(The author is a Reuters market analyst. The views expressed
are his own.)
By Gerard Wynn
LONDON Jan 4 The European Commission is
poised to propose the only short-term fix available for the
plunge in carbon prices, removing surplus emissions permits in a
move that may still do little to boost low-carbon investment.
The European Union's emissions trading scheme needs rescuing
from a 10-year glut in supply of carbon dioxide (CO2) permits,
which has left prices near record lows.
The best solution is a price floor, which would set the
minimum cost of carbon emissions out a decade or more, sending a
clear signal for low-carbon investment and the 12,000 polluting
factories and power plants directly affected by the emissions
That is likely to court political and industry opposition,
however, as an intervention limiting the flexibility of the
carbon market and raising industry costs.
A European Commission spokesman for climate action, Isaac
Valero Ladron, ruled it out on the basis it counted as a direct
"The Commission does not support the idea of a price floor.
We don't have a price floor, we will never propose a price
floor," he told Reuters.
A price floor has support from some industry and from
academics and policy thinktanks such as the UK-based "Climate
Strategies" group, but may have to be a solution after 2020.
For now the EU is poised to enact an alternative, more
palatable intervention, to remove a certain number of emissions
permits or EU allowances (EUAs) from the market, in a so-called
"withholding" or "set-aside" measure.
That will not guarantee that prices are restored to more
environmentally effective, pre-crisis levels (15-25 euros),
barring an unlikely European economic rebound.
It has political advantages, however: it could be agreed by
a majority of environment ministers in a tweak to existing
auctioning regulation under the trading scheme, in a process
which would only take about six months.
The Commission, the EU executive, would propose to withhold
a certain number of EUAs, after more guidance including an
expected Parliament vote on the issue within months.
By contrast, a carbon price floor would likely require a
change to existing emissions trading law, and is clearly out of
favour with the Commission anyway. A move to forge tougher,
broader climate action through stricter EU-wide emissions
targets would need member state approval, and would be likely to
Some free market proponents suggest that no fix is needed,
arguing falling carbon prices simply reflect less pollution and
demand for emissions permits in the wake of the financial
But the government-led scheme fails to mimic how
manufacturers of goods in real markets mothball capacity in a
downturn, trimming supply in line with demand and so limiting
The carbon market has no such recourse: supply is fixed and
each year's EUA surplus simply adds to a burgeoning glut,
extending the price slide into the future.
The EU emissions trading scheme had a traded value of about
$120 billion in 2010. One EUA accounts for 1 tonne of carbon
dioxide (CO2) emissions.
Carbon prices have continued their slide since a brief
recovery last month after a European Parliament environment
panel proposed to withhold some 1.4 billion EUAs.
That compares with annual emissions under the scheme of
about 2 billion tonnes of CO2.
A withholding of 1.4 billion EUAs would certainly help
restore price tension: a renewed EUA shortage would force power
generators to switch from burning high-carbon coal to gas,
implying a carbon price of about 21 euros given present coal and
That's three times the carbon price now.
But the EU may not agree to such an ambitious proposal which
may have some impact on fuel bills at a time when many member
states are enduring harsh austerity measures.
The European Commission has previously suggested withholding
a smaller 500-800 million EUAs from 2013-2020.
And European Parliament approval is needed, likely guided by
an industry panel vote recently delayed until February, rather
than by the more zealous environment committee which voted last
The industry committee is expected to support the idea of
withholding EUAs, in a vote which would push the legislative
process, but the panel will not necessarily back the 1.4 billion
The EU emissions trading scheme allocates a fixed quota of
emissions permits to industry. The present quota was agreed
before the scale of the financial crisis was clear.
How many EUAs should be removed?
Carbon market analysts forecast that a glut in EUAs and
other carbon credits will persist through 2020 and beyond.
They project a net surplus in 2020 of 650 million
EUAs(Barclays Capital); 1,200-1,300 million (Point Carbon); 800
million (UBS); 800 million (Societe Generale); or 566 million
Such estimates suggest regulators should withhold at least
700 million EUAs, and likely more, to restore price tension.
Even if that could be agreed and it were effective in
driving up prices, withholding EUAs remains a rather arbitrary
measure and leaves the market open to future meddling.
A simple price floor would provide a surer, long-term
footing, but for now the market is headed towards a second best
(Reporting by Gerard Wynn; Editing by Anthony Barker)