LONDON The credibility of the European Union's flagship carbon trading scheme was dealt another blow on Monday after carbon prices fell to six-month lows as U.N. talks in Copenhagen failed to deliver a strong climate deal.
Traders and analysts say low prices could continue well into 2010, slowing investment in low-carbon technologies which have already been dented by tight financing due to a slow economy.
"(The low price) reinforces the idea that relying solely on the EU ETS to drive investment is probably not the answer at the moment," said Andy Kelly, head of business development at Centrica.
"This does give ammunition to the anti cap-and-trade brigade," an emissions trader said, referring to groups who say emissions trading does not work.
The European Union's Emissions Trading Scheme (EU ETS) imposes a cap on carbon emissions from power plants and factories in the 27-nation bloc using a fixed quota of EU Allowances (EUAs).
Prices can directly influence the daily operation of power generators, encouraging them to switch to gas from heavy-carbon coal, or make investments in renewable sources of electricity. Low prices directly benefit fossil fuel energy production.
The scheme is sometimes criticized for not spurring low-carbon investment fast enough. Utilities say they need certainty from a prolonged and sustained rise in carbon prices to invest in new nuclear plants and carbon capture and storage.
Many analysts say EUAs need to rise to 25-30 euros or even higher to spur such investments but prices are not forecast to reach that level until 2012 or beyond.
EUA prices were under 13 euros ($18.63) a tonne on Monday, a far cry from almost 30 euros last summer. So far in 2009 the economic downturn has reduced industrial output, thereby the need for emissions permits.
Whatever the current price, New Energy Finance argues it should not deter utilities from formulating business models based on future prices.
"We don't see much impact from the EU ETS on investments at all under current caps. Utilities will be looking at longer-term prices for their business models, in which case today's price is not very relevant," said Olivier Lejeune, analyst at New Energy Finance.
WEAK DEAL, WEAK CARBON
"Carbon prices could remain depressed until the second or third quarter of 2010. The market will be exposed to the issuance of 2010 allowances and subject to a remarkable economic upturn we face the potential of excess selling," said Andrew Ager, head of emissions trading at Bache Commodities.
Many players expect industrial companies to sell off excess EUAs in January or February, weighing on prices further.
Market participants had hoped that a strong deal in Copenhagen would produce tougher carbon caps, upping demand for emissions permits.
However, the so-called Copenhagen Accord was not ambitious enough to persuade the EU to raise its emissions target to a 30 percent cut by 2020 from 1990 levels from 20 percent.
In the absence of a strong global climate pact, it will be difficult to expect significantly higher prices, some market players said.
"Without a firm agreement, I can't see that much which will boost the price in the short term. Below average temperatures and a booming economy would obviously boost carbon prices. However I am not confident of either," Ager said.
(Reporting by Nina Chestney; Editing by Sue Thomas)