BRUSSELS, March 24 (Reuters) - As the coronavirus pandemic sends prices tumbling in the world’s carbon markets, policymakers must ensure their emissions trading systems (ETS) are designed to withstand major economic shocks, the International Carbon Action Partnership (ICAP) said on Tuesday.
“Carbon markets around the world are witnessing their lowest prices in a two-to-three-year period,” William Acworth, an author of ICAP’s annual carbon market survey, which was published on Tuesday, told Reuters.
The recent drop in prices shows the need for governments to ensure carbon markets are “strengthened to be resilient to shocks,” Acworth said.
Carbon markets force firms to buy “permits” that give them the right to pollute. Permit prices in some of the world’s biggest carbon markets have tumbled in recent weeks, as the deadly virus is expected to shrink emissions from utilities and heavy industry amid shutdowns, crushing demand for permits.
The price of permits in Europe’s carbon market - the world’s largest - fell on Monday to its lowest level since mid-2018. Allowance prices in the Regional Greenhouse Gas Initiative, a carbon market covering a cluster of northeastern U.S. states, hit a 21-month low last week.
In the short term, lower carbon prices can “make compliance easier for companies that might be experiencing other financial stresses,” Acworth said. “But what we would hope not to see is a sustained period of low prices like we did in the past.”
The EU agreed measures in 2018 to buffer its carbon price against periods of low demand, after the 2008-2009 financial crisis contributed to a drop in Europe’s emissions, causing a decrease in the carbon price and a build-up of spare carbon permits.
The reforms include a “market stability reserve” (MSR), which last year started removing excess allowances from the EU ETS.
A planned review of the MSR next year could be a “timely opportunity” to tweak the mechanism if it struggles to support EU ETS prices against the fallout from coronavirus, Acworth said.
Emissions trading systems currently cover 8.9% of the world’s greenhouse gas emissions, a slight increase from 8.6% a year ago, according to ICAP’s 2020 carbon market survey. (Reporting by Kate Abnett Editing by Leslie Adler)