Call for 'carbon reserve' as CO2 prices hit record low

10 February 2009
In the media
Published at
Cites Oscar Reyes
The economic slump is threatening to derail the EU's nascent carbon market, with declining industrial demand reducing the price of CO2 emission allowances to record lows last week. Mark Lewis, director of global carbon research at Deutsche Bank, proposed on Friday (6 February) to establish a reserve price for EU emissions allowances (EUAs) to avoid a price collapse in the third phase of the bloc's trading scheme, which starts in 2013. Speaking in Brussels, Lewis argued that because allowances are bankable from one phase to another, such a reserve price for the next stage of the emissions trading scheme (EU ETS) would increase the value of allowances today, as buyers know that they will be worth more in the future. EUA prices slumped to €9.99 per unit on 4 February, the lowest daily value so far for the current second phase. "It is an artificial market created to achieve a policy objective," Lewis said, arguing that if price signals fail, then the market is not delivering the objectives. He argued that current prices will not deliver the EU's climate targets for 2020 (see EurActiv LinksDossier), nor will they make carbon capture and underground storage technologies commercially viable by the same date (see EurActiv LinksDossier). Economic crisis sends CO2 market shrinking A forecast from Barclays Capital predicted on Friday that the EU emissions allowances would cost €9 on average this year. Point Carbon, a consultancy, also revised its 2009 forecast downwards last month, citing declining industrial production and electricity demand as a cause for lower carbon emissions as the economic crisis takes hold. They now predict that the price will settle at €12/t, some €10/t below their figure for last November. Industrial emitters were selling their surplus allowances heavily at the beginning of the year to raise capital, believe Point Carbon. As a result, the market has shrunk by a third since last November, according to Point Carbon's data. It estimated that the value of EUAs traded had fallen by 38%, from some €322 million a day in November to roughly €208 million in January. Commission still confident By contrast, Energy Commissioner Andris Piebalgs did not consider low carbon prices to be a cause for concern. "I believe in the EU we have created a framework with the climate change package […] as the more important instrument for investment. And we should not worry that the carbon price is very low today, around 11-12 euros per ton of CO2. What would you expect, in an economic crisis, that someone will be buying allowances to produce more? No. But carbon prices react to what happens in the economics. So I believe this is one of the pillars for investment in the EU," he said. However, according to Lewis, free allocation of allowances is a fundamental problem, ingrained in the third phase too, which is set to begin in 2013. This means the market price for carbon does not reflect supply and demand, he said. Lewis argued that carbon allowances are risk-free assets for emitting industries as they are received free of charge. "Industrial companies don't usually engage in selling short-term assets," he said. However, they now see their unused allowances as assets to sell in order to obtain urgently needed cash to pay for running costs at a time when short-term loans are not readily available, he concluded. Central Carbon Bank? According to Lewis, the EU ETS should have included better institutional arrangements in the first place, claiming that establishing a Carbon Central Bank would have increased confidence in the market. "The very existence of such an institution would in fact pre-empt the need for the bank to intervene by psychologically increasing the trust in the functioning of the market," he added. "We missed the boat in December" when the EU ETS arrangements were agreed, Lewis stated. But he nevertheless urged Australia and the US to find the appropriate institutional arrangements, as they are in the process of building their own trading schemes. In an "ideal world," a central carbon bank could do away with the need for price caps, which always risk being too low to deliver the desired effect, he concluded. Positions: Kjersti Ulset, a manager at consulting firm Point Carbon, said: "It is entirely rational that companies are responding to these extreme economic conditions by selling carbon credits if they have excess credits available. When companies emit less due to a downturn then the price of carbon will inevitably fall. This downturn has proved to be steeper and deeper than it first appeared resulting in these drastic cuts to emissions and prices." Oscar Reyes of research group Carbon Trade Watch said: "The ETS has bowed to corporate self-interest at every stage of its design and implementation, so there is no surprise that it is now being used as a cash cow to see firms through a difficult financial phase." Next steps: By 30 June 2010: Commission will publish the absolute Community-wide quantity of allowances for 2013. By Dec. 2010: Commission will publish an estimated amount of allowances to be auctioned in the third phase. 2013: Revised scheme due to enter into force.