“The economic crisis has significantly impacted the effectiveness of the EU ETS as seen by today’s low level of trading and carbon price,” says the letter from the EU Corporate Leaders Group on Climate Change (EUCLG), whose patron is Britain's Prince Charles.
“It is critical that the European Institutions take decisive action now,” the letter says, calling for a withholding of allowances in auctions for the 2008-2012 Phase III of the emissions trading scheme, or ETS, and a recalibration of the mechanism for the next phase.
While the corporate group has not taken a position on the amount of allowances that would need to be withheld, Trevor Sikorski, the head of carbon research at Barclays Capital has, estimated a surplus of over a billion EU and international carbon credits for the 2008-2012 period.
Yesterday (December 14) benchmark EU and UN carbon credits plunged to record lows of €6.53 a metric tonne, and €3.99 a metric tonne, respectively – a fall of some 60% on their value since June.
Carbon credit crunch
As a carbon credit crunch loomed, EUCLG Director Sandrine Dixson-Declève told EurActiv that a healthy carbon price would be closer to €30.
“Because investors do not necessarily want to take a risk on clean technology projects, the viability of these projects is definitely being undermined with such a low carbon price,” she said.
As a result of the carbon price crash, the EUCLG – which represents energy giants such as Shell, Alstom, Philips and Dong Energy – argues that the ETS is failing to create incentives to shift toward decarbonisation.
The letter notes other deflationary price signals that could be on the way, and says it is “therefore imperative that these potential impacts are taken into account and measures are put into place to ensure the viability of the EU ETS before it is too late.”
Cap and trade
Carbon credits were established under the Kyoto Protocol in 1997 as a cap-and-trade mechanism for allowing industrialised countries to offset their carbon dioxide emissions by investing in carbon-reduction projects in the developing world.
After five consecutive years of robust growth, spurred by implementation of Phase III of the EU’s trading scheme, the total value of the world’s carbon markets touched $142 billion (€109 billion) this year, and then hit the buffers, as the economic crisis bit.
Without a strong price for carbon - or equivalent measures - many industrialists fear that the current downward carbon price spiral could accelerate.
“We need to look at the impact of the economic situation on the proper functioning of the ETS as we are in a recession that we’re all expecting will triple dip,” Dixson-Declève said.
As well as withholding allowances, she said that in Phase IV of the ETS, some companies would favour a reserve price option in permit auctions, to prevent carbon credits being sold at too low a level.