Bloomberg News

EU Carbon Price Increases Would Intensify Crisis, Poland Says

July 08, 2012

The European Union should avoid measures to prop up carbon market prices because they would lead to higher energy costs and could aggravate the economic crisis in the region, Poland’s environment minister said.

The EU emissions trading system, or the ETS, is delivering on its target to reduce greenhouse gas emissions at the lowest possible cost and there’s no need to “manipulate” the market after a slump in industrial output drove carbon prices to a record low, Marcin Korolec said.

“The ETS is not here to set a particular carbon price,” he said in an interview yesterday in Nicosia, Cyprus, during a meeting of environment and climate ministers from the 27-nation bloc. “What Europe needs at this moment is low energy prices and we should be happy that the system works and is flexible enough to adjust to the economic situation.”

The price of EU carbon permits for delivery in December dropped to 5.99 euros ($7.36) in April, the lowest level since the contract started trading in 2005. The 17-nation euro economy will shrink 0.3 percent this year, according to the European Commission. Unemployment rose to a record 11.1 percent in May, economic confidence slumped to the lowest in more than 2 1/2 years in June, and services and manufacturing output contracted for a fifth month in the Euro area.

The emission caps that the ETS imposes on more than 12,000 facilities owned by manufacturers and utilities were set before the economic slowdown. The system doesn’t allow any minimum or maximum prices.

Backloading

The slump in emissions costs triggered calls from investors including Acciona SA (ANA) and Royal Dutch Shell Plc (RDSA) for the EU to curb the oversupply of allowances and start talks about long- term carbon targets for the region. EU Climate Commissioner Connie Hedegaard is aiming to present this month a proposal to postpone auctions of some allowances in the third phase of the ETS that starts in 2013, a practice known as backloading.

“When the rules of the next phase of the ETS were negotiated in 2008 it was agreed that it will be a market mechanism,” Korolec said. “Let’s stick to this rule. Backloading would be aimed at eventually tightening the emissions target and that’s not a move Poland could back.”

The proposal is to be published alongside a report on the functioning of the carbon market, which will show one option to improve the system in the longer term is to permanently set aside a number of permits in the third phase to tackle oversupply caused by economic slowdown, according to people familiar with the matter.

Political Mandate

“A permanent set-aside of allowances would mean tightening the target and the commission doesn’t have a political mandate to propose such a move,” Korolec said. “It doesn’t have a social mandate either because it means weakening the European position and a risk of companies relocating their production at a time of a crisis.”

Another option to strengthen the ETS that the EU’s regulatory arm will sketch out in the report is increasing the 1.74 percent linear factor by which European emission caps will fall annually in the next trading period, people with knowledge of the matter said last month.

Accelerating the annual decrease in pollution limits would mean stricter pollution goals in 2020 and beyond. The EU is currently on track to meet its target of cutting greenhouse gases by 20 percent in 2020 compared with 1990 levels and the commission said in a policy paper last year that the bloc could cut emissions by 25 percent domestically if it boosts energy savings. The cheapest way for the EU to attain its 2050 de- carbonization target would be to lower emissions by 40 percent in 2030 and 60 percent in 2040, according to the commission.

Stricter Policies

“It’s not a good moment to decide about post-2020 goals when we don’t have the clarity about emission-reduction commitments by countries such as China or the U.S.,” Korolec said. “Some companies seek stricter policies, but at the same time there are many that urge policy makers not to make too- ambitious moves that would worsen Europe’s competitiveness.”

EU carbon allowances for December closed at 8.07 euros a metric ton on the ICE Futures Europe exchange in London on July 6, down 22 percent from a year ago. The current cost of emissions is much lower than expected when the ETS was being created and fails to encourage investment in clean technologies, the commission, environmental lobbies and businesses including Dutch energy company Eneco Holding NV have said.

Flexibility

The ETS is not the right tool to stimulate a shift toward renewable energy sources and EU members should be granted flexibility in measures to encourage such transformation, according to Korolec. He said he is confident Poland will meet its green energy targets. The central European nation relies on coal for more than 90 percent of its energy consumption.

“There’s no one-size-fits-all solution and that’s why all countries in the EU have their own renewable energy goals,” he said. “Nations should be allowed to implement their own instruments in that area. The ETS was created as a tool to cap emissions, not to incentivize modern technology.”

To contact the reporter on this story: Ewa Krukowska in Nicosia at ekrukowska@bloomberg.net

To contact the editor responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net


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