(Gerard Wynn is a Reuters market analyst. The views expressed
are his own.)
By Gerard Wynn
LONDON Nov 24 The European Union's
emissions trading scheme now needs rescuing, but only on new
terms which better address its main aims and eradicate some of
its failings, using a price floor.
The scheme, launched in 2005, is at a cross-roads, as carbon
prices plunge to record lows and the fact dawns on traders that
there may be no strong recovery for more than a decade.
The EU carbon market is now irrelevant as an environmental
policy but a price floor would reverse that, and could deliver
additional tens of billions of euros to member states through
2020 from extra auction revenues.
The market works by allocating a fixed quota of emissions
permits to manufacturers and power plants, some of which they
get free and the rest they have to buy, from state-run and EU
A floor price would work by setting a reserve price at
auctions from 2013 (the start of the next trading cycle), say at
15 euros initially rising to 25 euros for example, by 2020.
Price would rise immediately on the expectation of a change
coming down the pipe.
But first, policymakers must be convinced of the urgency:
the scheme has taken so many blows, including tax fraud, a past
price collapse, doubtful environmental benefits, theft and
windfall profits, it may be hard to see that it can't shrug off
the latest European economic downturn.
And even if urgency is acknowledged, past failings have
injected some cynicism and apathy about whether it's worth
The benchmark carbon price hit a record low of 8 euros on
Thursday and without action will drift for a decade at under 20
euros per tonne of CO2 emitted, below a level which drives
The scheme is meant to help the EU meet carbon emissions
targets through 2020.
Carbon prices have collapsed because, in its bid to be
transparent, the EU published the quota of permits to 2020
before the severity of the downturn was clear.
The recession and present downturn mean a large portion of
those EU allowances (EUAs) are no longer needed but cannot be
They also have no alternative demand outside a troubled
Europe, unlike any other commodity.
Carbon prices could go lower, depending on traders' faith
that the market has a future.
CAN IT BE RESCUED?
The EU Commission which oversees the scheme now has four
1) sharpen the EU's broader carbon emissions target for
2) cut EUA supply;
3) set a price floor;
4) let prices languish at irrelevant levels for a decade.
The first can be dismissed: on the brink of recession there
is no appetite to burden EU countries or companies with tougher
carbon emissions targets, even if it can be argued that the
extra cost would be minimal.
The second is messy and undermines the market: how many EUAs
should be withdrawn, with what justification, and with what
guarantee that bureaucrats wouldn't intervene unexpectedly
The third - a price floor - makes sense and arguably should
have been done long ago, while the fourth clearly is not ideal.
A price floor would remove uncertainty over carbon costs for
industry going forward.
It would retain the present emission caps through 2020 and
beyond, which is the main success of the carbon market so far.
It would also increase emissions cuts, and as much as double
auction revenues for struggling EU member states.
And it would prevent a patchwork of EU policies emerging,
where Britain has already announced its own, unilateral floor
The scheme has two main aims. The first is to put a price on
carbon emissions in order to drive cuts and support low-carbon
technologies. The second is to give industry a clear annual
emissions cap trajectory through 2020 and beyond.
A third potential goal is to raise money for low-carbon
technologies in developing countries. Germany has done that by
using revenues from auctioning emissions permits.
And businesses can offset some of their emissions by paying
for carbon cuts in developing countries.
On emissions cuts, prices now and over the next decade are
too low even to motivate energy savings: surveys suggest that
most companies are motivated to make savings only where there's
a quick pay-back in two or three years.
The scheme has been most successful in providing a
transparent emissions trajectory for industry, with the caveat
that this has also caused the present price crash.
The market has also raised carbon finance for developing
countries, although these carbon offset revenues declined to
$1.5 billion last year from a peak of $7.4 billion in 2007.
Such carbon finance will become more important over time, as
a sweetener to entice developing country commitments in a future
global climate deal.
The present market crash presents a window of opportunity
for a rescue, imposing a price floor which would have few
dissenting voices among free market die-hards, given the
alternative of letting the scheme drift in limbo for years.
Miss the opportunity and that is what will happen.
(Editing by Jason Neely)