Low carbon prices give EU jitters 

Carbon prices have collapsed amidst the economic downturn due to reduced demand for energy. The falling prices have raised concerns that the market mechanism does not guarantee high enough prices to give adequate impetus for industries to switch to cleaner sources of energy or retrofit their coal plants with carbon capture and storage technology.

"A trading scheme is the right way to go, but it is challenging when prices fall to eight euros," Miliband told a parliamentary committee on 25 February. "We need to structure it as best we can to have a proper carbon price," he said.

In the meantime, Deutsche Bank released a new report calling for action from EU policymakers if EUA price weaknesses were to intensify ahead of UN talks on a succesor to the Kyoto Protocol on climate change in Copenhagen.

"With so much political capital invested by the EU in establishing a global carbon market, a very weak EUA price and potentially significantly reduced activity in new CDM origination in the months leading up to Copenhagen would in our view be very difficult for the EU to sustain politically," the report said.

Deutsche Bank analysts suggested that EU policymakers should modify the ETS Directive to start regular reviews of annual cap reductions after 2020. Meanwhile, they urged the bloc to investigate the opportunity to establish reserve prices for allowances auctioned from 2013 (EurActiv 09/02/09).

The calls come as the EU discusses its position for the international dicussions on a post-Kyoto climate agreement, where financing emission cuts in the developing world is key to a successful deal (29/01/09). The Commission proposes "innovative sources of international funding based on the polluter pays principle and the ability to pay," and says that "EU member states could also use part of their future revenues from auctioning allowances under the EU emissions trading system to support developing countries".

No regulation

Not everybody is singing the praises of market intervention, however. "Price floors do not exist in any other markets," said Emmanuel Fages, a carbon analyst at France's Société Générale. He claimed that creating artificial reserve prices would turn the carbon market into an outlier, discouraging new investors from entering the market, according to press agencies.

Ahead of yesterday's EU Environment Council, at which financing the international climate agreement was on the table, Commission sources said the EU had no intention of intervening in the carbon market. The EU executive is working on the assumption that the financial crisis is temporary and market conditions would turn around long before new legislation on the ETS kicks in in 2013, the source added.