Few Policy Options Available to Maintain Faith in EU Carbon Trading, Analysts Say | Mobilization for Climate Justice
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Emissions Trading News

By Ali Qassim
LONDON—With low carbon prices and a struggling economy in the European Union, governments appear to be running out of policy options to maintain confidence in the EU Emissions Trading System (ETS) as a way to reduce greenhouse gas emissions, according to London-based energy analysts.
“It’s hard to overemphasize the lack of carbon policy” shown by governments to handle this crisis, Kash Burchett, a European energy analyst at IHS Global Insight, told BNA April 24.
Tom Greenwood, senior analyst of carbon markets at IDEAcarbon Ltd., an independent and professional provider of carbon ratings, said even the few options that have been brought to the table, such as reducing the future volume of carbon dioxide emission permits, are unlikely to fix the longer-term problems with the ETS.
Depressed Carbon Prices
According to Burchett, last October, when the price of European Emissions Allowances (EUAs) fell below the €10 ($13.20) barrier for the first time in 20 months, it felt like a significant development. “But now 10 euros feel like you’re looking at a skyscraper.”
In early April, the price of EUAs—each of which represents the right to emit 1 metric ton of carbon equivalent under the ETS—inched close to €6 ($7.90), although the price returned to above €7 ($9.30) in the third week of April, Burchett said.
At their highest level—in August 2008 just before the global economic downturn began—EUAs traded at €28 ($37).
At current prices, the incentive for power plants and heavy industry to switch even from coal to natural gas fuel is low, let alone to renewable energy, Burchett said.
The Global CCS Institute estimated in a March 8 paper that to make clean carbon storage technology profitable, carbon prices would have to be at about €40 ($52.90).
Even more depressed are the prices of Certified Emission Reductions (CERs), the tradable carbon units under the Kyoto Protocol’s Clean Development Mechanism. CERs reached a record low of €5 ($6.60) in March, according to the IntercontinentalExchange’s Monthly Utilities Report for March.
Tackling Oversupply
According to IDEACarbon’s Greenwood, “if nothing was changed on the regulatory front, the consensus is pretty much that by 2020, there will be an oversupply of CO2 emissions permits [equal to] about 1.3 billion metric tons.”
Given the glut of permits and the continuing economic crisis in Europe, the carbon price in fact “ought to be zero euros and the fact that prices haven’t reached that low is due to the expectation that politicians in Europe will do something to change supply,” Greenwood said.
EU Climate Action Commissioner Connie Hedegaard on April 19 announced that the European Commission, the European Union’s executive arm, would by the end of this year propose a plan to amend the Auctioning Regulation to reduce the number of carbon permits to be auctioned in the next phase of the ETS, which begins in January 2013 (76 DEN A-3, 4/20/12).
Even assuming the Commission manages to push through this change in auctioning rules, Greenwood said, “the fundamental problem with this option is that it would entail setting aside this glut of permits until 2019, but this fails to tackle the problem of oversupply of permits by 2020, which is the official end of the third phase of the ETS.”
Carbon Price Floor Option
In any case, even coming to an agreement to temporarily set aside permits for the beginning of the third phase appears unlikely, given that Poland—a major user of coal energy—is adamantly opposed to any changes, Greenwood said.
Burchett agreed that any changes without Poland on board would be “very difficult.”
Some EU governments, such as the United Kingdom, are looking at alternatives to encourage investment in cleaner energy, such as the introduction of a carbon price floor.
Currently, the British Treasury has plans to introduce a carbon price floor for the power sector starting at about £16 ($26) per metric ton of carbon dioxide in 2013, rising to a target price of £30 ($48.70) per metric ton in 2020.
The Czech Republic and Italy have also been looking at versions of a carbon tax. “The problem is that these actions are hardly a vote of confidence on the EU ETS,” Burchett said.

Article source: GJEP Climate Connections Blog

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