BRUSSELS - Carbon prices are key to Britain's drive to a low carbon economy, the government is expected to say on Tuesday, but much uncertainty remains about their future level and whether this can spur change.
In the eagerly-awaited Energy Review, Britain is widely expected to pave the way for new nuclear power stations as well as burying or storing polluting carbon dioxide, and point to carbon pricing as a key driver.
European carbon prices are the creation of the European Union's carbon market, which puts a price on greenhouse gas emissions by linking these to tradeable permits.
But a recent price crash coupled with uncertainty about the future direction of the scheme has investors, analysts and carbon traders sounding cautious.
"There's much that needs to be cleared up," said Bene Perdok, carbon trader at Essent, speaking on the sidelines of an emissions conference in Brussels.
Prices could drop to near zero for the rest of the first phase of the scheme, from 2005-07, or rise beyond the current 16 euros (US$20.45) depending on pollution levels and the demand for permits, analysts told the conference, sponsored by Environmental Finance.
A price of around 15 euros is enough of an incentive to promote nuclear power, according to Seb Walhain, Director of Environmental Markets at Fortis Bank.
Because they do not burn fossil fuels, nuclear plants can cash in on the power price hike that a carbon market contributes to, without having to worry about buying permits.
But the cost of permanent storage of nuclear waste in Britain is undecided and so difficult to factor in.
Other changes may need higher carbon prices, for example some 40 to 50 euros to drive a switch from coal to gas, according to utilities analysts.
Carbon capture and storage (CCS) is seen having huge potential to combat climate change by burying heat-trapping carbon dioxide (CO2) underground, and could become economic at a carbon price of US$25-30, says Bert Metz, co-chair of a 2005 UN CCS report.
But one senior oil executive saw a bigger incentive needed.
"US$30-50 is the level at which you can see carbon sequestration (storage) going along fairly rapidly," he said.
LONG-TERM
But carbon prices become ever less sure into the future -- a surplus of emissions permits in 2005 drove carbon prices down, and the European executive wants states to propose tighter permit quotas from 2008-12, the market's second phase.
Britain has proposed a cut in its quota, but many other countries have tabled increases.
European carbon prices in phase two could vary anywhere between 10 and 50 euros, depending on gas prices, Ecofin analyst Chris Rowland told the Brussels conference.
And an even bigger issue for investors, eyeing energy infrastructure with a lifespan of decades, is the guaranteee carbon prices will still be around after 2012, when legally-binding emissions limits under the international Kyoto Protocol expire.
An extension to these caps is being re-negotiated in talks that could last years. Such caps are the ultimate pressure to force European countries to squeeze their supply of pollution permits.
Story by Gerard Wynn
REUTERS NEWS SERVICE
