EU's 2020 Emissions Target to Boost Carbon Markets
Date: 12-Mar-07
Country: UK
Author: Gerard Wynn
Carbon markets allow companies and countries, facing targets to cut their greenhouse emissions, to shop around for the cheapest emissions reduction permits.
Such markets depend on tough targets, without which there would be no demand. Analysts and officials said Friday's EU announcement would help to provide those essential goals.
"It's what everyone's been asking for, in longer term confidence, (although) not certainty," said Garth Edwards, trading manager of environmental products at Shell.
"We've known for some time that the EU emissions trading scheme would continue after 2012, it makes that more real, with clearer guidance on the expected targets."
The EU trading scheme works by giving companies a certain quota of carbon emissions permits beyond which they have to pay for permits from cleaner companies that have a surplus.
European companies can also buy permits by funding emissions cuts in developing countries under the Kyoto Protocol's so-called flexibility mechanisms, and tough European targets should also stimulate that trade.
"We've calculated that if the EU does this 20 percent cut and does about half of it through flexibility mechanisms... that could generate an (annual) carbon finance flow of US$15 billion by 2020," said Yvo de Boer, the UN's climate change chief.
"That is a potential flow of resources that can also represent an attractive incentive to developing countries to green their economic growth."
European Union leaders resolved at a summit on Friday, steered by German Chancellor Angela Merkel, to slash greenhouse gas emissions and switch to renewable fuels, challenging the world to follow its lead in fighting climate change.
CARBON PRICE
Tougher emissions reduction targets do not necessarily mean higher carbon prices, provided they are set long enough into the future and so give companies more time to prepare, said Seb Walhain, director of environmental markets at Fortis Bank.
"If the time horizon is long enough you can plan projects," he said, forecasting a European carbon price below 17 euros from 2012 to 2020.
The carbon price depends on the supply and demand for permits -- an over-supply caused EU allowances (EUAs) to collapse to around 1 euro in the first phase of the European scheme from 2005-07.
EUAs for delivery in the second phase, from 2008-12, traded at near 15 euros on Friday, and could rise as high as 20 or 25 euros, analysts say.
The European Commission said in January that it wanted to see the scope expanded of both its own carbon market and trading under Kyoto. The EC proposes legislation at the end of the year on the future of the European scheme from 2013.
-- Additional reporting by Alister Doyle