is in fact a huge swathe of part-time work which offers no long term security and is generally low paid work – nothing there to fuel a consumer-led recovery.

If you want to experience a real sense of dislocation and dizziness, try focusing one eye on a chart of the S&P 500, marching to ever higher highs, and another on a chart showing full time jobs in the US over time (hint, it goes down, not up). Unless you assume that somehow technology has rendered large numbers of jobs superfluous, quite where the productivity is coming from to support the onward and upward march of the S&P is not apparent and squinting at the chart doesn’t help. “Wait a moment,” you might say. “The news from the US was that unemployment is going down and more jobs are being created.”

True, but also false. What is being created, to a worryingly large extent, is a huge swathe of part-time work which offers no long term security and is generally low paid work – nothing there to fuel a consumer-led recovery.

John Mauldin quotes an article by Mort Zuckerman in the Wall Street Journal, where Zuckerman points out that there by June 2013 there were just over 28 million part time jobs in the US economy, which is three million more part time jobs than at the start of the recession in 2008. President Barak Obama’s Healthcare legislation, known as Obamacare, has had an impact on this surge in part time jobs since part of the legislative rule set around Obamacare is a stipulation that employers have to pay for the health insurance of employees who work more than 29 hours a week.

Related: Obama Proposes “Bold” Plan To Boost Middle Class

Related: US Health Care System Wastes $750 Billion Annually: Report

Related: Infographic: The Cost Of Healthcare Fraud – $70-250 Billion Per Year

With a rule like that in place it is a no-brainer to see employers shifting their employment strategies to favour sub 29 hour week part time work over full time work. Forbes recently picked up on a Reuters story about Walmart, which seems to have shifted its recruitment policy towards hiring part time workers only:

“A new hiring policy uncovered by Reuters (which surveyed 52 Walmart stores, Walmart being the largest private employer in the US) shows that nearly half its stores are only hiring part-time employees, thus avoiding the mandate to provide health care or pay a fine…”

Moreover, the full time jobs that are coming to the market in the US are not, in general, going to the vast pool of unemployed who are between the ages of 24 and 50. As John Mauldin points out, a large number of the “good” jobs are going to the over 55s. Mauldin includes a chart in his analysis, based on data from the St. Louis Federal Reserve, showing a pretty straight line from bottom left to top right in terms of the number of new jobs going to the over 55s. In fact looking at the chart, there is no discernible dip in its onwards and upwards march through the notorious 2007-2009 time frame. Looking at this particular chart you wouldn’t know there had even been a recession.

Related: Will America’s Middle-Class Crisis Diminish Its Global Superpower Status?: George Friedman

Related: 600 Million New Jobs Needed Over 15 Years To Sustain Global Economy: World Bank

Related Infographic: Evolution of the American Economy

Many of these jobs, Mauldin points out, although full time, are medium to low skill, such as working as a check-out clerk. Employers in the US have come to prefer mature workers who can project friendliness and competence and who need little training, over young workers who would, in the past, have used these jobs as “fillers” on their way to gaining competencies and moving onwards and upwards. Jobs for new entrants are just not happening any more, or not in sufficient numbers to matter. Some 7 million new jobs have been created in the US since the crash, but the employment chart for the 24-50 age range shows almost no gains in the last five years.

All this could change, of course, if the US economy really does pick up and the competition for employees heats up. As the Forbes article notes, “a dwindling labour pool and competition for employees does wonders for worker’s rights”. However, for now the boom in part time jobs in the US is a real dampener on consumer spending, and without more consumer spending the US economy is unlikely to pick up the pace any time soon. The US is perilously close to being caught in a vicious spiral here and whatever it might do to healthcare in the US, Obamacare is already having a pernicious impact on the search for real jobs, it seems…

Related: Obama – The Harbinger Of A New Era For Politics In America?: Jeffrey Sachs

By Anthony Harrington

Anthony Harrington is an award-winning business and energy journalist, writing regularly for the Scotsman newspaper, the Glasgow Herald newspaper, Financial Director magazine, Pensions Insight magazine, CA Magazine, and a number of other publications. He won Business Finance Journalist of the Year 2006, Institute of Financial Accountants, and Journalist of the Year, State Street 2006 Institutional Press Awards, and was runner up in 2007 and 2008.

Where have all the good jobs gone? Gone to part-time… is republished with permission from the QFinance Blog.

Get the QFinance Dictionary of Business and Finance iOS app for a comprehensive guide to financial terms and expressions.

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The global financial crisis has brought a huge windfall for organised crime networks. Banks have profited handsomely from terrorists and drug lords, channelling billions of dollars through the U.S. financial system, while the European debt crisis has cemented the grip of the mafia on underground economies in peripheral eurozone countries like Italy and Spain. European authorities are now taking action against the staggering web of corruption – but is it too late?

The global financial crisis has brought a huge windfall for organised crime networks. Banks have profited handsomely from terrorists and drug lords, channelling billions of dollars through the U.S. financial system, while the European debt crisis has cemented the grip of the mafia on underground economies in peripheral eurozone countries like Italy and Spain. European authorities are now taking action against the staggering web of corruption – but is it too late?

The Basel Committee on Banking Supervision recently issued a consultative paper on money laundering, or rather, on the sound management of the risks associated with the possibility of money laundering and the financing of terrorism. The consultation period ends in September 2013 and the point is to devise rules and supervisory strategies that will reduce the possibility of major banks being contaminated by the huge illicit cash flows washing around the system from drug barons and organised crime, as well as from those seeking to fund terrorist groups.

Part of the problem the Basel Committee, and regulators in general face, is that money, in the sort of quantities that we are talking about, has a hugely corrosive power. It has the capacity to subvert politicians, police and regulators alike, all of whom are on salaries that look minuscule by comparison with the bribes that could be on offer.

Related: The Vatican Is Now A Money-Laundering Risk, Says US

Related: Vatican Bank Fires President Amidst Money Laundering Scandal

Related: Papal Impropriety: The Dark Secrets Of The Vatican Bank

To get a sense of what this means, consider the case of Russia, famously labelled a “Mafia State” by U.S. officials in documents released some time ago by WikiLeaks. Bear with me through a brief digression which sheds a disturbing light, in my humble opinion, on the extent to which officials, nay, an entire state apparatus, can become deeply tainted by criminality.

On 11 July a Russian court convicted a whistle-blowing auditor of tax fraud some four years after his death. This was a new low even for the oh-so-not-independent Russian court. Sergei Magnitsky was convicted, in this absurd judgement, of the very crimes that he had tried to expose. When auditing the accounts of Hermitage Capital, Magnitsky uncovered evidence that Russian officials and police had stolen around $230 million in tax refunds. When he tried to report his findings he was arrested, charged with fraud himself and whisked off to a detention camp where human rights activists claim he was beaten to death. This belated trial was stage managed, his supporters say, to rubbish the charges he brought.

In a report on the trial ABC News points out that William Browder, the head of Hermitage Capital, one of the largest foreign investors in Russia prior to Magnitsky’s audit, was himself then convicted in absentia on similar trumped up charges. Commenting on the Magnitsky verdict Browder said:

Related: Putin “Friends” Accused Of Embezzling $30 Billion From Winter Olympics Funds

Related: Nearly $50bn Left Russia Illegally in 2012, Reveals Central Bank

Related: Resurgent Russia: An Economy in Transition, Dysfunctional but Intact

The point, when one stand back from it all, is that no decent government, or set of elected political representatives answerable to their constituents and under proper scrutiny from a free press, would be able to tolerate such a monstrous farce being perpetrated through its legal system. When something like this happens it exposes, at a stroke, the staggering depths of the corruption into which the Russian state has fallen.

It is not that there are no honest folk in Russia, it is just that there is no way of telling who is dirty and who is not, and when corruption permeates a society, attempting to layer anti-money laundering regulations over the top of it is likely to turn out to be an exercise in delusion. And this is the nub of the problem that the Basel Committee is consulting on. Money laundering is huge and what one finds through persistent, diligent investigation is that it constantly turns up in highly “respectable” places.

Take the case of HSBC. U.S. authorities spent a decade investigating possible money laundering at the bank. The U.S. Treasury Department called HSBC’s money laundering actions “the most egregious” it had ever seen. The bank was fined $1.9 billion over allegations that, in the words of a Guardian report it had acted as banker for rogue states, terrorists and drug lords, channelling billions of dollars through the US financial system.

Related: HSBC Reaches $1.9bn Money Laundering Settlement with US Authorities

Related: Standard Chartered Fined $340 million in Money Laundering Probe

Related: Black Money: The Business of Money Laundering

The Basel Committee’s revised version of the Core Principles for Effective Banking Supervision, published in 2012, has a dedicated provision (BCP 29) which deals with the abuse of financial services, recognising that anti-money laundering and countering financing of terrorism provisions are integral to protecting the safety and soundness of banks and the integrity of the international financial system. Its current consultation document is all about how countries will implement the recommendations of the Financial Action Task Force, which published a revised version of its International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation.

Whether it will be successful in getting bankers to think beyond the profit motive and see the bigger picture, where money laundering and funds channelling through to terrorist groups are cancers in the fabric of society, remains to be seen.

Related: FBI Recruits ‘Gordon Gekko’ In Fight Against Wall Street Greed

Related Infographic: Do Rich People Live By A Different Set of Moral Standards?

By Anthony Harrington

Anthony Harrington is an award-winning business and energy journalist, writing regularly for the Scotsman newspaper, the Glasgow Herald newspaper, Financial Director magazine, Pensions Insight magazine, CA Magazine, and a number of other publications. He won Business Finance Journalist of the Year 2006, Institute of Financial Accountants, and Journalist of the Year, State Street 2006 Institutional Press Awards, and was runner up in 2007 and 2008.

EU looks to strengthen anti money-laundering provisions is republished with permission from the QFinance Blog.

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Eager to contain the spike in CO2 emissions, the European Union in 2005 launched an emissions trading scheme which has since been copied by a number of countries, including Australia, South Korea and some Chinese provinces. However, the global financial crisis and subsequent fall in demand and economic activity has caused the price of carbon to plunge to just five euros a tonne, effectively crippling the legitimacy of the world’s largest carbon trading market.

Eager to contain the spike in CO2 emissions, the European Union in 2005 launched an emissions trading scheme which has since been copied by a number of countries, including Australia, South Korea and some Chinese provinces. However, the global financial crisis and subsequent fall in demand and economic activity has caused the price of carbon to plunge to just five euros a tonne, effectively crippling the legitimacy of the world’s largest carbon trading market.

If you believe that global warming is the biggest catastrophe and economic disaster coming our way, then attempts to retrofit measures to contain CO₂ emissions onto a global industrial base that has evolved largely without regard to emissions (other than as pollution) is a hugely important task. Finding a way of putting a price on carbon is the obvious route to go. The EU set itself up to be the global leader in creating mechanisms for carbon pricing but its emissions trading scheme, which has been copied by a number of countries, including Australia, South Korea and some Chinese provinces, is now in disarray. A vote by the European Parliament in April effectively holed the EU’s carbon pricing scheme below the waterline, to quote a recent article in The Economist.

Related: China Launches Pilot Carbon Trading Scheme

Related: Australia Green Lights Pay-to-Pollute Tax

There are basically two ways to get industry to reduce its carbon emissions. You can mandate it by law, in a command-and-control manner, using the power of the state to force compliance, with massive fines and even prison as the ultimate sanctions for non compliance. Or you can set a cap-and-trade policy and leave it to the market, which is what the EU has done. Under a cap-and-trade approach you set limits to the emissions of the heaviest producers and then allocates or auctions carbon credits to cover production up to the limit. Firms that manage to reduce their emissions below the limit will have surplus credits that they can sell to other companies. By lowering the limit over time, the government can bear down on emissions, gradually reducing them over time, while trading in carbon credits creates a true, market based per-tonne price for carbon.

That, at least, is the theory. What the EU did not count on when it set up the scheme back in 2005 was that advanced markets would suffer a global financial crash which would lead to years of no-to-very-low growth. This resulted naturally in falling emissions and so to surplus numbers of credits washing about in what was supposed to be a limited-supply market. It is now obvious that the EU handed out far too many carbon allowances from day one, back in 2005, and every year since, to the point where, according to The Economist, there is now a surplus of about 1.5 to 2 billion tonnes of carbon allowances in the system, causing the price per tonne to drop from twenty euros in 2011 to just five euros a tonne in 2013.

Related: France & Germany – Building A Path To A Low-Carbon Future: Jeffrey Sachs

Related: Fighting Climate Change – Why Current Solutions Don’t Work: Gail Tverberg

The EU’s solution to this was a plan to withdraw some 900 million tonnes of carbon allowances off the market, with the idea of reintroducing them at some unspecified point in the future when the price per tonne of carbon had firmed up. The idea was dubbed “backloading” by the EU.  Constraining supply has always been a good way of driving up price and since the whole market is artificially created there is probably no logical reason why the EU shouldn’t be able to tinker with the scheme to firm up prices. But the EU needed the European Parliament’s approval to put this scheme into action and on 13 April 2013 the European Parliament rejected the idea. The price of carbon sank like a stone, bottoming at under 3 euros. Since the International Energy Agency is warning that the price of carbon needs to be at least fifty euros to be effective in moving power generation companies away from coal to gas and renewable sources, this does not look hopeful for the EU’s best lever against global warming.

There is now a serious question mark over the future of emissions trading schemes generally, which is not particularly helpful for California, which introduced its cap-and-trade scheme in January 2013. The Californian scheme raised far less, by way of auctioning of carbon credits, than State authorities had anticipated and the tribulations of the EU scheme will not go unnoticed. Australia had been planning to link its cap-and-trade scheme to the EU’s scheme, creating an international trading market in carbon allowances, but that too, now looks rather unappealing. Right now the EU’s ETS scheme looks like no more than a rather useless additional “green” tax which the power companies simply pass on to the consumer. As a behaviour changing mechanism, it is dead in the water until and unless the EU finds a way of shoring up the price. Unfortunately for the EU no one actually wants carbon in the way that they want gold. The market is entirely artificial and carbon allowances, as a tradable asset class have just given a graphic illustration of what is meant by “political risk”.

Related: Towards A Global Carbon Tax – A Better Way To Fight Climate Change?: Jeffrey Sachs

Related: Lufthansa Passes Carbon Surcharge On to Passengers Following Trade Spat

Related: Aviation Industry Rally Against EU Carbon Tax

By Anthony Harrington

Anthony Harrington is an award-winning business and energy journalist, writing regularly for the Scotsman newspaper, the Glasgow Herald newspaper, Financial Director magazine, Pensions Insight magazine, CA Magazine, and a number of other publications. He won Business Finance Journalist of the Year 2006, Institute of Financial Accountants, and Journalist of the Year, State Street 2006 Institutional Press Awards, and was runner up in 2007 and 2008.

EU’s carbon pricing strategy takes a potentially fatal hit is republished with permission from the QFinance Blog.

Get the QFinance Dictionary of Business and Finance iOS app for a comprehensive guide to financial terms and expressions.

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