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8. Title: Point Carbon Headline: EU faces lure of price control in pivotal vote Date: 11/07/2011 European lawmakers face a crossroads this week that will see them take the first steps to becoming a central bank for their flagship emissions trading scheme (ETS) or inject fresh supply into a market that is near a two-year low, risking hundreds of millions of euros in clean technology investment. On Wednesday, officials from the 27 member states will vote on whether to advance supply of 120 million carbon allowances originally slated for sale in 2013 to help power companies hedge forward power sales next year. The move was originally designed to stop carbon prices spiralling upwards, but the EU faces the prospect of sending negative market signals at a time when the price of carbon has crashed by 34 per cent in just six weeks, largely due to concerns about the EU economy. If the EU reneges on a previous pledge to deliver the credits, it risks accusations of interfering in the market as well as the credibility of the European commission, the defacto regulator of the scheme and an institution that has so-far denied any role as a carbon central bank. But by delivering on a previous pledge to sell additional supply next year, it chances a sustained slump in carbon prices that could jeopardise plans to fund renewable energy and carbon capture and storage (CCS) projects. The funding is due to come from a separate sale of 300 million permits from a reserve set aside for new entrants (NER 300) to the scheme, which is slated to earn €4.5 billion ($6.3 billion).

But at current prices the permits would only generate around €4 billion in revenue for the pioneering projects, a huge sum, but still €500 million short of target. “The current price raises concerns about whether the ETS will supply what is required to get low carbon technology off the ground,” said Eric Drosin, a spokesman for the Zero Emissions Platform, a wide consortium of power companies, scientists and environmental groups supporting CCS.

The ZEP group reckons that for European leaders to make good on their pledge of delivering 10-12 commercial scale CCS plants by 2020, they need to help find €5-6 billion to build the infrastructure to capture, transport and bury emissions far beneath the Earth’s surface. Any cash for pilot renewable projects, such as tidal power and geothermal energy, would need to come on top of this figure.
 The dilemma has led to calls by consultants Idea Carbon for the EU to take on an intervening role in the carbon market, similar to the Bank of England’s over UK monetary policy and the US Commodities Futures Trading Commission’s over commodities trade. Pressure to deliver funding for carbon-cutting projects and other commitments could create a problem for officials who were previously fearful of meddling in a mechanism designed to cut emissions at the lowest cost. Jonathan Grant, a consultant for PWC, said the EU was likely to resist the temptation to intervene, despite the prospect of less money for clean energy.

“I don’t think there is any ulterior motive to manipulate the market in order to raise more money for the NER300 pot, though obviously the commission would like to fund as many projects as possible,” he told Point Carbon News. Grant said a bigger concern for EU lawmakers is how much a sustained slump in prices will reduce the bloc’s capability of using revenue from selling permits to fund action on climate change in developing countries. A UN agreement struck last year targeted raising $100 billion a year by 2020 to help developing states limit their emissions and adapt to a warming climate. Under current EU law, the 27 member states can sell around half of the 2 billion EU allowances set to be issued each year after 2013, potentially raising well over €250 billion by the end of the decade for government coffers and overseas development aid.

But the recent price crash has potentially halved this figure.

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Communications Report 2011

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