Isra-Mart srl:Commission ‘doing everything it can’ to generate higher price of carbon

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Isra-Mart srl news:

The European Commission “is using all the levers in its control” to engineer a higher carbon price, according to a leading market analyst.

Speaking at Carbon Forum Asia last week, Barclays Capital analyst Trevor Sikorski said that his company is forecasting EU allowance (EUA) prices to rise to €28 ($39) in 2012, despite the fact that there will be more EUAs in circulation than likely carbon emissions over the second phase of the EU Emissions Trading Scheme (ETS), from 2008 to 2012.

“By the end of Phase II, there will be more than 370 million tonnes [more] EUAs than emissions – it’s a structurally long carbon market,” he told delegates. “It’s long carbon, but we’re very bullish.”

The immediate cause of the run up in prices from current levels of around €15/tonne will be utilities buying heavily from next year to hedge forward power sales covering 2013 and beyond, before the corresponding allowances are auctioned by EU governments.

Utilities tend to hedge around 50% of their power sales two years in advance, and 90% one year ahead. “It’s going to be a shock to the system,” Sikorski said. “They will have to pay industrial [emitters] more to get them to sell their surpluses.”

The sector has argued forcefully for auctions to take place as early as possible – but Sikorski notes that, while the Commission has published its auctioning rules, it “has not told us” when the auctions will take place. “It’s a big piece of uncertainty.”

And there are other decisions by the European Commission designed to “engineer a higher price of carbon”, Sikorski contended.

These include its advocacy by Climate Action Commissioner Connie Hedegaard for the EU to increase its 20% reduction target by 2020 to 30%, proposals that will be matched by a reduction of available allowances in 2013 and 2014, and plans to impose qualitative restrictions on the types of offset credits that can be used in Phase III (2013-20).

“Why? Because it gives you a higher price of carbon,” he said. “This is the one theme running through all of it. In terms of being bullish on European carbon there’s a fairly good story out there.”

A Commission spokeswoman told Carbon Finance: “The Commission does not have a view on the carbon price. It attaches importance to creating a stable regulatory framework that allows the carbon price to be driven by market fundamentals.”

However, she added: “The Commission, like all observers and analysts, notes that the recession has left a considerable impact on the demand for carbon allowances and has substantially depressed the price. As much as this is a welcome relief for business during an economic downturn, this implies also a loss of the innovative power of the European carbon market and reduced investments in clean energy.”

“One of the benefits of an increase of the EU’s greenhouse gas reduction target to 30% would be to allow Europe to re-equip the EU ETS, its flagship policy, with the innovative power for which it was initally created,” she concluded.