COLOGNE, Germany The European Union needs to aim for a deeper emissions cut soon, to rescue a record low carbon price and spur long-term investment in low-carbon technology, leading carbon market players said at an industry gathering.
Europe's economic slump has made it easier for the EU to reach its 2020 climate goal, and a tougher target to cut emissions would restore relevance in the EU emissions trading scheme by lifting carbon prices from record lows, they said.
Europe's stagnant growth has caused a massive surplus of so-called EU Allowances (EUAs), which are the instruments of compliance for more than 12,000 power and industrial plants taking part in the scheme.
The European Commission is preparing to propose in July measures to create scarcity in the market. [ID:nL5E8GVE1K] Yet market participants fear intervention will fall short of fixing the problem.
"EUAs are like confetti at the moment," said Mark Meyrick, head of the carbon desk at Eneco Energy, a sustainable energy firm in the Netherlands.
Without the EU deepening its 2020 target beyond a 20 percent cut in emissions against 1990 levels, there is little reason to expect the market to escape the doldrums, he told Reuters.
"The market is not going to crash radically from here with 7 euros to go, and we could be bumping along the bottom for a while."
Analysts say the surplus will likely exceed an equivalent of 1 billion tons of emissions by the end of 2012, taking into account a healthy supply of U.N.-backed emissions offsets which can be used for compliance in the EU scheme.
Germany has asked for discussion on deeper EU carbon emissions cuts to be put on the agenda at a meeting of environment ministers in June. But debate of bigger carbon cuts has been difficult, with coal-reliant Poland objecting that they could damage its economy.
A majority of carbon market experts called for supply intervention in the EU ETS, though the preferred policy choice was the EU increasing its 2020 target to 30 percent, a poll of carbon market experts showed this week.
LEADING BY EXAMPLE
Valued by the World Bank at nearly $150 billion last year, the EU cap-and-trade scheme is by far the world's biggest carbon market. Despite some teething pains since its launch in 2005, the EU ETS has become a role model of sorts for other schemes.
Carbon market initiatives are emerging in Australia, South Korea and Mexico, as well in California and Quebec.
"We need the (EU) ETS to be a shining example at this moment in time as a lot of countries and regions around the world are looking to establish a carbon market," said Hege Marie Norheim, a senior vice president at Norwegian oil firm Statoil.
"(But) the way the ETS is working today it is not creating enough trust and stability for us," the Statoil executive said at the three-day carbon conference which ended on Friday.
"Trust and long-term stability in the carbon price is obviously fundamental for us to do investment, which are always investments that cover decades."
The Commission will in July also publish an analysis of the EU ETS that will touch on longer-term emissions reduction targets for the 27-nation bloc, said Jos Delbeke, the EU Director General for Climate Action.
"We are going to be fairly specific about a number of options, (and) one of them will be a debate on 2030," Delbeke told the conference on Thursday.
But even with front-year carbon prices trading near historic lows, just above 6 euros a ton, the carbon market has liquidity and the low prices reflect the current level of ambition and economic conditions, said James Atkins, chairman of brokerage Vertis Environmental Finance.
ETS emissions have fallen in two of the past three years, thanks mainly to Europe's sluggish growth and fiscal crisis.
"The market is working and emissions are going down," Atkins told Reuters.
He said some people in the market are worried about carbon prices being too low. "For me, the problem is that the target isn't high enough."
(Editing by William Hardy)