The EU’s carbon currency has had tumultuous ups and downs already. In its early days, the scheme was brought into disrepute because too many allowances were handed out and the price of carbon plunged to a few cents, leaving no incentive to cut emissions. But now the ETS seems to be working. In 2008 industrial emissions were 3% lower than in 2007. The Commission estimates that around half of this decline can be attributed to the scheme. The rest is attributed to the recession, which has left factories idle, so cutting pollution. The Commission’s figures square with the analysis of New Carbon Finance, a market analysis firm, which reached similar conclusions earlier this year.
In theory, the price of carbon should be more stable in future, because the EU has agreed long-term rules that show investors the direction of travel to 2020 and beyond. At the end of last year the EU agreed on rules for the third phase of the ETS (2013 to 2020). Through this phase, EU industrial emissions should fall by 21% by 2020 (compared to 1990 levels). Every year, the emissions cap will be reduced by 1.74%. One little-noted fact is that this reduction rate does not expire in 2020 and (in theory) leads industry on a downward path to 73% fewer emissions by the middle of the century.
Price instability
The end goal of the ETS is there to see, but uncertainty still lies ahead. One worry for some governments is price instability. Carbon prices have had a bumpy year, reaching highs of €30 per tonne last summer and falling to around €8 once the recession began to bite. Some EU governments, such as coal-dependant Poland, have been concerned about high prices. After prices hit their peak last summer, governments inserted a clause into the ETS directive that will allow market management in the event of “excessive price fluctuations”. Price changes will be deemed excessive if for a period of six months they are three times higher than average, compared to the previous three years. In this situation, the Commission might allow governments to turn on the tap and put more allowances into the market, thereby depressing the price.
Other governments have expressed concern about low prices. Earlier this year Ed Miliband, the UK’s minister for climate change, said that a price of €8 per tonne was “challenging” and that the market needed to be structured “as best we can to have a proper carbon price”.
