EU carbon market lagging in climate fight: analysts

By Gerard Wynn

COPENHAGEN (Reuters) - Evidence is slim that the European Union's four-year old carbon market is sufficiently penalizing emissions of the greenhouse gas carbon dioxide, in the fight against climate change, analysts said on Tuesday.

Carbon markets work by placing a limit on carbon emissions and allowing participating countries and companies to trade emissions permits within that cap.

The tighter the supply of permits, the higher the carbon price, and the more economic it is to improve energy efficiency or switch to low carbon-emitting sources of energy.

But the construction of coal-fired power plants, the biggest emitters within the carbon-intensive power sector, is continuing despite an EU carbon price, in part because some countries such as Germany are planning to phase out nuclear.

For example, half of investment by Denmark's DONG Energy is now in renewable sources such as wind, but the company is also planning "a very big" new coal plant in northern Germany, Chief Executive Anders Eldrup said on Tuesday.

"It's difficult to see the world surviving without coal for many, many years to come," Eldrup told a carbon market conference in Copenhagen.

Asked whether the carbon price was influencing DONG Energy's investment decisions, Eldrup said the price was too low to make it economic to bury coal plant's carbon emissions underground, considered a vital technology.

Europe's carbon price now, if reflected globally for years to come, would do no more than limit global warming to about 3 degrees centigrades, said one leading climate scientist.

"We really need a higher price, clearly this is not good enough," said Rajendra Pachauri, chair of the IPCC, the U.N. climate panel which last year won the Nobel peace prize for raising awareness about the threat of climate change.

Pachauri was referring to prices of $20-50 per tonne of avoided carbon dioxide (CO2) by 2030, adding that a price of up to $100 by 2030 was a better target. EU carbon emissions permits were trading at around 22 euros ($34.04) on Tuesday.

UNCERTAIN

The European Union's executive Commission in January tightened the supply of emissions permits in its trading scheme after carbon prices plummetted to below 1 euro in the scheme's first trading phase from 2005-07.

A new proposed rule that from 2013 power generators buy all their emissions permits, rather than get most free as now, was a contributory factor in the cancellation of at least four coal plants, German energy giant E.ON said last month.

Investment bank analysts now forecast carbon prices of 25 to 35 euros ($54.15) following those new, bolder Commission proposals, but even these are still way below Pachauri's target.

And uncertainty over the global economic outlook and future energy prices means current prices still lag those forecasts, as doubts pare confidence in the value of emissions permits.

"I tend to agree it's bullish, the difficulty is the uncertainty," said Paolo Coghe, gas and emissions analyst at Koch Energy.

Researchers Point Carbon on Tuesday pointed to the successful growth of carbon markets, saying that global trade was up 80 percent at 40 billion euros in 2007.

Point Carbon added that in a survey of EU carbon market participants, two-thirds of respondents were involved in or planning emissions reductions of some kind.

(Reporting by Gerard Wynn; editing by James Jukwey)