Carbon price fall bad for green investment

By Fiona Harvey in London
Published: February 1 2009 22:16

The price of carbon dioxide in the European Union has fallen so low it no longer provides an incentive to low-carbon development, and seems unlikely to do so in the near future.
Permits to emit the gas, issued by the EU’s emissions trading scheme (Euets), have tested record lows in the past two weeks and now trade at about €11.80 ($15.12, £10.42), according to analyst Point Carbon.

That is barely a third of their peak of more than €30 last summer, and well below the level at which they tip the economic balance for companies in favour of making investments in efficiency and “clean” technologies, analysts and traders say.
“The current carbon price has little impact on green investment decisions,” said Dean Cooper, head of renewable energy at Ambrian. “A price nearer to €25 a tonne is necessary for carbon to play a role.”
Paul Newman, managing director at brokerage Icap, puts the desired level higher, at €35 to €45, to make a real impact on investments. But he is more optimistic about the scheme’s future: “It makes people more conscious of the subject than four years ago, and that alone has some merit.”
The effect of the low price is already felt by industry. Paul Golby, chief executive of Eon UK, told the Financial Times: “As the cost of carbon permits has crashed in recent months, funding low-carbon investments has become more difficult.”
The trading scheme intends to cut greenhouse gas output by heavy industry by issuing companies with a quota of permits to emit carbon dioxide.
If businesses need to emit more, they must buy permits from companies with spares. That should make efficiency and investment in modern equipment and renewable energy more attractive.
But the carbon price has been volatile, and its recent falls have demonstrated the difficulty for the European Commission and member states to set carbon quotas at levels industry finds acceptable, while providing a reliable incentive to low-carbon investment.
Since the scheme began in 2005, the carbon price has correlated closely to energy prices, and is seen by some traders as a hedge against high oil prices. As the oil price has fallen drastically, so has the carbon price.
That has been compounded by the recession. As companies produce less, they will need fewer permits.
The price fall of permits is also bad news for EU governments. Several, including the UK, intended to raise substantial sums, in the billions, by auctioning carbon permits, as permitted under EU rules.
Additional reporting by Ed Crooks
Copyright The Financial Times Limited 2009