BRUSSELS The Europe Union's carbon market could be flooded with excess pollution permits over the next decade, cutting prices in half and depriving governments of billions in budgeted revenues, EU sources say.
"There's a real concern of negative impacts on prices if the issue is not properly addressed," one EU source said on condition of anonymity. "Some of the studies imply that carbon prices will collapse."
It is not clear, however, whether European governments will support measures that would erode carbon prices, which would put a severe dent in budgeted government revenues in 2013-2020.
It would also undermine investment in green technology, a key economic driver in countries such as Germany and Denmark.
The new "energy services directive," due in late June, will propose cutting energy consumption in buildings, vehicles and more controversially, industry.
Energy efficiency measures for building and transport are widely supported by many industries, as well as environmentalists.
But carbon market experts, including those in the Commission's climate department, say it would be a mistake to put a further layer of regulation on top of the EU's main tool for curbing greenhouse gas emissions -- the Emissions Trading Scheme (ETS).
The ETS covers about 11,000 factories and power plants, forcing them to buy permits for each tonne of carbon dioxide they emit, and pushing down their combined emissions with a steadily decreasing cap.
But an overlying mandate for energy efficiency will reduce demand for permits -- by about 400 million tonnes in 2013-2020, one EU source said -- leaving them swilling around in the market, and exerting downward pressure on prices.
One leaked study seen by Reuters foresees carbon prices falling to 14 euros per tonne, compared to a business-as-usual price of 25 euros. Another sees the price dropping to zero.
"The energy services directive could potentially wipe out billions of euros for governments across the EU, unless EU ETS allowances are set aside," said Sanjeev Kumar at environment consultancy E3G.
The Commission's energy spokeswoman, Marlene Holzner, declined to comment.
Carbon traders are also worried.
"The European Commission seems to be going back to the bad old days," said Henry Derwent, president of the International Emissions Trading Association (IETA). "We have a creeping re-ascendency of command and control in a part of the world economy that once prided itself on being market oriented," he added.
The problem was initially foreseen by the Commission's climate team, under climate commissioner Connie Hedegaard, in a strategy paper in February.
But her proposal to balance out the problem by setting aside the excess permits was attacked by some of her colleagues, who sought to protect industry from high carbon prices.
EU carbon market experts were divided over whether the dispute had arisen from clumsy policy-making, or if energy commissioner Guenther Oettinger in fact aimed to curb the role of the ETS.
The leaked impact assessment suggested the impact might be no accident -- that the Commission's energy department is pushing for a fundamental shift, with carbon prices no longer playing the prime role in decarbonisation.
"The total cost for industry will diminish, leading (to) an increased competitiveness in global markets," said the assessment.
Heavy industry favors a low carbon price and has gained increasing political influence over EU climate policy since the economic crisis.
"We do worry a lot that there is not much coordination between those working on the taxation, the regulation and the pricing of carbon," said IETA's Derwent.
(Reporting by Pete Harrison; editing by Jason Neely and Rex Merrifield)