EU EMISSIONS TRADING PULLS THROUGH

European carbon trading survives key tests
Fiona Harvey, April 8, 2010 (Financial Times)

"A funny thing has happened to carbon dioxide prices in the past few days: they have failed to collapse.

"…[Last week] the European Commission issued data showing the carbon market, under the European Union's emissions trading scheme (EUETS) was oversupplied…Owing to the recession, Europe's heavy industries used far less energy than expected in 2009, and so had a surplus of the carbon dioxide permits they need to comply with the EU's environmental rules."

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"Preliminary data showed industry emissions…down just over 11 per cent…Not all [issued permits] will have been traded in the market…[T]here is still estimated to have been a surplus of more than 80m tonnes…Environmental campaigners reacted angrily, arguing a lower ceiling on emissions was needed to encourage investment in low-carbon technology…But rather than dropping sharply - as they have done in similar circumstances in the past - prices for carbon permits rose slightly to about €13.50…One reason prices held steady is that the bad news was already priced in. Another was that companies can hold on to the permits they received for this year, and use them as the economy picks up over the next few years…

"…[Carbon markets] have been battered in recent months by a series of blows. Revelations of hacking and fraud, the effects of the recession and political setbacks have all taken their toll on a market that is particularly vulnerable to shocks, as it is still in its infancy, and exists only as the result of regulatory fiat…[I]n 2006, a year after the scheme began to operate…[t]here was a large surplus in permits - a disaster, for a market that depends on scarcity for its existence. Prices dropped almost to zero amid international ridicule…The Commission ensured fewer permits were issued in the second phase, from 2008 to 2012, but the financial crisis and recession destroyed its calculations."

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"Henry Derwent, president of the International Emissions Trading Association, says the problem of bureaucrats trying to second-guess the economic cycle to set the level of permits should abate in the third phase of the scheme, which runs from 2013 to 2020…Officials will be able to base their permit issuance instead on a calculation of how far the EU needs to cut its emissions to meet its target of a 20 per cent reduction from 1990 levels by 2020.

"Even more damaging, in the past few months there have been a series of technical problems…[though] swiftly contained…Worse followed last month when it emerged the Hungarian government had "recycled" carbon credits…The move caused turmoil in the markets, and two exchanges - Bluenext and Nordpool - temporarily suspended trading…[T]he EU moved to close the loophole…[but] the scandal was damaging…If the carbon markets are to fulfil their potential, other countries will have to develop their own trading systems to link to the EUETS, creating a global market and a level playing field that should encourage business to invest in low-carbon technology…"