Bloomberg News

EU Carbon Price Hurt by Concern on Post-2012 Rules, CDC Says

October 12, 2011

(Updates with Shell comments from sixth paragraph.)

Oct. 12 (Bloomberg) -- European Union carbon prices are being hurt by a lack of clarity as to how the bloc’s emissions trading system will operate after 2012, a report said.

Current undervaluation of carbon-dioxide permits is linked to uncertainty about the “exact market operation rules” for the next trading period running to 2020, according to research conducted by academics from the University of Paris-Ouest and published by the CDC Climat. CDC is a climate-protection unit of Caisse des Depots et Consignations, the French state-owned bank.

European carbon allowances for delivery in December dropped 24 percent this year, trading at 10.73 euros ($14.81) a metric ton on the ICE Futures Europe exchange in London as of 4:48 p.m. local time. The price of carbon fell by roughly half from 22.50 euros at the beginning of the current trading period in 2008.

“The market needs greater clarity and predictability regarding its operating rules and the level of constraint that will affect the allowance supply in the long-term,” Anna Creti, Pierre-Andre Jouvert and Valerie Mignon said in the report.

The EU cap-and-trade system, the world’s largest, is moving toward auctioning in the next eight-year trading period after giving most permits to companies for free since 2005. Fraud and an increased supply of United Nations-backed offset credits have added to investor uncertainty, according to the academics. UN offsets can be used for compliance under the EU system.

Reduced Demand

EU lawmakers should consider tightening the market as slow economic production has cut demand, David Hone, climate adviser at Royal Dutch Shell Plc and chairman of the International Emissions Trading Association, said Oct. 6.

Hone suggested the bloc consider “setting aside” a fixed number of allowances, meaning a certain volume of permits would be at least temporarily removed from the market. He also suggested lawmakers consider an auction-reserve price for the period from 2021, when the fourth phase begins.

The EU won’t seek to introduce a minimum price for carbon permits in its system, a spokesman for the European Commission said today. “The commission never proposed a floor price in the past, nor is it considering it now, nor will it propose it in the future,” said Isaac Valero-Ladron, climate spokesman for the commission, the bloc’s regulatory arm.

What’s needed are tighter emission-reduction limits, said James Emanuel, head of environmental markets at STX Services BV in Amsterdam, a carbon-trading company.

“What we should be discussing is not floors on price, but governments setting more ambitious targets, which in turn would result in a higher short-term price until such time that the market achieves those targets and the price falls again,” Emanuel said yesterday by e-mail. “The best-case scenario is a very ambitious target and a low price, which would be an indication that the target is close to being achieved.”

--Editors: Rachel Graham, Randall Hackley

To contact the reporters on this story: Ewa Krukowska in Brussels at ekrukowska@bloomberg.net; Mathew Carr in London at m.carr@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net


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