More on Europe’s falling carbon dioxide emissions

The fall of about 4-6 per cent in the European Union’s carbon dioxide emissions – depending on which analyst you believe – shows that the carbon market is working, according to Henrik Hasselknippe of Point Carbon, the research group.

Yes, the recession was a prime cause of the decline, and that has cratered the price of carbon permits in the EU’s emissions trading scheme, but Mr Hasselknippe and other analysts believe the price will recover.

“But for the recession, we would have seen much higher CO2 prices than we have now,” Mr Hasselknippe says. He points out that the industries covered by the ETS had slightly fewer permits than they needed last year, in spite of the downturn.

“While the fall in emissions was partly due to the recession, it was partly because we had a much higher carbon price for much of 2008.”

Permits peaked at about €30 per tonne of CO2 last summer.

He expects the market will be over-supplied this year, as there is flexibility to shift permits between years, so unneeded permits from 2008 will be coming on to the market. Thereafter, however, he expects the market to tighten.

Citigroup agrees, in a note published today:

Policymakers will breathe a sigh of relief that we are likely to see a shortfall of
permits in the first year of Phase 2, the first time this has been delivered by the
ETS. There may well be a surplus in 2009 and 2010 due to the economic
downturn, however we are still expecting a shortage of permits overall between
2008-12.

That does not necessarily mean that permit prices are set to rise, it adds:

The shortage of emission permits should be adequately met by the
import of CERs from developing countries implying a price of €10-€12 within
the next few years.

However, in the longer term, into phase 3 of the scheme that starts in 2013, prices are likely to be higher.

ICF International, a consultancy, warns today that in order to hit EU targets for emissions reductions and the expansion of renewable energy by 2020, the price of carbon will have to be much higher, to support those higher-cost low-carbon energy sources. It suggests a figure of €70-plus per tonne of CO2 is likely, which would imply a much higher cost of electricity in the EU.

Meanwhile, Stavros Dimas, the EU’s environment commissioner, has expressed some scepticism about the Waxman/Markey US clean energy bill, which includes plans for a cap on carbon dioxide emissions. (Joshua Chaffin writes from Bussels)

“It’s not exactly what we have targeted in the EU, and what science has told us is necessary,” Mr Dimas said of the goals laid out in the bill.

The legislation calls for the US to reduce its greenhouse gas emissions by 20 per cent from 2005 levels by 2020. That would amount to roughly a 5-6 per cent decrease from 1990 levels, according to Mr Dimas, which is far short of the 20 per cent reduction from that same base year that the EU committed to in December.

Nonetheless, Mr Dimas said he welcomed the Waxman bill, as well as the recent climate change proposals from the Obama administration. “This is really very encouraging,” the commissioner said, adding: “This is entirely different from what we were talking about with the previous administration.”

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