News | Climate Change

http://www.carbonpositive.net/viewarticle.aspx?articleID=1873

A call by British politicians for intervention in the EU carbon market to lift the “flat-lining” price of carbon has drawn cautionary and critical responses from the government, Brussels and carbon market players.

The UK’s cross-party parliamentary Environmental Audit Committee (EAC) says the current EU ETS carbon price is well below the levels needed to drive investment in low-carbon energy and industry. An EAC report released this week says emissions caps around the EU are too low to support a high enough carbon price that would in turn create the incentive to invest in clean energy infrastructure.

Exacerbating the situation is impact of recession, which has created a surplus of EUA emissions permits in the second phase of the EU ETS, running until 2012. A Bloomberg market survey estimated the oversupply at 2.3 per cent. This compares to a planned shortfall when allocations were finalised three years ago - before any hint of financial crisis and economic downturn.

"If the government wants to kick-start serious green investment, it must step in to stop the price of carbon flat-lining," EAC chairman Tim Yeo said.

The EAC report downgrades its forecast for the 2020 carbon price from €56 per tonne of CO2 to just €22. Current prices are €13-16. Studies suggest carbon prices of up to €100 are needed to drive the required levels of investment across the portfolio of low-carbon technologies available.

Also weighing on carbon prices is the deteriorating outlook for concerted climate action following the Copenhagen climate conference. The EU had undertaken to tighten its emissions target from 20 per cent to 30 per cent below 1990 levels in the advent of a strong international agreement. This would have boosted carbon prices significantly over the next decade but a higher EU target has been ruled out for now.

The EAC report suggested measures to lift carbon prices such as imposing a carbon tax, setting a floor price for EUAs or creating incentives for firms to cancel their surplus EUA holdings. It also calls for increased auctioning of permits by governments, rather than free allocation, to help fund clean-energy investment. It also said that in the absence of the UK being able win agreement for changes to the EU ETS, unilateral measures in Britain should be considered to show leadership.

In response to the report, the UK government questioned whether a floor price would be effective in the context of long-term emissions goals. The European Commission rejected the idea that the current low price was affecting long-term investment decisions, via an anonymous official speaking to Bloomberg: “It seems inconceivable that a company investing in a new power plant would be guided by the short-term carbon price during a severe recession. Naturally such decisions are driven by expectations about the carbon price for the next two decades or so, which would hardly be influenced at all by short-term and ad hoc interventions.”

A number of financial market players also criticised the idea of market intervention. Such interference goes against the nature of a cap-and-trade system, said Trevor Sikorski, a commodities analyst at the investment bank of Barclays. “Once the cap is set, government interference in the market is unnecessary and unhelpful,” he said.