London, 22 January 2012: Thomson Reuters Point Carbon

The world’s biggest carbon market could have up to four times as many excess permits by 2020 than some analysts currently estimate, according to an EU draft document, raising the prospect of further price write-downs. A European Commission draft working paper, seen by Point Carbon News, says the EU Emissions Trading Scheme (ETS) will have 2.4 billion surplus emission permits over 2008-2020 because of lower CO2 output as a result of the economic and financial crisis.

“(The crisis) resulted in ... significant emissions reductions and a build up of a large buffer of banked allowances and unused international emissions reduction credits in the EU ETS,” said the draft, which outlines the costs to member states of deepening the EU’s 2020 emission reduction target. 

The EU executive’s calculations are far higher than the most recent surplus estimates by leading carbon market analysts, which include the 1.3 billion expected by Thomson Reuters Point Carbon, 879 million by Societe Generale bank’s forecast and Deutsche Bank’s prediction of 566 million. 

Based on their oversupply estimates, the carbon analysts believe average permit prices to 2020 will not rise above 13 euros, but the Commission draft warns the surplus could keep prices down even if the EU economy picks up. 

“(The surplus permits) will have a depressing effect on the price of allowances in the ETS for years to come, even when taking into account the partial recovery in industrial production in the past two years and further projected economic growth to 2020,” said the Commission draft, which is expected to be finalised later this month. 

The looming overabundance of carbon permits in the EU cap-and-trade scheme has contributed to the price of permits falling from above 30 euros in mid-2008 to around 7 euros this year.

SET-ASIDE

The commission’s analysis comes as EU lawmakers consider whether to withdraw hundreds of millions of permits from the ETS in an effort to prop up prices that some argue do little to incentivise the creation of jobs in low carbon industries and boost economic growth. 

EU carbon prices climbed as much as 30 percent after a group of EU parliamentarians from all political parties last month voted to set aside up to 1.4 billion permits, though the value of permits has since slipped back to near record lows. 

The proposal must survive two remaining votes in the parliament and get the approval of many previously reluctant member state governments before it can become law. 

The Commission’s draft said any reduction of the number of permits in the system would be effectively a move to deepen the bloc’s 2020 emission reduction target and would cost relatively more for newer member states in the east of the 27-nation bloc.

To partially compensate for the extra cost burden, the paper suggests that only the 16 richest nations in the EU should set aside EUAs from their allocated units, but not the 11 poorer countries.
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Source: Point Carbon  www.pointcarbon.com