MARKETS: Increasing use of coal in Europe drives up the price of CO2 emissions trades (06/23/2008)
John J. Fialka, ClimateWire reporter
Although Europe's cap-and-trade carbon emissions trading system was initially designed to discourage the use of coal, the soaring price of oil is spurring utilities to use more of it.
Because natural gas prices are tied to the soaring price of crude oil, power generators are finding it cheaper to switch to coal-fired plants, which create twice as much CO2 emissions as gas-fired plants. Because their emissions levels are capped, the utilities then have to buy more allowances or permits to emit a metric ton of CO2 in the European Union's market. Last week, according to Point Carbon, an Oslo, Norway-based company that tracks the market, the price of an allowance topped €28 ($43.40), hitting a two-year high.
Henrik Hasselknippe, Point Carbon's chief market analyst, predicted the price could rise more steeply between now and 2012, reaching the equivalent of $70 per allowance.
"This is a surprise from earlier projections," admitted Hasselknippe, who said experts believed that the use of credits from emissions reduction projects in developing nations or in Eastern Europe would help reduce the upward pressure on the price of allowances. He said one of the problems involves the United Nations, which is tightening its approval procedures for emissions reduction projects, creating a backlog.
The Kyoto Protocol allows the use of reduction credits under its Clean Development Mechanism for developing countries or, in the case of Eastern Europe, so-called Joint Implementation Projects. The theory is that a metric ton of CO2 emissions reduced anywhere in the world has the same environmental value, and that use of credits from reductions implemented in the Third World will make reduction efforts in industrial nations much cheaper.
Linkage with potential U.S. CO2 market may be more difficult
The soaring European carbon prices are also likely to raise eyebrows in the United States, where Congress is debating whether to include a "safety valve" that would authorize government intervention in a U.S. cap-and-trade system if carbon prices got high enough to damage the U.S. economy. The price range considered damaging in the recent Senate debate started at about $22 per allowance.
"Politically in Europe this is acceptable," said Hasselknippe, referring to the rapidly rising and much higher European price range, but it may be "difficult to sell politically," in the United States, he said, if the two markets become linked, as some U.S. senators have suggested. "With the current high prices in Europe, we may have regional markets for a while," he added.
Richard Rosenzweig, chief operating officer for Natsource LLC, an asset management firm that buys emissions credits around the world, said "people are very concerned about a supply crunch." He blamed the tightening U.N. registration process and slow implementation of emissions reductions projects in Eastern Europe. "The institutions that are needed to do this aren't set up there yet."
Robert Stavins, director of Harvard University's environmental economics program, blamed a decision by the European Union to limit the influx of foreign-based reduction credits. "I think that was the wrong policy decision," he said.
Welcome to 'green capitalism'
Stavins said that rising European allowance prices and an aversion by European traders to the possibility of a safety valve emerging in a U.S. trading program will make direct linkage of the two trading markets improbable. But he said that an E.U.-U.S. market could emerge through an indirect linkage that would allow trading in international reduction credits, but not emission allowances. "I think that's where we will be moving toward over the next several years," he said.
While the steeply rising allowance prices are driving up electricity prices in Europe, some U.S. traders are making money. In Europe, some 12,000 companies in electricity and heavy industries make up most of the trading. Few U.S. industries are involved because most are not subject to the European cap. But U.S. investment banks and other members of the financial community have been active in buying and selling European allowances, said Hasselknippe.
"They're selling when it's high and buying when it's low. This is like any other commodity market. I like to call this green capitalism," he explained.
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