London, Dec 14, 2006 -- M2 PRESSWIRE

 

Launched amid high hopes and much fanfare a couple of years ago, it seems the EU emissions trading scheme will ultimately fail to deliver in its current form, according to latest research* from independent market analyst Datamonitor (DTM.L). An over-allocation of emissions credits in the first phase continues to subdue the price of carbon below the levels necessary to promote genuine investment in carbon abatement and moreover, a lack of policy cohesion is consistently undermining Europe's attempt to get the second phase back on track. Unless Brusselsgets to grip with this fledgling, but disparate market, the EU will collectively miss its Kyototargets.

Awash with credits

Europe is pinning its hopes on a market mechanism to tackle climate change. The EU emissions trading scheme (ETS) was officially launched in January 2005 and is commonly viewed as the central pillar in Europe's drive to meet its collective Kyoto Protocol target. Under the cap and trade' mechanism, member states set an emissions quota for each installation covered by the scheme in their National Allocation Plan (NAP) - and herein lies the first stumbling block, says Datamonitor energy and utilities analyst Paul Stewart. "Allocations are overly generous for the first phase", he says. "Of the 23 member states that reported their first year emissions on time, only Austria, Ireland, Italy, Slovenia, Spainand the UKwere short of credits. Germany, the largest emitter in the scheme, accounting for over a quarter of the EU's overall quota, had over-allocated by 4.5%."

Carbon is too cheap

A lack of scarcity in Europe's carbon market is undermining the first phase of the scheme by curbing the value of carbon. Perceived to be sheltered from the rigours of international competition, and a prodigious source of carbon, power generators are expected to bear the brunt of absolute emission reductions. Fuel switching away from dirtier, carbon-intensive coal-fired output to cleaner natural gas is anticipated to provide significant abatement opportunities.Unfortunately, the costs associated with emitting carbon are simply too low, Stewart says. "The excess of credits at present are not incentivising electricity producers to switch away from cheaper coal and the rising wholesale price of natural gas across western Europe has served only to exacerbate the issue."

Even at their peak in April 2006, when EU emission allowance prices hit the *30 per metric tonne mark, it was still more profitable for power generators to burn coal as opposed to gas. The price of carbon for 2007, the final year of the first phase, is currently nearer *8 per metric tonne. The impact of rising gas prices has been keenest felt in the UK, where coal has overtaken natural gas as the key input fuel for power generation, Stewart says. "Britain was subsequently the furthest from meeting its allocation in the first full year of emissions trading."

Incoherence will undermine second phase

The lack of collective political commitment amongst member states will debilitate Brussels' attempt to establish the necessary level of phase two quota cuts. The second phase of emissions trading begins in January 2008 and ends in 2012 - by which time Europeis committed under the Kyoto Protocol to cut overall carbon emissions by 8% on 1990 levels. In recent weeks, the European Commission rejected nine of the 10 NAPs it had received for phase two, slashing allocations in the process. The storm of protests this provoked from member states does not augur well for the future of the EU ETS. Describing cuts to Germany's second phase NAP as "totally unacceptable", Economy Minister, Michael Glos and his compatriots will be lobbying hard to exempt new coal-fired plant builds from emissions curbs- a move that would "threaten the integrity of the entire scheme", Stewart says.

Political wrangling aside, there are more fundamental drivers behind strong carbon output that Brusselsis relatively powerless to overcome. Rapidly developing and increasingly energy intensive economies like Spainare key emitters who are threatening to undermine the effectiveness of the scheme. Madrid's tacit acceptance that it will miss its targets and buy the necessary credits required to meet its quota is unlikely to bring about actual emission reductions, particularly given the relatively weak price of carbon.

Kyototar gets under threat

Europe finds itself in a position of extreme responsibility. A failed European venture would severely hamper any post-Kyoto attempt to create a global emissions trading scheme. Of the 36 Annex B countries that have agreed to fixed emission targets under the Protocol, 31 are European states. Should the scheme limp on in its current form, focus will begin to shift back to national policy instruments. While environmentally proactive member states such as the UK, Sweden and Germany will continue to lead the debate, not everyone will necessarily follow, Stewart says. "Climate change is a global issue that requires a cohesive, multi-lateral response."

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