Carbon prices

Published: March 24 2009 09:31

Idle factories, fewer fume-belching smokestacks. So it’s no surprise that prices of carbon emissions permits have plunged in line with prospects for the world economy. More surprising is their recent rally. In Europe, prices of permits that allow cement factories, power plants and other big polluters to spew greenhouse gases under the European Union’s carbon cap-and-trade scheme have jumped 40 per cent from their mid-February nadir.
Over the same period, the FTSE Eurofirst 300 index of European stocks has shed about 7 per cent. Some perspective is required. In spite of their recent jump, at just under €12 per tonne, EU allowance prices remain near the all-time low of €8.20 reached last month – and well below the €30-per-tonne highs of last summer. Back then, forecasters were expecting only a mild economic slump. The outlook has darkened.

Nonetheless, analysts expect the market for EU carbon allowances to stay “long” this year. European companies should still emit enough greenhouse gases for them to be forced to buy permits to comply with emissions rules – but only just. New Carbon Finance, a carbon market consultancy, says allowance prices could fall as low as €6 per tonne before recovering next year.
Cheap permits will give companies little incentive to invest in clean technologies in the near term. However, a drop in output should make it easier for countries to hit their long-term emissions targets. Targets set by the EU early last year, for example, call for reducing emissions by 20 per cent from 1990 levels by 2020. NCF reckons that the recession could make the total cost of meeting that target just half what it would have been based on last year’s more bullish outlook for growth. Given that cost has been a key obstacle to winning broad international agreement on emissions targets, the recession may have a silver lining after all.
BACKGROUND NEWS
Prices of European carbon allowances have risen 40 per cent in recent weeks, confounding expectations of a continued slide. The permits, which allow cement factories, power stations and other big polluters to emit greenhouse gasses under the European Union’s emission trading scheme, fell to €8.20 per tonne last month – down about 75 per cent from the highs reached last summer, before the recession hit.