Troubled ETS must have ‘robust’ carbon price, say analysts

EU greenhouse gas (GHG) emissions dropped by 2.45% in 2011 as a result of the continuing economic downturn - fuelling concerns that Europe's carbon market will be oversupplied until 2020.

A new 2011 emissions data report, released yesterday (April 2) by the European Commission, found that last year some 1,888m tonnes (Mt) of GHG emissions were emitted by the 27 countries participating in the EU’s Emissions Trading Scheme (ETS), compared to 1,939Mt in 2010.

It revealed that the greatest relative changes came from the power and heat sector, which saw emissions decrease by 41MT to 1,141Mt. This has been attributed to a mild winter and an increase in the use of renewables for energy generation, as well as tougher climate policies.

In particular, it found that wind and solar power generation outweighed the impact of emissions from the closure of nuclear power plants in Germany.

This also brings the total surplus accrued by the ETS over the carbon budget to 355m allowances, with the largest of these continuing to accrue to the highest emitting manufacturing sectors, such as steel and cement, which now account for 279m and 195m respectively.

As a result, concerns have now been raised among analysts that the European carbon market will be oversupplied until at least 2020, consequently depressing the carbon price and reducing market incentives for low-carbon investment for about a decade.

According to forecasting and advisory firm Thompson Reuters Point Carbon (TRPC), which had predicted a slowdown in emissions generated by the economies of Europe, the outcome of the analysis is below market expectations.

It stated that the results show that the ETS has been oversupplied for the third year in a row – indicating that economic recovery has still not returned to European economies to their recession levels.

As a result, TRPC senior market analyst Marcus Ferdinand warned that the data will have “an additional bearish impact on the current low carbon prices” although the “lower than expected verified emission numbers could increase support for the set-aside of allowances in phase 3 of the EU ETS”.

He added: “We started 2011 with expectations for steady growth and recovery for most sectors after the financial crisis and, indeed, the first half of the year looked promising with positive economic indicators and industrial production levels growing.

“However, concerns over Greek and southern European debt escalated during the latter half of the year and worries over slowing growth in the eurozone and the possibility of another recession materialised in slowing production levels for important industry sectors, reflected in the drop in emissions”.

It is thought that these new figures will add pressure to EU policymakers to intervene to rescue the struggling scheme by reducing the supply of carbon allowances before the next carbon budget starts in 2013.
This trading period would then run until 2020.

NGO Sandbag Climate Campaign’s senior policy advisor Damien Morris says that the political conditions have “never been better for policymakers to rescue the ETS from the twin legacies of overallocation and recession”, adding that MEPs from across the political spectrum now recognise the need for a “robust carbon price over the coming decade”.

This he says is important “if we’re to reach Europe’s longer-term climate goals cost-effectively, and business voices – including major energy companies – are also demanding intervention”.

However, he warns that the window for fixing the ETS is rapidly closing and must be amended before the 2013 deadline.

He concluded it is “imperative that the European Council move swiftly to support Parliament’s proposal in the Energy Efficiency Directive to withdraw ETS allowances; that way we can present companies with a clear investment framework out to 2020 that is also environmentally robust”.

Carys Matthews

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