Analysts say that any one-off EU clearing of the massive glut of carbon permits now clogging the Emissions Trading System (ETS) is likely to lead to a ‘central bank' or other policy tool to manage future imbalances.
But the European Commission is cautious about entrenching such a mechanism in the ETS, which is the bloc's chief weapon to fight climate change.
Figures released today (2 May) show that 254 million carbon offsets worth around €2.6 billion were used in 2011, an 85% increase on 2010, despite statistics showing that the EU emissions continue to fall, due to recession.
Companies are thought to have been trying to maximise their use of offsetting allowances before the current trading current phase of carbon trading comes to an end in late 2012.
Analysts and observers say a new tool is needed to fix an oversupply estimated at several hundreds of millions of carbon permits, because EU carbon prices – now trading below €8 a tonne – are way too low to drive green investment.
EU officials, member states and lawmakers are debating if and how to intervene, and a one-off move to withhold permits for the scheme’s third period between 2013 and 2020 is possible. A decision is expected later this year.
“The ETS was designed to provide a price signal that drives future investment and a low carbon pathway. It is clearly not doing that at the moment,” said Miles Austin, director of Climate Markets & Investment Association (CMIA), a lobby group.
Europe's recession has slowed industrial output and growth, limiting CO2 emissions, and creating a vast over-supply of carbon credits, most of which were provided freely to over 10,000 industrial and power plants for trading purposes.
Market analysts predict that the market will now be oversupplied until at least 2020. Carbon prices have fallen some 60% in 12 months and recently hit a record low of just under €6 a tonne.
Last month, EU Climate Commissioner Connie Hedegaard said the European Commission will review its auctioning rules for the EU carbon scheme by the end of the year as part of efforts to boost the market.
“The idea that we won't have another recession is unlikely, so you need a mechanism that is in place that can respond to it [recession] as it happens,” Austin said.
Next year, EU states plan to auction around half – or about 1 billion – of their emissions allowances per year, as the bloc moves towards charging all companies for them.
Critics of market intervention argue that it would turn the ETS into a tax, but the Commission has repeatedly said any intervention would be a one-off.
Companies and analysts doubt this and are increasingly suggesting the need for some kind of automatic intervention system.
“Once you allow a politically motivated manipulation of the market, it is going to happen on a regular basis because other events or problems will be used to justify intervention” said Russell Mills, global director of energy and climate policy at Dow Chemical.
“If the political forces are so strong that there is no other option than to have some kind of political interference in the market, then as a minimum this should be via some kind of independent carbon central bank that has a very clearly defined and predictable mandate to manage excessive price swings,” he said.
Carbon central bank
A carbon central bank is one of many measures that could come into force over the next few years, said Scott McGregor, chief executive of Camco, a developer of emissions reductions and clean technology projects.
“There are a number of options that could provide the market with the long term certainty it needs and these should be considered before the best and most sustainable intervention can be identified that will ensure this market can continue to encourage emission reductions at least cost,” he said.
But a source at the European Commission said the idea of a central bank for the carbon market “is not on the table”.
The problem with a carbon central bank is getting EU agreement for an institution tthat could intervene when the carbon price moves outside an agreed range of limits, according to Bas Eickhout, a Dutch Green member of the European Parliament.