EUETS prices may not recover, say bankers

Prices in the current phase of the EU emissions trading scheme (EUETS) - which plummeted to a record low in January - are unlikely to recover, according to investment bank UBS.1 The market’s collapse has not stopped several member states from threatening the European Commission with legal action over cuts made to their phase 2 allocations.

The price of 2007 allowances dropped to €3.50 per tonne of CO2 in mid-January - a 50% fall since the start of December and down from more than €30/tonne last April (See ENDS Report 376, pp 12-13 ).

Prices have been falling since the end of April when it became clear that participants had emitted around 100MtCO2 less in 2005 than their allocations permitted, creating a surplus. Figures for 2006 will be released in May. The latest fall has been blamed on mild weather cutting demand for electricity.

Analysts at Point Carbon believe the price may still recover if the weather gets colder but research by financial analysts UBS suggests that the overall surplus for 2007 will be around 95 million tonnes - or 4.5% of the allowances allocated. This means prices are likely to average €3/tonne over the rest of the year, and may well fall to €1/tonne, it argues.

The Commission signalled its determination to make the second, 2008-2012, phase of the scheme more effective when it cut nine countries’ phase 2 allocation plans at the end of November (See ENDS Report 383, pp 46-47 ).

Of the ten plans assessed, only the UK’s escaped unscathed. The rest faced an overall reduction of 64 million tonnes/year, or 7%. Worst hit in percentage terms were Latvia and Lithuania, asked to make cuts of 57% and 47% respectively. While Germany’s 6% reduction may look modest, its position as the EU’s leading emitter of CO2 makes the cut the largest in terms of volume - equivalent to 29 million tonnes/year.

Sweden and Ireland also saw the limits they had set on the use of Kyoto Protocol flexible mechanism credits halved.

The Commission’s assertion that the rulings are non-negotiable has not stopped squeals of protest from the countries that have been squeezed. Germany and Slovakia have begun preparing legal appeals against the cuts, and Lithuania, Latvia and Sweden have submitted revised allocation plans which propose caps higher than set by the Commission.

In a second round of announcements in January, the Commission cut Belgium’s allocation by 8% and the Netherlands’ submission by 5%. This was less of a cut than the market had expected and the price of carbon for phase 2 fell only slightly on the announcement to just under €15/tonne

Based on the Commission’s first batch of rulings, UBS expects phase 2 to be short by around 200 million tonnes/year. Up to 85% of this gap could be filled by cheaper flexible mechanism credits, it says, adding extra uncertainty to price predictions.

Meanwhile, The Commission launched legal proceedings of its own in December when it sent final written warnings to Austria, Denmark, Hungary and Italy for failing to submit their allocation plans for the second phase. Denmark submitted its plan in January, but if the other three fail to respond to the letters, the Commission will refer the cases to the European Court of Justice.

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