EU carbon too cheap, no mention of intervention: draft

BRUSSELS Thu Jan 26, 2012 11:42am EST

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BRUSSELS (Reuters) - European Union carbon allowances are far too cheap to encourage increased environmental investment, a leaked EU draft seen by Reuters said, but it stopped short of calling for the market intervention politicians and energy companies argue is urgently needed.

Pressure has built from industry and lawmakers across the political divide for action to prop up the EU's Emissions Trading Scheme (ETS), which has sunk to record lows of less than 7 euros. On Tuesday, permits were trading at around 7.75 euros a tonne.

A cross-party parliamentary environment committee in December favored withdrawing carbon permits from an oversupplied market.

The European Parliament's industry committee will revisit the debate at the end of February and members of the European Parliament have said they expect continued support for withdrawing a significant number of permits.

But the draft resolution to be debated at EU government level only noted "a robust allowance price" was vital in moving towards a low carbon economy and "the present ETS allowance prices provide substantially lower incentives than anticipated."

It also "acknowledges the need to pay due attention to the risk of carbon leakage" in a reference to the risk that carbon not emitted in the euro zone will be emitted elsewhere if regulations are miscalculated.

Environmental non-government organizations said the draft conclusions, expected to be discussed in a working party group pending formal adoption later this year, did not confront the weight of opinion supporting intervention to bolster the carbon market.

"It has failed to recognize the political momentum building around ETS set-aside," Sanjeev Kumar of environment group E3G said.

EFFICIENCY COULD ADD TO SURPLUS

Carbon prices could sink even lower if the European Union succeeds in improving its record on energy efficiency, which would add to the surplus of carbon allowances.

Denmark, the EU's current president, has a national commitment to a green agenda and has said it will push for stricter enforcement of the EU's efficiency target.

But it has also acknowledged the difficulty of reaching political agreement across all 27 members of the EU and said it was unsure if a deal on cutting carbon permits could be completed during its six-month presidency.

The target is the only non-binding goal of the EU's set of three 2020 targets. They are to cut carbon by 20 percent and to increase the share of energy from renewable sources by 20 percent, as well as to improve energy efficiency by 20 percent.

The EU is on track to meet its two binding goals, but for now is only expected to around half-achieve the non-binding efficiency target.

"If the EU delivers on its energy-efficiency objectives, this would enable the EU to outperform the current 20 percent emission reduction target and achieve a 25 percent reduction by 2020," the draft conclusions seen by Reuters said.

A reference to the possibility of a 25 percent carbon cut stirred up stormy debate last year when Poland, then holder of the rotating EU presidency, blocked setting it as a goal.

Another draft seen by Reuters showed that raising the EU's emission reduction target to 30 percent by 2020 would be a lot less costly than previously thought, although it would be more expensive for nations in eastern Europe, such as Poland, which is heavily dependent on carbon-intensive coal.

(Additional reporting by Charlie Dunmore; editing by James Jukwey)

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