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Carbon prices - Breathing difficulties - A market in need of a miracle

Mar 3rd 2012 | LONGYEARBYEN | from the print edition

THE European Union's Emissions Trading System (ETS), the world's biggest carbon

market, has two main aims. One is to restrict the carbon-dioxide emissions of

the 11,000 companies trading on it to an agreed cap. The other is to give these

firms an incentive to invest in clean technology. On the first count, thanks to

the economic malaise, the ETS is a success: its participants' emissions are

well below the current cap. On the second, for the same reason, it is failing

wretchedly. Oversupplied with permits, the market has tanked. Having reached

nearly 30 ($47) a tonne in 2008, the carbon price is now persistently under

10: much too low to prod firms to make their investment plans greener.

The situation is about to get worse. The EU is in the process of selling an

additional 300m permits to raise cash for green energy projects, adding to

oversupply. It is also about to introduce a new regulation on energy

efficiency, which will further reduce emissions and which was not factored into

the current cap. Matthew Gray of Jefferies, an investment bank, reckons that by

2020 the ETS will have an accumulated surplus of 845m permits, against a

planned cap that year of 1.8 billion permits.

Investors in green technology are pleading for intervention to prop up the

carbon price. Various ways have been suggested, from setting a carbon

floor-price to tightening the cap. In December, when the carbon price fell well

under 7, a committee of the European Parliament recommended three possible

strategies: withhold or set aside an undetermined tranche of permits from the

market; withhold 1.4 billion permits; or tighten the cap. On February 28th a

higher-powered committee approved the first strategy. It will now be voted on

by the parliament; if passed, the details will be negotiated with member

states.

This is a familiar sort of Eurofudge. The simplest thing would be to tighten

the cap, so that the carbon price rises to somewhere between 15 and 30, the

range regulators had in mind for it. Yet this would be furiously resisted by

heavy emitters such as Poland, which burns lots of coal. And it would set a

meddlesome precedent, another way to deplete investor confidence. To address

that worry, the set-aside would ideally be no bigger than the reduced demand

for permits resulting from the energy-efficiency rule, which is the ostensible

reason for acting.

That would be a modest measure: the carbon price actually fell in response to

the committee's announcement. And even then it will require fraught

negotiation. Meanwhile, the market's overseers are left dreaming of a sudden

economic upturn or a new American or Japanese cap-and-trade scheme to boost

demand for ETS permits in short, for a miracle.

from the print edition | Finance and economics