Europe fights to save cap-and-trade as price of carbon continues far too low to be effective

Aviation joins the EU Emissions Trading System on 1st January.  Due to the recession, the price of a tonne of carbon was €14 in January 2011, but now it has been to €6 or so, making it much cheaper to pollute and slashing the financial incentives for companies to invest in low-carbon technologies. With the prospect of recession and the problems for the €, the price could fall to €2 soon, making the system ineffective. There are far too many permits in the system, and there always have been since the scheme’s launch in 2005. Technologies like carbon capture and storage are not economically viable unless the price is at least €25. Now the environment committee of the European Parliament voted to withdraw some 1.4 billion allowances, about 15% of the total, from the carbon market between 2013 and 2020.

Price of EUAs (EU Emission Allowances) € 8.81 on 21.12.2011

 Europe fights to save cap-and-trade as crisis hits

20.12.2011 (Yahoo)  – Associated Press.

Europe’s main weapon in the battle against climate change is now fighting for its own survival.
In early January, investors in the continent’s cap-and-trade system still had to pay some €14 ($18.30) for the right to emit one ton of carbon dioxide into the air. By last week, the price of one emission allowance had tumbled to a meager €6.41 — making it much cheaper to pollute and slashing the financial incentives for companies to invest in low-carbon technologies.

Analysts warn that the prospect of another recession in the debt-ridden continent, and the accompanying decline in emissions, could push prices below €2 by the end of next month.

The troubles in the carbon market, a system being watched closely from California to China, is linked to the struggles of Europe’ other ambitious project, the euro. And just as financial investors have looked to the European Central Bank to save the currency through massive intervention in the bond markets, analysts say the emissions market may need similar centralized help.

Last week, 19 companies, including oil giant Royal Dutch Shell PLC, Philips Electronics NV and supermarket chain Tesco PLC, sent a letter to the European Commission urging it to reduce the number of emission allowances in the system and figure out how to protect the market from future economic shocks. The commission and national governments jointly manage the cap-and-trade system.

“The lower price is really undermining the development of technologies that will be needed in the decades to come,” said David Hone, Shell’s climate change adviser.

Shell, which is mostly known for selling oil and gas, has been one of the pioneers of carbon capture and storage, projects in which CO2 emissions are stored underground so they don’t get released into the atmosphere and contribute to global warming. But investing in new technologies like carbon capture and storage only becomes commercially viable at a carbon price of between euro25 and euro30, Hone said.

“Over the last few months, we have seen some of these projects disappear,” he added.

In October, the U.K. government shut down the carbon capture project in Longannet in eastern Scotland in which Shell was one of the partners.

While the prospect of another recession is the main reason for the recent drop in carbon prices, experts say that — just like with the euro — serious flaws in the system are exacerbating the problems and could lead to its failure if they can’t be fixed.

The economic crisis has lowered emissions and thus hit the price of carbon allowances. But the drop has been so dramatic because there were too many allowances in the system to begin with.

To get industry and skeptical governments on board, the Commission set a very high cap for emissions when it launched the carbon market in 2005.

Since then, most allowances have been given out for free to the 11,000 power stations and factories covered by the system based on their historical emissions. Companies that emit less carbon dioxide than they are allowed can sell their spare permits to firms that exceed their limit. As of next year, airlines will also be included in the system.

But the big test for Europe’s carbon market — and whether it can provide the financial incentives for cutting emissions — will come in 2013, when governments start selling a growing number of allowances at auctions.

It is before then that the Commission has to intervene, say the companies that wrote last week’s letters.

There are signs that their calls are being heard.

On Tuesday, the environment committee of the European Parliament voted to withdraw some 1.4 billion allowances, about 15 percent of the total, from the carbon market between 2013 and 2020. At the same time, the committee said, the annual cap should be cut by 2.25 percent per year, rather than the 1.74 percent currently planned.

While the committee vote is the first step in a long process of changing the system and few industry watchers expect the figures to survive negotiations among EU states trying to protect their national industries, it caused carbon prices to jump more than 18 percent.

“It opens up a much deeper discussion about what does the intervention look like and when is it going to happen,” says Sanjeev Kumar, an expert on carbon trading at environmental watchdog E3G in Brussels.

“Without intervention,” warned Kumar, “not only the ETS is over, but Europe’s climate policy is over. It will put Europe back into the dark ages.”

Apart from failing to encourage the necessary cuts in emissions and technological innovation, the collapse in the carbon price could also worsen Europe’s debt crisis.

Between 2013 and 2020, when companies have to pay for more and more of their allowances, the cap-and-tade system could raise as much as euro190 billion for government across the EU if prices recover.

“This is a pretty important revenue stream for most member states,” says Rob Elsworth, of climate campaign group Sandbag in London. “And they are watching revenues just disappear.”

Experts like Kumar and Elsworth are hopeful that states will garner the political will to save the carbon trading system, which has pioneered the market-based approach to saving the environment.

“If you take away this green-economy narrative,” asked Elsworth, “what’s really left of Europe?”


posted by Damien on 20th Dec 2011

This morning in Brussels, MEPs in the Environment Committee approved essential proposals to reduce the supply of carbon permits under the EU Emissions Trading Scheme (ETS).

The proposals were passed as amendments to the draft Energy Efficiency Directive, which observers have eyed nervously for its potential overlap with the ETS. Reduced demand for EU carbon permits since the recession has seen prices languishing; however, in some models used by the Commission the Energy Efficiency Directive threatened to reduce the demand for carbon permits so far that the carbon price would crash down to zero. The dwindling carbon price not only provides a weak investment signal for companies looking to invest in clean energy, it has seen governments projected auction revenues steadily recede, and dedicated EU funding for carbon-capture-and-storage projects disappear.

But progressive policymakers in the EU parliament have seen this potential crisis for Europe’s flagship climate policy as an opportunity for its permanent reform. Today saw an amendment passed to set aside 1.4 billion permits from the 2013-2020 carbon budget that, if implemented, would bring much needed scarcity to the system. Even more promisingly, the committee passed an amendment which would steepen the trajectory of the EU ETS cap to align it with Europe’s stated 2050 climate goals – a move which could save 8.5 billion tonnes of pollution over the next 4 decades, roughly equivalent to 2 years worth of Europe’s emissions at current levels. An additional more modest amendment calling for a careful assessment of the impacts of the new directive on the EU ETS, and a removal of permits on that basis, was also passed.

The carbon price, which had fallen to a record low of €6.30 last week, immediately rallied above €8 following the news – a vindication of Deutsche Bank’s recent assessment that the integrity of the carbon price now almost entirely depends on a clear political intervention.

Going forward from here, the amendments will be revisited by the Industry, Research and Energy Committee on January 24th, before being put before the whole Parliament in April. January 24th will also see the Environment Committee revisit ETS reform in relation to the 2050 Low Carbon Roadmap.




The price of carbon permits can be seen at Point Carbon at



see also

Bloomberg article   13th September 2011

Emissions are under-priced in Europe

Analysis shows that the current price of carbon will need to rise significantly to achieve Europe’s emissions goals after 2020

London, 13 September 2011 ‐‐ The price of carbon in the European Emissions Trading System (EU ETS) should be trading at three times today’s levels according to new analysis by Bloomberg New Energy Finance of the long-term fundamentals in the emissions market. Looking at how the scheme will evolve up to 2020 and beyond, the price today should be €40 – 60/tCO2, compared to the current price of around €12 – 13/tCO2. By 2020 prices will need to rise to €60 to €90/tCO2.

Since the beginning of 2011 the European carbon price has traded between €10 and €19/tCO2. These low prices reflect oversupply caused by the accumulated surpluses of Phase II (2008-2012) largely created by the recession, as well as an increase in the volume of carbon credits imported from outside the EU. According to Bloomberg New Energy Finance these prices will broadly be sufficient to achieve the emission reduction targets set for the EU ETS in 2020 – and allowing for the full import quota of 1.66bn tonnes of international credits.

Between 2008 and 2020 the scheme will be in cumulative deficit of around 1,968Mt. Some 1,664Mt (85%) of this can be met by the use of international credits – the maximum allowed in the scheme up to 2020 – resulting in a net shortfall of around 300Mt over the period, equivalent to around 20Mt/yr or 1% of emissions covered by the scheme. This can be met by a small increase in the carbon price, which is currently trading at around €12/tCO2.


and it continues ….