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Emissions-trading in the spotlight as the price of carbon sinks

Like the price of oil, the price of carbon in the EU's Emissions Trading Scheme (ETS) has fallen by around two thirds since mid-2008. This has raised doubts about renewable-energy developers' ability to fund projects during the recession, cut incentives for companies to lower emissions and undermined demand for green energy. This could create embarrassment for EU policymakers in the run-up to the Copenhagen climate change summit in December.

In terms of volume, the ETS is increasingly successful. Almost 0.7bn tonnes of carbon, valued at more than €6.5bn ($8.3bn), were traded on the six main European exchanges in February – a volume rise of around 60% over January, and nearly 150% more than the 2008 monthly average. Research firm Point Carbon estimates annual global trade is likely to rise by 20% to almost 6bn tonnes in 2009.

But the carbon price fell to around €8/t in February, compared with €30/t in mid-2008: a low price not only affects projects within the EU, but also UN clean-development mechanism (CDM) projects in the developing world, permits for which are also traded on the ETS.

The market slide has been exacerbated by the sale of carbon permits, or EU emissions allowances (EUAs), by firms that were allocated them by the EU at a time when economic growth was rising. Now, when industrial output – and consequently carbon-emissions growth – is slower than expected, the attraction of selling surplus permits to raise badly needed funds has been hard to resist.

There have been calls to introduce a price floor to ensure sufficient incentives to keep carbon emissions down remain in place. Mark Lewis, director of global carbon research at Deutsche Bank, recently suggested the EU should amend the scheme to build in a reserve price for EUAs in order to avoid a price collapse in the third stage of the ETS – due to start in 2013 – when more industries will be included and more permits issued. Other analysts says the scheme should be robust enough to withstand the present economic turbulence without imposing a floor and that the carbon price will recover when global economic growth picks up.

So far, EU ministers have resisted pressure for change in the scheme, but are keeping their options open. "A trading scheme is the right way to go, but it is challenging when prices fall to €8/t," Ed Miliband, the UK's energy and climate change secretary told a UK parliamentary committee in February. "We need to structure it as best we can to have a proper carbon price."

Disquiet in the EU has extended to other parts of the world, where similar carbon-trading schemes are being introduced; the Australian government, for example, wants to launch a scheme in 2010, but faces the difficult task of doing this at a time of market weakness and when its proposed scheme has been widely criticised.

Green politicians believe the planned scheme is not tough enough, while the Conservative party wants it delayed to protect business from an increased financial burden. But with the government of Labour prime minister Kevin Rudd requiring the support of one or other of these parties to pass legislation, a period of protracted negotiations is likely to ensue.

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