EU carbon permits for delivery in December fell to EUR9.82 per metric tonne in early October, and had bounced back to trading levels of around EUR10.50 a tonne at mid-month. Trevor Sikorski, an analyst at Barclay's Capital, said the price should stabilise at about EUR10-EUR11 a tonne, barring a worsening of the economic backdrop. He expects prices should not go much above EUR12 before 2013, when the third phase of the European Union Emissions Trading System (EU ETS) is set to begin.
Launched in 2005, the EU's ETS is based on a cap and trade principle that sets CO2 limits for some 11,000 utilities and manufacturing plants in the EU's 27 member states, as well as Iceland, Liechtenstein and Norway. Under the system, each greenhouse-gas emitting business has a carbon-emissions limit, which they can use. But if a company does not use all of its permits it can sell them to another firm that needs more. The ETS thus ensures an efficient allocation of permits without raising the overall emissions limit. It is key to the EU's plans to cut CO2 emissions 20% from 1990 levels by 2020.
A strong carbon price is not a driving factor for all investors in wind and other renewable-energy plants, who may be content with receiving feed-in tariffs or other incentive prices, but Sikorski stressed it was key for utilities. "For utilities, getting the average price of carbon down is probably just as important as a feed-in tariff," he said. "What modest carbon prices are telling some utilities at the moment is that you can delay that investment in renewable energy because the extent of your liability isn't as big as you expected."
While national support schemes have been quite successful in driving investments, the carbon price has been too low to drive additional investments, according to Remi Gruet, senior regulatory advisor for climate change and environment at the European Wind Energy Association (EWEA).
The most visible reason for depressed carbon prices, Gruet noted, has been the economic slowdown. "In cement, steel and other industrial sectors you've had a massive reduction in industrial output and emissions, so the industrial sector has been selling its (excess) emission allowances to the power sector. At this moment, Europeans are paying a subsidy to heavy industry to do absolutely nothing."
While a number of free emission allowances were issued in the first two stages of the EU ETS, tighter rules mean that from 2013 the majority of power plants will be required to purchase all permits.
Nonetheless, Sikorski expects the market could still suffer from an excess supply of carbon emission allowances until 2019 or 2020.
To help support carbon prices and encourage the deployment of additional renewable-energy capacity in this environment, EWEA considers a set-aside of emission allowances to be vital, Gruet said.