EU carbon market hit fresh low after backloading vote

BRUSSELS/LONDON Thu Jan 24, 2013 9:41am EST

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BRUSSELS/LONDON (Reuters) - EU carbon prices briefly slid 40 percent 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 (ETS) on Thursday dropped to 2.81 euros a metric ton (1.1023 ton) 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, they later climbed back above 4 euros.

This week the Commission warned that the price could drop dramatically and the scheme could become irrelevant and EU energy and environment policy would unravel 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 on Thursday.

"The alternative is a re-nationalization 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."

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 euros to make utilities switch to lower carbon energy generation.

SCHEME TO STAY

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.

Thursday's vote is part of a long EU process. 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, leaving the market limping along and Europe's ambitions to lead the world fight against rising carbon emissions severely dented.

So far, coal-intensive Poland is opposed, Britain wants a more ambitious plan and Germany, the bloc's most influential member, is undecided.

Euro skeptics 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.

"Many in the business community have been clear on this issue for over a decade - it's all about putting a price on carbon," David Hone, climate change advisor for Royal Dutch Shell said.

"Policy-makers need to focus on the single clear goal of a carbon price in the energy system, rather than multiple energy mix targets. This is what business really needs."

But 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 euros in 2008 - a level many market participants do not expect again this decade.

LIQUIDITY VANISHED

Traders said the latest drama in the carbon market was swift and overdone.

"Liquidity vanished for a moment and that caused the freefall (in prices)," one carbon trader at a utility said.

Many speculative traders set their stop-loss positions at 5 euros and when carbon prices fell below that level, it triggered automatic sales without buyers.

"The news itself did not justify such a freefall, it was mostly due to this technicality," the trader added.

"Until there is a clear will to give legislative support to this market we cannot expect participants to keep believing in it," another emissions trader said.

Analysts say the ETS will limp along, even if at levels so low as to provide no incentive for a lower carbon energy mix, as it would be as complicated to dismantle it as it is to reform.

"At worst, it will spend a number of years being unexciting until that time policymakers actually commit to making significant emissions reductions," Barclays analyst Trevor Sikorski said.

(Additional reporting by Marton Kruppa and Ben Garside; editing by Keiron Henderson)

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