Glut of European Carbon Permits Likely - Report
Date: 26-Sep-07
Country: UK
Author: Gerard Wynn
Carbon markets are meant to drive cuts in greenhouse gases blamed for global warming by ensuring a shortage when issuing emissions permits for heavy industry.
But the European emissions trading scheme (ETS) allows affected businesses to buy additional permits, or carbon offsets, from developing countries outside the scheme.
The problem is that this extra supply of offsets will easily exceed the shortage of carbon emissions permits within Europe, making it cheap for European firms to avoid cutting their own emissions at all, according to Wood Mackenzie.
"Companies subject to emissions limits under the EU ETS, and the European Commission itself, appear to be winners. The only loser seems to be the environment," it said in a report "EU ETS Phase II: A Fundamental Assessment".
"Our analysis shows that the European Commission is likely being too lenient in the allowance of (offset) imports."
The first phase of the European trading scheme from 2005-07 has now been relegated to the status of an experiment, after it emerged that businesses obtained, for free, more emissions permits than their actual carbon emissions.
A repeat of the resulting carbon price crash will not happen in the second phase from 2008-12, simply because this time permits will be valid in future trading cycles from 2013, meaning they will preserve some residual value.
"That (price crash) won't happen this time because of the uncertainty in phase 3," said lead author Paul McConnell, who added that he expected the European carbon price to stabilise at the price of offsets, currently worth some 17 euros (US$23.93) per tonne of carbon dioxide.
Over the five years of the second phase of the European scheme Wood Mackenzie estimated a shortage of EU emissions permits equivalent to some 563 million tonnes of carbon dioxide emissions.
Using some conservative estimates of carbon offset supply, however, the consultants estimated that developing countries could deliver some 768 million tonnes of permits into the European scheme over the same period.
That implied a comfortable surplus of carbon emissions permits in the European scheme, even after taking into account a European limit on the import of cheap offsets.
