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EU ETS increasingly irrelevant: investors exit CDM market

London, 25 March 2013

The EU Emissions Trading Scheme “no longer has a significant impact on emission reductions”, according to one in five respondents to Thomson Reuters Point Carbon’s annual carbon market survey. The results of the survey – Carbon 2013 – reveal that 20% of respondents said the EU ETS caused emission reductions in the past but has little impact on emissions today. “We attribute this to the weak price signal currently generated by the EU ETS, which saw prices fall to historic lows in 2012” said Emil Dimantchev, Thomson Reuters Point Carbon analyst and author of the report.

The long-term outlook for the EU ETS, however, is positive. The majority of the survey’s participants (65%) believe it is likely that EU politicians will adopt the backloading proposal to delay the supply of European allowances. Around half considered the long-term carbon price a decisive factor in investment decisions, in line with past survey results: “These results imply that the majority of market participants assume market reform in their trading and investment strategies”, Dimantchev commented. “If these plans fail, the market will pass a tipping point beyond which both the price and companies’ behavior will be drastically different.”

A majority of respondents also believed that the EU will adopt one of the six options to structurally reform the market put forward by the European Commission. These include increasing EU’s emission reduction target to 30%, removing allowances, increasing the cap’s linear reduction factor, extending the scope of the scheme, restricting credit eligibility, and implementing a discretionary price management mechanism. As many as 77% believed the EU will take on a more ambitious reduction target for 2020.

Regarding aviation in the EU ETS, half of the survey’s respondents did not expect extra-EU flights to be included in the scheme again. 41% believed that the EU ETS will apply only to flights within the EU after 2013. Dimantchev commented that “the EU is unlikely to cover extra-EU flights again; we expect that the outcome of October’s ICAO Assembly meeting will give the Commission a reason to permanently scale down airlines’ compliance obligation”.

Participants in the Clean Development Mechanism (CDM) reported an unprecedented collapse in activities, and 45% of participants said they were planning to cease CDM investments all together, three times higher than last year. Dimantchev suggested that “surging supply and stagnant demand have driven the market into a period of low prices, which increasingly appears to be irreversible”. Nearly two thirds of respondents showed readiness to turn to the voluntary market. “Projects which can demonstrate high environmental and social benefits in addition to emission reductions will be able to meet the demands of buyers in the voluntary market”, Dimantchev continued.

Outside the EU, nascent carbon markets are more optimistic in their outlook. In California, 60% of respondents who have a compliance obligation under the WCI market said they are setting up trading operations, and 53% said they are planning internal abatement. The majority of respondents expected a carbon price around $10-15/t in 2013.

In Australia, 65% of respondents believed that the country’s cap-and-trade programme will start as planned in July 2015, despite intensifying opposition from the Liberal Party. “Although the Liberal party is projected to win the election, it appears unlikely that they will be able to repeal the Carbon Pricing Mechanism”, said Dimantchev.

Following the passage of cap-and-trade legislation in South Korea, this year’s survey also shed light on the potential for a Korean ETS. Two thirds believed that an emission trading system will be in place by 2015, with three quarters believing a Korean cap-and-trade system will successfully reduce domestic emissions.”South Korean politicians from both main parties see the carbon market in positive light, as carbon market stakeholders in Korea believe the market will spur clean technology innovation” Dimantchev explained.

Discouragingly, disappointment with multilateral climate change negotiations increased among survey participants compared to last year. For the first time since Copenhagen in 2009, the majority of respondents felt dissatisfied with the outcome of the latest Conference of the Party to the United Nations Framework Convention on Climate Change. Dimantchev commented: “However, the Doha Climate conference did secure one landmark achievement – to agree on a second commitment period under the Kyoto Protocol thereby focusing the further negotiations on the process of reaching a deal on a new international agreement in 2015”.

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Thomson Reuters Point Carbon is the leading provider of market intelligence, news, analysis, forecasting and advisory services for the energy and environmental markets.