The carbon market

Europe's Carbon Emissions Market Is Crashing

Marketweek,

28 March, 2013

Carbon markets were supposed to help the world fight climate change by making fossil fuels more expensive, thereby curbing the burning of coal, oil, and natural gas, which release carbon dioxide into the atmosphere. This year, the market is pricing a lifetime of pollution at less than the cost of a tank of gasoline. Using one type of United Nations carbon credit, in January it was possible to offset 581 tons of emissions, about as much as the average European generates in 80 years, for €23.24 ($30). The price has climbed to $82. “The fact that prices are so cheap says the market is broken,” says Edward Hanrahan, director of ClimateCare, in Oxford, England, which invests in carbon-reducing projects. “It’s not spurring large emitters to make investments” in reducing emissions.

Carbon markets were set up to help developed countries meet the emissions targets they agreed to under the 1997 Kyoto Protocol. The idea is to issue factory owners and utilities permits for a certain amount of pollution, with a declining number of permits issued each subsequent year. Companies that don’t use all their allowances can sell them to companies that exceed their limits. There are also markets like the UN’s Joint Implementation program, where companies can buy carbon “credits or “offsets” to help meet their emissions quotas. The money they spend on credits is invested in UN-approved emissions-cutting projects.

The European Union Emissions Trading System is by far the biggest carbon market, accounting for 89 percent of the $61 billion in trading worldwide in 2012, according to data compiled by Bloomberg. Users range from German power company RWE (RWE) to Danish brewerCarlsberg (CARLA). RWE emitted 140 million tons of CO2 in 2011 and had a cap of 89 million, so it had to buy 51 million tons of either carbon permits from other EU companies or offsets on the UN market.

When the EU started its Emissions Trading System eight years ago, policymakers expected the price of carbon would have to hit €25 to €30 a ton or more to coax industry to shift to renewable energy. David King, the science adviser to Britain’s then-Prime Minister Tony Blair, said companies wouldn’t change for less than €100 a ton. After trading on the EU ETS began, prices reached a high of €31 per ton. But the economic slump beginning in 2008 slowed industrial activity, depressing prices. Permits for delivery in December 2013 (and valid for seven years) touched a low of €2.81 on Jan. 24. They closed at €4.15 on March 22.

Lawmakers in the European Parliament are due to vote April 16 on a European Commission proposal that would delay issuance of new permits through 2015, temporarily restricting supplies in hopes of lifting prices. Prospects for passage are uncertain. Poland objects out of concern the plan would boost energy prices. Cyprus says it can’t afford to lose revenue from auctions. Greece is also opposed. Germany hasn’t decided how to vote. Without a big adjustment to the structure of the European market, buyers fear it “might just fall away,” says Abyd Karmali, head of carbon for Bank of America (BAC) in London. “You might end up with a patchwork quilt of measures across the 27 member states, where each state decides to put in place its own policies.”

In the U.S., proposals for a national carbon-trading market supported by President Obama stalled in the Senate in 2009. Japan’s government shelved a trading plan in 2010. At the same time, Japan, Canada, and Russia have declined to take part in the second round of quotas called for in the Kyoto agreement, which came into effect on Jan. 1, so companies there no longer require any permits or offsets. With the EU ETS foundering, support is growing for alternative approaches to curbing emissions, such as a direct tax on carbon. Even some oil company executives have endorsed the idea. “A carbon tax is much more straightforward,” Rex Tillerson, chairman ofExxonMobil (XOM), said in an interview with Charlie Rose on March 7. Dieter Helm, a professor of energy policy at Oxford University, agrees that taxing carbon would be more effective. “We want a carbon price to reflect where you want to go,” he says, “and not just current circumstances.”

The bottom line: With the price of carbon below €5 a ton in the EU’s Emission Trading System, companies have little incentive to cut emissions.