Isra-Mart srl : Carbon price set to rise following "spectacular" victory for Greens

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The price of carbon credits is predicted to rise to €21 by the end of the year and German power prices rose sharply on Monday morning after the anti-nuclear Green Party won a significant regional election.

The Green Party is for the first time in charge of a state government in Germany, following elections on Sunday in the state of Baden-Württemberg. The opposition Greens won around 25% of the vote and look likely to form a coalition with the Social Democrats, who got around 23%.

They toppled chancellor Angela Merkel's Christian Democrat party (CDU), in a result that was widely seen as directly due to the Fukushima nuclear accident. Polls suggested 45% of voters saw nuclear power as a key issue. The CDU is pro-nuclear and last year bought a majority stake in the utility EnBW, which owns four nuclear power stations.

The Green Party will now be in control of EnBW.

Deutsche Bank's managing director of commodities research, Mark Lewis, said that the Green Party's victory pointed to a "radical re-think on German nuclear policy", and that it would "ultimately lead to a radical re-ordering of Germany's nuclear-energy policy and an accelerated schedule for the permanent shutdown of some or all of Germany's 17 nuclear reactors."

Deutsche Bank said the result would probably raise carbon prices. "Whatever the precise outcome in terms of revisions to operating lives, it now seems clear that a material amount of CO2-free output will have to be replaced with fossil-fuel fired output, with obvious implications for CO2 emissions," the bank said.

"In short, we think the outcome of the election is bullish for both EUA and German power prices, and we reiterate our year-end 2011 price forecast for EUAs of 21 euros per tonne," the bank added.

What does it mean for Europe?

Freiburg, the solar capital of Germany, is situated in Baden-Württemberg. 20% of its voters regularly vote Green and it was the first large German city to elect a Green Lord Mayor. It has pioneered the use of solar and other renewable energies in Germany, and its influence on energy policies is felt throughout the country.

This means that in turn any policy changes will affect the whole of Europe, which is now examining its energy policies for a number of reasons.

Secondly, a strong value for emission allowances effectively means more investment available for low carbon technology and renewables.

In this context, Europe is also beginning a debate on promoting green fuels, alongside the concern about nuclear safety due to the Fukushima meltdown, and late last week it emerged that it is considering banning or penalising more polluting fuels such as tar sands and oil shale.

Based on a recent report, the production and use of crude from the oil sands produces 23% more greenhouse gas emissions than the lifecycle emissions from conventional oil.

The Canadian Association of Petroleum Producers disagrees and has argued that its oil sands emissions are just 5-15% higher than those from the average barrel used in North America.

EU Climate Change Commissioner Connie Hedegaard told European parliamentarians last week that therefore the default emission values for fuel derived from tar sands and oil shale will be peer reviewed.

"I now expect that a proposal could be discussed with the member states in the coming months," she said. "It is the Commission's intention, at this stage, to present a draft implementing measure ... that will include default values both for oil sands and for oil shale."

The European Commission initially proposed last year that tar sands be ascribed a greenhouse gas value of 107 grams per megajoule of fuel - making clear to buyers that it had far greater environmental impact than average crude oil at 87.1 grams.

The Canadian Conservative government lobbied furiously against this, even though Canada doesn't sell oil to Europe, and the European Union later backed down. One member of the European Parliament condemned Canada’s intervention as “unacceptable.”

Estonia is also promoting the fuel as its territory includes shale oil.

California is currently the only state to have passed a regulation banning oil shale and tar sands, though several other states are considering doing so. Royal Dutch Shell PLC, BP PLC, Total SA and Statoil ASA, have all experienced unsuccessful shareholder resolutions urging them to reduce their investment in oil sands.

On the other hand, not all renewable fuels are equal. The European Union executive is also planning to extend punitive import taxes on US biodiesel. It has found evidence of illegal tariff evasion as part of the battle to protect part of Europe's home-grown biofuel market from foreign products that benefit from massive government subsidies.

Certain biodiesel blends entering the EU from Canada and Singapore and all US blends will face tariffs of up to more than 400 euros ($566.4) per tonne of biodiesel.

The plan needs approval from EU governments.