MILAN - The rising costs of reducing carbon dioxide emissions by smokestack industries may trigger a shift in major investments in such sectors from Europe to countries where carbon controls are less strict, analysts said.
The European Union's carbon market is supposed to control the supply of pollution permits to heavy industry, and so drive cuts in greenhouse gas emissions, as the bloc tries to meet its Kyoto Protocol goals and fight climate change.
The European Commission will press some EU states to tighten permit quotas in the second phase of the trading scheme, from 2008-2012, especially after industry got more permits than it needed last year.
But analysts say an overly tough approach could drive up the price of permits, called carbon credits, to as much as 40 euros ($50.48) per tonne in the second phase, from some 15 euros per tonne now.
"In the future, (European) companies may decide to make big investments abroad, say in Brazil, because Europe is too expensive," Michael Grubb, chief economist at the Carbon Trust, a UK thinktank, told a European power conference last week. "There is an option of driving energy-intensive industries out of Europe," he said on Friday.
Europe's Emissions Trading Scheme (ETS) is already changing the way energy-intensive companies conduct business, with costs of carbon emissions influencing strategic, organisational and economic decisions, executives from energy firms and sector analysts said at the conference.
Raffaele Chiulli, CEO of energy firm EuroFuels -- part of the world's second-biggest cement maker Holcim -- said rising production costs on the back of carbon prices have already influenced decisions on the location of new production.
"This may lead to competitive disadvantage for EU producers against importers from countries not subject to ETS and to loss of market shares," Chiulli told the conference.
Buying carbon credits at current prices raises Holcim's production costs by 20 percent and on top of this, the cement maker's costs increase because electricity prices rise as utilities have to factor in carbon market prices, Chiulli said.
The trading scheme controls the emissions of the power, pulp and paper, oil and gas and steel and cement sectors. Its impact can be wider because carbon prices can push up power prices.
In a strange twist, power firms -- some of Europe's biggest polluters -- have profited by passing on to consumers the cost of using pollution permits which they need to burn fossil fuels, but which they got for free at the market's outset.
To cut their costs further, utilities are investing in green projects in poorer countries to buy pollution reduction units using a Kyoto Protocol tool, as they say CO2 reduction costs in Europe are too high. Such moves are seen by some observers as a precursor for shifting major investments outside the EU.
Story by Svetlana Kovalyova
REUTERS NEWS SERVICE
