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European carbon market plummets

Prices are plunging dramatically on the world’s largest carbon-trading market. Today, it will cost large facilities participating in the European Union’s mandatory emissions trading scheme (ETS) just €7 (US$9)* to buy an allowance to emit one tonne of carbon dioxide: that’s a record low and a drop of 25% this week alone (Reuters reports). Analysts expect prices to fall further: the underlying problems driving the collapse — weak economic conditions and industrial activity and an oversupply of carbon credits — will not quickly go away. *By the end of 25 November, the price had rallied to €7.6, still a record-low close.

If you’re a scientist, not a market trader, you might hope this will have little direct effect on research. But if today’s low prices persist for a few more months, they will slash billions of euros from a European fund dedicated to clean-energy projects. That’s because the fund, named NER300, is about to raise its cash by selling 300 million carbon credits on the ETS. Eight carbon-capture projects and 34 renewables projects were set to benefit from the money. But at present prices, the sale would raise only €2.1 billion, instead of the €4.5 billion hoped for when the fund was proposed. Sales of the first 200 million carbon credits are planned to begin in December and continue for the next 10 months, says Stig Schjølset, head of EU carbon analysis for the consultancy firm Thomson Reuters Point Carbon.

In one sense, the carbon market is behaving exactly as it is supposed to: economic activity and industrial emissions are slowing down, so carbon credits are less valuable. In the ETS, the overall supply of tradable allowances to emit carbon dioxide is fixed at an agreed-upon cap set in 2008, before the recession kicked in. (The cap gradually tightens over decades, ramping down to zero by 2070). The present oversupply of carbon credits means that real emissions are lower than policymakers expected when they set the cap — which, in one sense, is good news. When industrial activity gathers pace, carbon credits will become more valuable again.

The market had been drifting down for months, but this week’s sudden plunge into sub-€7 territory followed pessimistic price forecasts from analysts such as UBS and Deutsche Bank. (UBS said that allowances would fall to €5 in 2012 and 2013). It hardly helps that 200 million extra carbon credits are about to be injected into the market, at a time of weak demand. Last week, a European court opinion suggested to analysts that even more carbon credits will be allowed to flood the market. Poland and Estonia are among member states sitting on a surplus of carbon credits after national industries emitted far less than expected, and are hoping to be able to sell them on the ETS. The court opinion suggests that they may win a long-running lawsuit with the European Commission on the matter.

What might be done to bring carbon prices up again, short of waiting for industry to recover? Interventionist measures might include cutting the emissions cap, or setting a ‘price floor’ for emission allowances. In the longer term, Europe might increase its 2020 emissions reduction target to 25% or 30% of 1990 levels, rather than the present 20%, which would make emissions allowances more valuable again. But with policy-makers more worried about keeping Greece and Italy afloat, these discussions aren’t a priority at the moment, says Schjølset.

The European Commission has also said that it won’t delay its sale of carbon credits for the NER300 clean-energy fund. It seems that clean-energy projects will miss out on billions of euros.

See also our explainer: The problems with emissions trading.


  1. Report this comment

    jim said:

    This would be easy to fix. Do the same as the banks did, bundle carbon credits into a sub-prime derivative type vessel and sell it to banks and investment houses. The EU could take a 20 percent skim off the top thereby generating billions for government use and when the carbon market goes bust, the EU can then use more tax monies to bail the banks out once again, they shouldn’t be allowed to lose any of their bonuses..

    We peasants can always be counted on to fund our betters….

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