Advertisement

SKIP ADVERTISEMENT

Europe Tries to Stem a Plunge in Carbon Prices

LONDON — The European Commission is poised to propose the only short-term fix available for a plunge in carbon prices, removing surplus emissions permits in an action that may still do little to increase low-carbon investment.

The European Union’s emissions trading program needs rescuing from a 10-year glut in the supply of carbon dioxide permits, which has left prices near record lows.

The best solution would be a price floor, which would set the minimum cost of carbon emissions for a decade or more, sending a clear signal for low-carbon investment and for the 12,000 polluting factories and power plants directly affected by the emissions trading program.

A price floor has support from some industries and from academics and policy research institutions like Climate Strategies in Britain. But the idea is likely to court opposition from politicians and companies, which see a price floor as an intervention limiting the flexibility of the carbon market and raising industry costs.

A European Commission spokesman for climate action, Isaac Valero-Ladron, ruled out a price floor on the basis that it would count as a direct intervention.

“The Commission does not support the idea of a price floor. We don’t have a price floor. We will never propose a price floor,” he said.

For now the Union is poised to enact an alternative and more palatable intervention to remove a certain number of emissions permits or E.U. allowances — E.U.A.’s — from the market, in a “withholding” or “set-aside” measure.

That will not guarantee that prices will be restored to more environmentally effective, prefinancial crisis levels (€15 to €25, or $19 to $32), barring an unlikely European economic rebound.

The action has political advantages, however. It could be agreed upon by a majority of environment ministers in a tweak to existing auctioning regulation under the trading program, in a process that would take only about six months.

The European Commission would propose to withhold a certain number of E.U.A.’s, after more guidance, including an expected Parliament vote on the issue within months.

By contrast, a carbon price floor would probably require a change to existing emissions trading law and is clearly out of favor with the commission anyway. A move to forge tougher, broader climate action through stricter Union-wide emissions targets would need member state approval and would take years.

Some free market proponents suggest that no fix is needed, arguing that falling carbon prices simply reflect less pollution and demand for emissions permits in the aftermath of the financial crisis.

But the government-led program fails to mimic the way manufacturers of goods in real markets mothball capacity in a downturn, trimming supply in line with demand, thus limiting price falls.

The carbon market has no such recourse. Supply is fixed and the E.U.A. surplus for each year simply adds to a burgeoning glut, extending the price slide into the future.

The E.U. emissions trading program allocates a fixed quota of emissions permits to industry. The present quota was set before the scale of the global financial crisis was clear.

The E.U. emissions trading program had a traded value of about $120 billion in 2010. One E.U.A. accounts for one ton of carbon dioxide emissions.

Carbon prices have continued their slide since a brief recovery last month after a European Parliament environment panel proposed to withhold about 1.4 billion E.U.A.’s. That compares with annual emissions of about two billion tons of carbon dioxide under the program.

A withholding of 1.4 billion E.U.A.’s would certainly help restore price tension, as a renewed E.U.A. shortage would force power generators to switch from burning high-carbon coal to natural gas, implying a carbon price of about €21, given present coal and natural gas prices. That is three times the current carbon price.

But the Union may not agree to such an ambitious proposal, which might affect fuel bills at a time when many member states are enduring harsh austerity measures. The European Commission has previously suggested withholding a smaller 500 million to 800 million E.U.A.’s from 2013-20.

And European Parliament approval is needed, which is likely to be guided by an industry panel vote in February, rather than by the more zealous environment committee, which voted last month. The industry committee is expected to support the idea of withholding E.U.A.’s, but the panel will not necessarily back the proposed 1.4 billion figure.

How many E.U.A.’s should be removed? Carbon market analysts forecast that a glut in E.U.A.’s and other carbon credits will persist through 2020 and beyond.

They project a net surplus in 2020 of 650 million E.U.A.’s (Barclays Capital); 1,200 million to 1,300 million (Point Carbon); 800 million (UBS); 800 million (Société Générale); or 566 million (Deutsche Bank).

Such estimates suggest that regulators should withhold at least 700 million E.U.A.’s, and probably more, to restore price tension.

Even if that could be agreed upon and it were effective in driving up prices, withholding E.U.A.’s remains a rather arbitrary measure and leaves the market open to future meddling.

A simple price floor for carbon permits would provide a surer, long-term footing, but for now the market is headed toward a second-best policy.

Gerard Wynn is a Reuters columnist.

A version of this article appears in print on   in The International Herald Tribune. Order Reprints | Today’s Paper | Subscribe

Advertisement

SKIP ADVERTISEMENT