EU carbon prices briefly slid 40% to a record low after politicians opposed plans to support the market, raising concerns prices could hit zero and sending a warning to European governments to pull together in lowering carbon emissions.
Prices in the EU's Emissions Trading Scheme on January 24 dropped to 2.81 EUR/tonne after a vote in the European Parliament's energy and industry committee opposing a scheme known as "backloading" to support prices by extracting allowances from the market and reinjecting them later. In volatile trade, prices later climbed back above 4 euros.
The Commission warned that the price could drop dramatically and the scheme could become irrelevant and EU energy unless parties agreed on a rescue plan. "This should be the final wake up call both to governments and the European Parliament," EU climate commissioner Connie Hedegaard said. "The alternative is a re-nationalisation of climate tools meaning a future patchwork of up to 27 different systems and taxes instead of one market creating a level playing field internally in Europe."
Although not binding it is the latest sign of the difficulty the EU is having in reaching agreement on how to intervene in the carbon market. A vote in the environment committee, expected next month, as well as another in a committee of representatives of member states, are far more decisive. Many doubt the Commission's proposal will be passed, meaning more ambitious reform plans might not happen for years. So far, coal-intensive Poland is opposed, Britain wants a more ambitious plan and Germany, the bloc's most influential member, is undecided.
Euro sceptics and those who oppose regulation, such as energy-intensive industries, might celebrate, but others want a coherent EU-wide policy and ultimately a global carbon price - along the lines of the global oil market.
The $148 billion scheme is core to Europe's efforts to prompt utilities and industry to go green but carbon prices are far too low to provide that incentive. Analysts say carbon prices need to be at least 20 EUR/tonne to make utilities switch to lower carbon energy generation. Launched in 2005, the scheme is now in its third trading phase and is legislated to run until at least 2020, which means it cannot be dismantled even if prices crash to zero. Since the European carbon market launched in 2005, it has been beset by problems, including tax fraud, and an over-allocation of permits that generated huge windfall profits for polluters.
Prices crashed to near zero in 2007 from a 32 euro-peak in April 2006 because of the over-allocation of permits. But traders today dismiss that collapse, blaming it on early errors in the experimental phase of the market. It spurred Commission reforms and less generous allocation of allowances, helping prices to reach almost 30 EUR/tonne in 2008 - a level many market participants do not expect again this decade.
Source: EMP 29.01.2013