The current price of carbon in the European Union’s emissions trading scheme is just above €15 – slightly higher than the €13 to €14.50 range that it has been trading in for some time. The price tested six- and seven-month highs recently, and although it is giving up some of the gains, we can expect carbon to stay around current levels for a while.
Whether prices will go high enough to spur investment in low-carbon energy, however, is another question altogether.
Factors driving up the price of carbon have included high German power prices, concerns about the third phase of the scheme, and structural effects.
Says Andreas Arvanitakis, senior analyst at Point Carbon Advisory Services:
“The price is rising on the back of a surge across the energy commodities, particularly German power and gas. So utilities have started selling power (particularly on the German market) on a forward basis to 2012 and 2013 so need to buy carbon to cover emissions associated with actually generating that power.”
Phase 3 of the EU ETS, which will start in 2013, is also exercising the minds of companies and traders. Companies are unsure how many permits they will be granted in the third phase, and how many they will be forced to buy at auction rather than receiving for free. So, they look at the market and see a relatively low price for permits now, and think it might be worth their while buying some in order to hedge against future shortages.
“We still don’t know how many Phase 3 allowances will be made available via auctions by the European Commission or member states ahead of 2013, so they go to market for the allowances instead. It is what we have expected and we have said the EU ETS price would rise this year as utilities start forward selling power to 2013.
“To sum, commodity price rises and uncertainty over the phase 3 auctions combined have pushed up prices this week. We are expecting late teens as an average this year, up to 20s by end of year.”
Of course, this is not nearly high enough. If the EU ETS is to stimulate investment in low-carbon technologies and infrastructure, then the price must rise much higher – to more than €30 or €40.
This will only happen if the EU decides to get much tougher in phase 3. And a debate currently going on within the European Commission – as to whether the EU should increase its emissions target to a cut of 30 per cent by 2020, compared with 1990 levels – will be a key determinant of that. Supporters of the higher target are arguing that the recession has helped reduce the cost of going to the higher target, and are arguing strongly that it would be good for the EU economy in the medium term.
What are the chances that they will win? FT Energy Source’s betting experts put the odds at higher than those of Arsenal winning the league title this year, but considerably lower than the odds on either Chelsea or Manchester United.