EC Proposes Measures To Ramp Up Flagging Carbon Price

on Jul 31, 2012
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In perhaps her final act before clearing her desk and heading off on summer vacation, EU climate commissioner Connie Hedegaard on 25 July released a number of documents relating to a proposed deferral of the auctioning of a significant slug of carbon credits within the EU Emissions Trading Scheme from next year’s start of the third trading round. The press release and attendant ‘working document’ did not in fact contain any specific numbers but the Financial Times believes it could be up to 40 percent of the allowances otherwise scheduled to be auctioned over the next three years.

The underlying problem which the EC is seeking to address is the virtual stagnation in carbon trading on the EU ETS and the attendant build-up in unutilised credits, issued – mostly free – in the two rounds to date, since the global financial crisis morphed into semi-global economic slump from 2009-10. A relevant consequence was a Europe-wide wind-back of development and capacity-building projects across most industrial sectors, leading to a sharp fall in the need – and therefore demand – for carbon allowances. This from the working document (section 3.3) –

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>>Thus by the beginning of 2012 a surplus of 955 million allowances has been accumulated. Excluding the part of the surplus due to the use of international credits for compliance, the surplus would still have been 406 million allowances.
!m[](/uploads/story/209/thumbs/pic1_inline.png)That glut of supply over demand has seen the carbon price on the EU ETS in free-fall throughout 2011 and the first half of this year. As of 18 July, the FT reported the price of one EUA (European Union allowance – equating with one tonne of CO2/equivalent) as falling to just €6.80, a 12-month low, though it later recovered to €7.18. But by 25 July, the day the EC released its draft auction deferral proposal, Thomson Reuters Point Carbon were reporting the over–the-counter price of December 2012 EUAs as €6.59.

The whole point of the EU ETS’s cap and trade scheme is to allow market forces to impose a price on greenhouse gas emissions which will incentivise investment in mitigation – firms will conclude that it is more cost-effective to introduce greener production processes than to pay for offsetting via the trading scheme. But the global recession has turned this objective on its head. Whilst opinions differ, the consensus amongst carbon market participants and analysts is that the price on the EU ETS needs to be somewhere in the range of €35-50 euro/tonne CO2e for that green incentivisation to function. Prices around the €7/tonne mark are plainly not within a bull’s roar.

As mentioned earlier, 2013 sees the start of the third trading period of the EU ETS, scheduled to run through to 2020 – a big target year for emissions mitigation across the EU. The key change from the first two rounds is – or is supposed to be – a progressive shift from free allowance allocation to auctioned allowances. The theory being that competitive bidding for limited allowances will push the carbon price up towards that elusive incentivisation point. Which obviously isn’t going to happen anytime soon if the surplus already in the system is inflated by the new tranche of allowances which were supposed to be injected into the EU ETS from 1 January next.

Observers note with concern that the climate DG’s auction deferral proposals will require amendments – albeit technical – to the EC’s climate directive, necessitating votes from the European Parliament and Council. This is likely to be a protracted affair, affording further opportunity for some widely-differing viewpoints across the EU member states on climate change mitigation to once more be aired. Notably, Poland – whose economy relies heavily on coal-powered energy generation – will doubtless take the opportunity to again press for amelioration, at least in its particular case, of the EU’s 2020 mitigation targets.

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