A temporary removal of allowances from the European Union’s emissions trading system may not be enough to spur investments to cut carbon dioxide and instead structural changes are needed, according to Deutsche Bank AG.
EU allowances may rise to as much as 20 euros ($26) a metric ton by 2020, should either 1.2 billion permits be removed from the market from 2013 to 2020 or 600 million from 2013 to 2016, Mark Lewis, an analyst in Paris at the bank, said in an e- mailed report today.
The EU is considering tools to tackle the oversupply of emission allowances in the world’s largest carbon market, which drove prices to a record low earlier this month. A plan to set aside allowances would need changes in law, rather than altering regulations, a senior Polish government official said yesterday. That highlights the political difficulty the EU is facing to recalibrate the market after a recession and debt crisis cut industrial output, reducing demand for permits.
“A set-aside is necessary but not sufficient,” Lewis said. “While a set-aside would undoubtedly be the most pragmatic way of re-establishing meaningful price tension in the near term, we do not think it would be enough, on its own, to re-establish the longterm credibility of the scheme.”
EU plans to reduce energy use, including measures such as household insulation, may further increase the oversupply in the market as less energy is used and so fewer permits are required. Deutsche Bank increased its forecast oversupply as a result of Europe’s Energy Efficiency Directive by 19 percent to 1.264 billion allowances through 2020.
Structural changes to the trading system are needed to restore “price tension” and direct investment into cleaner energy production, rather than allow funds to be directed toward natural-gas generation that may impede long-term carbon reduction targets, Deutsche Bank said. The bank said a tighter 2020 emissions target and setting a reserve price for permits sold by auction may also help in recalibrating the market.
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