Price of CO2 permits falls to new low in Europe

By James Kanter
Published: January 21, 2009

BRUSSELS: The price of permits to emit carbon dioxide hit a new low this week in Europe, exacerbating concerns that efforts to make energy systems greener were falling victim to the global economic slowdown.
The price of permits has fallen by nearly 70 percent since reaching a high of €32.90 in April 2006 as companies produce less and pollute less, according to James Ash, head of European emissions at Spectron Environmental, a brokerage company in London. Prices for permits hit a low of €10.81 on Tuesday, though prices recovered to about €11.50, or $14.80, by late Wednesday.
"With the downturn of the European economy, some factories and companies no longer need permits," Ash said. "What we are probably seeing is these permits coming to the market."
Another factor in the price drop is the falling cost of less-polluting fossil fuels like natural gas, experts said. When that gas is expensive, energy producers rely more on coal, which emits higher levels of CO2 and increases demand for carbon permits. When natural gas is cheap, the demand for permits drops.
Factories and utilities in Europe are supposed to shrink their carbon footprints to help each country meet mandated targets. The low prices for permits are a concern because companies will have fewer economic incentives to make their production processes cleaner.
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And while the recession almost certainly means emissions will decline anyway, any apparent gain for the climate was "a double-edged sword over the longer term due to the impact on new investment," said Imtiaz Ahmad, an executive director and carbon markets trader at Morgan Stanley in London.
"Generators and operators of industrial plants are more likely to conserve cash and seek to run older, less efficient plant for longer rather than deploy new plant," Ahmad said. "The deployment of the renewable projects and newer, more efficient plants would have reduced emissions. Therefore cancellation or material delays will result in higher emissions than would have otherwise been the case," he said.
Under the EU system, companies mostly are allocated for free all of the permits they need to cover their projected emissions for a year, one permit good for each ton of CO2, the main greenhouse gas. If companies produce more gases than expected, they have to buy more permits. If they come in below target, they are able to sell their extra permits to companies that were polluting over their limit.
Some analysts blamed the recent price collapse on flaws in the EU system, in particular on the way governments are permitted to distribute most permits free of charge.
"If the allowances were all auctioned, this kind of selling would not be happening," said Mark Lewis, the head of carbon research at Deutsche Bank in Paris. EU officials "created an incentive for some industries to sell into a falling market," he said, arguing that if companies had been forced to buy the permits in the first place, they would have been less likely to have surpluses to sell.
Three years ago the nascent EU system virtually collapsed because governments had handed out too many permits to favored industries like steel and utilities. Once carbon traders got wind that there was a surplus of permits on the market, they drove the price down to nearly zero.
Since that last collapse, the European Commission has done a great deal to tighten the process of allocating permits by governments in order to prevent a recurrence. Commission officials have been much tougher with governments, only approving national plans that aim to ensure a scarcity of permits.
After 2012, the process of allocating permits will be centralized to try to keep heavy lobbying by polluters from influencing how carbon permits are issued.
Barbara Helfferich, a spokeswoman for EU environment commissioner, Stavros Dimas, said policy makers at the commission favored auctioning permits to companies rather than distributing them for free.
While she would not comment on the price levels of carbon permits, Helfferich also said that the system remained effective. "There will be ups and downs, but companies still will have to reduce their emissions," she said.
Even so, a further precipitous fall in the price of carbon permits would be an ominous development for European officials, who oversee the world's largest carbon trading system and are seeking a vote of confidence in their model by persuading the United States, under President Barack Obama, to adopt a similar system.
"A big lesson from Europe for President Obama is that his administration should devise a scheme that auctions all the allowances," said Lewis, the Deutsche Bank executive. "I think the United States can and will do better" than Europe, he said.