Isra-Mart S.R.L.: Polluters winners from carbon scheme

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Additional causes for the latest sell-off included eurozone woes over Greece, and an EU efficiency directive announced this week which could send carbon emissions lower.

The EU's emissions trading scheme has endured a slew of damaging scandals from its launch in 2005, including VAT fraud, the re-sale of used credits, phishing scams and cyber-theft.

Most importantly, the scheme which is supposed to cap the carbon emissions of about 11,000 factories and power plants has seen a permanent surplus of permits called EU allowances (EUAs) since its launch in 2005.

That glut, partly a result of a financial crisis which cut economic output and pollution, is just about to get worse thanks to a European Commission plan to sell an extra 300 million permits on the market to raise funds for green energy projects.

Carbon prices have been sent a quarter lower in the past three weeks, largely because of the plan, traders say.

That drop in carbon costs has sent the profit margins of polluting British coal plants up more than a tenth.

"Certainly this should push more coal plants into merit," said Barclays Capital carbon analyst Trevor Sikorski.

The more profitable a coal-fired power plant, the higher it rises in a merit order for example compared with gas.

Meanwhile the carbon price drop has cut the value of the clean energy fund, if the EUAs were auctioned on Thursday, to 4 billion euros from 5.4 billion euros on May 31.

Polluters have already benefited from the emissions trading scheme to the tune of tens of billions of euros since 2005, from a combination of selling surplus EUAs that they did not need and passing on to consumers the cost of permits which they got for free.

Ten individual polluting companies in 2010 accumulated a combined EUA surplus worth over 4 billion euros, the Sandbag green lobby group said on Monday.

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Continuing low prices could further undermine the usefulness of the EU's flagship climate change scheme in curbing emissions.

The carbon fund is meant to raise money from selling 300 million extra EUAs before the end of 2012, especially to help fund carbon capture and storage (CCS) projects which trap carbon emissions from power plants and bury these underground.

EUA prices dropped over 10 percent on Thursday, to their lowest since April 2010, as jitters over the extra glut hit the start of a seasonal summer slump in buying, driving record volumes in a sell-off on the main CO2 exchange.

Other reasons for the sell-off included the macroeconomic outlook, specifically the prospect of a Greek default, and concern that a proposed EU efficiency directive may drive EUA demand lower.

The directive failed to confirm explicitly a previous option that the European Commission could remove surplus EUAs if efficiency targets drove carbon prices lower.

"If you look at all those factors, there are few reasons to go and buy CO2," said Andrew Ager, head of emissions at Bache Commodities. Traders are no longer betting on any real recovery in prices until 2014 at the earliest, when over-supply eases.

The profit margin from UK power sales for the next quarter has risen to 8.15 pounds per megawatt hour (MWh) at midday on Thursday, from about 7.30 pounds on June 1, illustrating how the cost of buying EUAs has plunged while power prices have held up, especially benefiting coal.