LONDON Feb 12 Record low carbon prices have cut
the attractiveness of investments in renewable energy and may
even favour the construction of new, high-carbon coal plants,
conflicting with the aims of Europe's carbon market.
The EU emissions trading scheme is the 27-nation bloc's main
weapon to fight global warming. It imposes a cap on carbon
emissions by factories and power plants using a fixed quota of
The scheme is meant to force power plants, for example, to
cut their emissions by switching from coal to lower carbon gas
or to wind power, or else buy carbon permits.
"If you look at the price today it may start to become very
attractive, not for compliance purposes today, but for
compliance purposes for years," said Citigroup's head of
emissions trading, Garth Edward.
The prospect of utilities buying cheap permits in bulk to
cover their emissions for several years into the future did not
pose a threat to the scheme, however, said Edward.
"The purpose of an emissions trading programme is to deliver
emissions below a certain cap, end of story. We all probably
want the advantage of investment into (low carbon) technologies,
but that's an indirect and uncertain effect," he added.
Analysts do expect the present record-low carbon price to
cut investment in low-carbon renewable energy, by cutting the
cost of carbon emissions.
"It's going to make new renewable capacity less attractive,"
said Deutsche Bank's Mark Lewis.
Bigger reputation problems for the scheme would emerge if
utilities started exploiting the low carbon price to build new
"Then I think you really would have a question mark (over
the objectives of the scheme)," said one analyst who declined to
"Absolutely there is a danger of that, potentially, and that
would be terrible."
Prices of carbon permits called European Union Allowances
(EUAs) CFI2Z9 have lost three quarters of their value since
last July and are already down nearly 50 percent since Jan. 1.
EUAs traded at about 8 euros ($10.20) a tonne on Thursday, a
record low for the 2008-12 trading period of the scheme, and
could fall as low as 5 or 6 euros, traders and analysts said.
That fall is partly due to sagging industrial output and
therefore falling carbon emissions and less demand for EUAs.
However, also to blame and contributing to an "over-sell" is
a feature of the EU emissions trading scheme where participating
companies got most or all of their EUAs for free.
That means that they now have an incentive to sell their
surpluses, to raise cash during the downturn. Exaggerating that
effect, companies can borrow EUAs from future years until 2012
-- meaning they can now dump five years' worth of estimated
surpluses at little risk.
Utilities usually only buy EUAs to cover their expected
emissions from power production, for example from coal or gas
plants, which they have sold two to three years into the future.
But the prospect of a 5 or 6 euros carbon price could entice
them to make longer bets, unconnected to any power sales,
especially given that many will have to pay for all their carbon
emissions from 2013.
"If you're a utility looking to build coal plants in
post-2012 this is a bargain," said a trader at a bank.
(Reporting by Gerard Wynn; editing by Guy Dresser)