Since 2009 the price of carbon emission allowances in the EU Emissions Trading Scheme (ETS) has been so low that the market mechanism is largely ineffective: in 2006, an allowance cost €30 ($40) per metric tonne of CO2 (tCO2), compared to around €5 ($7)/tCO2 today. In an attempt to increase prices, on February 19th 2013, the EU Environment Committee voted by 38 votes to 25 to withhold the release of 900m tonnes of carbon allowances, which were due for release in 2013-2015.
The move will be welcomed by industry, particularly the petrochemicals, oil refining and manufacturing sectors. Firms, including CEZ, E.ON, General Electric, Shell and Unilever, have openly supported withholding allowances as a method to restore faith in the system which is currently failing. An alternative system to the ETS is for individual countries to ‘go-it-alone’ through carbon taxes, emissions standards or capacity markets which are all measures that bring increased costs and would be the least favourable option, especially for energy firms.
The over allocation and low prices of allowances have reduced the urgency and incentive for polluting firms to move to cleaner technologies. The problem has been building for some time with the Oeko-Institut – a European research and consultancy firm founded in 1977 - estimating back in June 2012, that there are 1.42 billion excess allowances in the system. If the ETS continues with a low carbon price, what will drive long-term cleantech investment? As it is, investors consider the European power sector far from attractive. And the implications don’t stop at investment. A weak EU ETS will have repercussions in Australia, which plans to link its market to the European market in 2015. A weak market is also likely to make China and South Korea nervous.
If the EU does succeed in withholding allowances – the final decision awaits a plenary vote in parliament, probably in April – this should boost the current price of allowances by €2-3 ($3-$4) in the short term through restricting supply. But delays to the decision-making process continue to make the market nervous: on February 26th 2013, the price of carbon fell immediately by 15 cents ($0.20) as the Environment Committee cancelled the vote to fast track the withholding process. If investor confidence is going to be restored, the EU should remove the allowances permanently and develop a process to actively respond to demand fluctuations - through a dedicated institution which holds the reserve of allowances. Releasing temporarily withheld allowances at a later date is falling of short of what is required to promote a successful ETS.