February 25, 2009 / 3:24 PM / 11 years ago

Leave falling carbon prices alone, say experts

* Experts say carbon price floor is bad idea

* Carbon market needs mechanism to regulate supply

* Introduction of central carbon bank could benefit market

By Michael Szabo

LONDON (Reuters) - Falling carbon prices should not be supported through artificial price floors or direct government intervention, as this may deter new players and stunt the still-nascent market’s growth, carbon market experts said.

“Price floors do not exist in any other markets,” said Emmanuel Fages, a carbon analyst at France’s Societe Generale and subsidiary orbeo, on Wednesday.

“Creating one in carbon would point out this market as an outlier and discourage regular market players, whom we depend on for the market’s ultimate success.”

Since 2005, the European Union’s Emissions Trading Scheme has capped the 27-nation bloc’s industrial emissions and issued an annual quota of emissions permits to firms, forcing them to buy from others if they emit more carbon dioxide than allowed.

But cash-strapped firms seeking to raise funds in the short-term have been dumping 2008 permits with a view to borrowing from their 2009 quota in April when last year’s permits are due to be handed in.

This has caused carbon prices to plummet, falling to nearly 8 euros ($10.25) a tons last week, down almost 75 percent from a 2-year high of 30 euros hit last summer.

“In other ‘classic’ commodity markets, lower price triggers supply destruction, which acts as an automatic stabilizer,” Fages said. “This does not work in carbon, as the supply is rigid and does not adapt to price changes.”

INTERVENTION

Observers warn that a low carbon price coupled with cheap oil and coal will deter new investment in renewable energy.

This has prompted pressure for market intervention, possibly through restructuring the scheme or setting a price floor.

“A trading scheme is the right way to go but it is challenging when prices fall to 8 euros. We need to structure it as best we can to have a proper price,” UK energy and climate change secretary Ed Miliband said on Wednesday.

But market experts warn that introducing a price floor may set a dangerous precedent for the market.

“If we create a price floor, then there may be a push for a price cap, which would impede investment in low-carbon technologies and distort the social cost of carbon,” Fages said.

“We should not tamper with prices to begin with.”

Deutsche Bank’s Mark Lewis said this week that intervention should be limited to setting a minimum price at which permits are auctioned from 2013 or modifying the rate at which the permit supply will decrease from 2020.

“This ability to alter the reduction rate in the cap is a very powerful policy lever because it means you can influence today’s supply by signaling a change to that reduction rate in the future,” he told Reuters.

Others argue for the creation of a central bank for carbon, which would regulate the supply of emissions permits similar to the way a central bank regulates monetary supply.

Fages said that a central carbon bank could “hold and store” permits when supply is overabundant.

Deutsche Bank’s Lewis said it may be too late for the EU to introduce such an institution into its scheme, but urged other nations like the United States to consider ways of regulating supply when developing their own emissions trading plans.

Additional reporting by Nina Chestney, Editing by William Hardy

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