Carbon price crash warning – predicted oversupply of 1.9 bn tonnes of carbon permits by 2020 in ETS

Carbon price crash warning

6.7.2011 (Euractiv)

A predicted oversupply of 1.9 billion tonnes of carbon permits in the EU’s emissions
trading scheme (ETS) between now and 2020 is risking a carbon price slump, according
to a report by the environmental NGO Sandbag.

New research in the study ‘Buckle up! Tighten the cap and avoid the carbon crash‘ says that the intended abatement covered by the excess carbon permits is equal
to around a year’s worth of carbon permits.

The group estimates that in Phase 2 of the ETS between 2008-2012, around 672
Mt (Million tonnes) of carbon will be banked, from an excess of 855 Mt, and carried
over into Phase 3.

Added to the inflated Phase 3 baseline (totalling 1.2 billion over 2012–2020)
this gives a total of 1.9 billion permits.

“The recent freefall in the price of carbon has a simple, underlying cause –
a huge oversupply of permits,” Damien Morris, the report’s author, said in a statement.

“Our climate seatbelt is so loose it’s almost useless, and Europe urgently needs
to buckle up and remove at least 1.7 billion permits if it is to get its flagship
policy back on track,” he said.

The report blames a combination of oversupply carried over by industry from previous
carbon trading periods, and a basing of the future cap on this over-allocation.

At least 1.7 billion carbon permits now need to be removed from the market to
tighten the ETS and prevent a crash, Sandbag says.

“If Brussels fails to reform the ETS then it is setting up Europe to fail when
it could so easily be leading the world,” said Sandbag’s founding director, Baroness
Bryony Worthington.

“We urge politicians across Europe to support tightening the cap so that the
emissions trading system can deliver a low-carbon Europe.”
see also
from Sandbag:
Report: Buckle Up! Tighten the cap and avoid the carbon crash
download PDF (56 pages)

Three years into Europe’s Emissions Trading System second trading period – how
is it performing? This report provides a comprehensive assessment of the environmental
outlook of the ETS, covering permit allocations, oversupply, companies use of
offsets and projected effectiveness of the cap through to 2020.

It finds that the huge overallocation to industry in Phase 1 has left a double
legacy undermining the effectiveness of the scheme to 2020 and beyond: a carryover
of permits banked into Phase 3 and an inflated baseline which affects the starting
position of the declining carbon cap beginning in 2013. The result: a likely oversupply
that grows to an eye-watering 1.9 billion tonnes through to 2020, equivalent of
a year’s worth of carbon permits in the scheme.

Sandbag recommends a number of measure to save the ETS from redundancy: that
the European Commission propose set-aside of 1.7 billion permits before 2013,
as well as opening up the Directive by 2015 to adjust the cap.


ections relating to aviation from the report:
The European Commission has set a separate cap for the aviation sector for 2012-2020
running parallel to the declining annual cap provided for stationary emitters.
Using average aviation emissions over 2004-2006 to set a baseline of 219Mt, the
Commission have set the 2012 cap at 97% of this, dropping to 95% across 2013-2020.These allocations are exclusively for use by airline operators and cannot be
surrendered by stationary installations for compliance, however a shortfall structured
into this cap will require airlines operators soak up excess permits from the
main cap. Based on emissions projections from Deutsche Bank, we see the aviation
sector absorbing 20Mt of surplus permits from Phase 2 and 468Mt in Phase 3.

(in Phase 3)  New entrants and aviation operators will also be allowed to use
offsets credits of up to 4.5% and 1.5% of their emissions during the period 2013-2020
(Table Page 34)
Aviation cap and projected emissions (MtCO2e)

Year     2012    2013     2014     2015     2016     2017    2018     2019     2020   2012-0  Total

Aviation cap     208      208       208       208       208       208      208       208      208        1,881

Aviation emissions   233    240     247     255     262     270      278      287       295        2,369

Shortfall                   -20     -32       -39        -46        -54       -62        -70       -78       -87        -488

Over Phase 3 the full climate and energy package would allow the system to accumulate
further EUA surpluses of 391 million, while still leaving 1.6Gt of unused and
substituted offsets untouched. Together the cap covering Phase 2 installations
stands to leave a legacy of 2.6Gt in permits and credits to future phases of the
system. As discussed above aviation emissions are expected to absorb some 490Mt of this.

 More on this at

Energy firms fear “tremendous decline” in CO2 price as large firms now hold huge
cache of carbon permits

Date Added: 18th June 2011

The EU’s carbon market could be flooded with excess pollution permits over the next decade, deflating prices and undermining investment in green energy, five EU energy companies have warned. The utilities said falling carbon prices could:

“severely hamper business incentives to invest in low-carbon technologies.”  Ten
steel and cement companies have amassed 240m carbon permits from generous allocations. Aviation will join the EU ETS in Jan 2012.Click here to view full story…