EU has ‘failed’ to save carbon market from long-term gloom, say analysts
By Paul Homewood
h/t Patsy Lacey
From the Telegraph:
The EU’s bid to rescue its beleaguered carbon market has “failed” to provide the stable price outlook which is needed to incentivise low-carbon investment, according to leading market analysts.
The price of emitting carbon tumbled 45pc over the past two months to to around €5 a tonne of carbon despite Brussels’ lengthy overhaul of the market structure last year to strip out the crippling over-supply of allowances which has crushed market prices.
Point Carbon’s lead carbon analyst Marcus Ferdinand said the market may only rebalance by 2030.
“As designed, the [reform] fails to deliver a stable carbon price outlook. We expect the shaken market confidence to result in a slow price recovery from current lows, leading to an average price of €6.6/t in 2016,” he said.
As the reforms slowly erode the market surplus prices could lift to an average of €10 a tonne in 2020 and €26 a tonne in 2030. But most experts agree that a price above €40 a tonne is necessary to encourage a switch to lower carbon power generation.
The EU’s emissions trading system (ETS) is the cornerstone of its efforts to tackle climate change, requiring all large factories and power plants to offset their carbon emissions by buying allowances through the market.
But at current prices it offers little incentive to decarbonise.
Prices showed signs of recovery last year after Brussels approved plans to remove a glut of carbon allowances from the market, but speculative financial players are believed to have shorted the market in the early days of January paving the way for another price crash.
The sharp losses triggered a market-wide sell-off fuelled by low demand from the power sector after a relatively mild winter.
A second analyst at the Thomson Reuters owned group, Emil Dimantchev, said the crisis of confidence has left market players “afraid to catch a falling knife.”
“The root cause for all of this the fact that the carbon market is still heavily oversupplied – with 1.7 billion allowances in 2015 – and will remain oversupplied for the foreseeable future. Due to this surplus, there are no fundamental economic forces to determine where the price should be, so the carbon price is to a large extent driven by sentiment, which can be easily disrupted by sharp changes in the price,” he said.
Power plants and manufacturers must buy allowances to offset their carbon emissions
The market failure is a blow to energy firms which typically favour a market-based driver to bring forward investment in low carbon technologies rather than policy interventions.
But Mr Dimantchev said the struggle of the EU carbon market could still form a template for a global carbon market which found widespread support at the COP21 climate talks in Paris late last year.
“The lesson is that the EU, and other nations can design more effective mechanisms. A best in class emissions trading system is one with a price floor. Such a system will deliver a predictable and stable investment signal and have enough flexibility while maintaining the benefit of emissions trading systems, which is the fact that they place a cap on emissions,” he said.
The Chinese authorities are currently considering price floors, and the idea has also been proposed in France.
The UK currently pays a carbon tax of £18 a tonne of carbon on top of paying for allowances through the EU’s carbon market.
Generations to come will wonder what sort of idiots tried to put a price on a gas that is a natural part of the atmosphere!