Carbon prices fall to record low as MEPs vote against intervention in market

Carbon prices fell to a record low yesterday after MEP’s voted against proposals to intervene in the carbon credit market by back-loading the auctioning of carbon allowances.

The rejection of the proposal, which was defeated by just 19 votes, was seen as a major blow to the credibility of the European emissions trading system, the world’s largest carbon market.

Carbon prices dropped by about 40 per cent to €2.63 a tonne immediately after the vote, though recovered to over €3 by early afternoon. According to some analysts, a carbon price of up to €50 a tonne could be necessary to encourage users to move from coal to more environmentally friendly energy sources. Companies and other producers are required to buy credits to offset their carbon emissions. The EU carbon price hit a €32 high in April 2006.

The Irish presidency of the European Council described the vote as "disappointing" but pledged to continue working on the proposal.

Minister for Environment Phil Hogan, who chairs meetings of EU environment ministers during Ireland's six-month presidency of the European Council, said the proposal to backload auctions was an essential short-term policy response.

“While I can understand concerns around intervening in a market-based instrument, the reality is that the EU is faced with an exceptional policy situation which demands an exceptional policy response.”

Carbon prices have collapsed by about 90 per cent over the past five years, an indirect effect of the industrial slow-down arising from the recession.

Emissions ceiling
The EU's emissions trading system, established in 2005, set an overall emissions ceiling. Beneath this ceiling, companies receive or buy credits auctioned by member states. But the economic slowdown has meant that some companies are emitting well below the ceiling, leading to an oversupply on the market. About 100 Irish entities are covered by the ETS, including power stations and big industrial producers such as CRH, Kerry Group and pharmaceutical companies such as Pfizer.

The European Commission had proposed that an auction of 900 million carbon allowances scheduled to take place between 2013 and 2015 be postponed to the years 2019 to 2020, in a bid to boost the price. But MEP's yesterday ruled against this, with 334 MEPs voting in favour of an amendment rejecting the proposal, 315 voting against it and 63 abstaining.

Concerns that higher carbon prices could be pushed on to consumers was believed to have been behind some MEPs’ resistance towards the move.

Some industry bodies argued that the proposal would have put European companies at a competitive disadvantage to other blocs, such as the US. While most member states are in favour of the measure, some countries, including Poland, have been vocal in their opposition. Last month the country lost a legal challenge against the European Commission. Poland had argued that it was entitled to extra carbon allowances because of its heavy reliance on coal. The matter will now revert to the European Parliament's Environment Committee for consideration.

Working group
Meanwhile, the Irish Presidency has said it will press ahead with two meetings of the environmental working group which is continuing to work on achieving agreement between member states.

Separately, MEPs voted to temporarily exclude intercontinental flights from the emissions trading scheme, while the EU continues to negotiate a global agreement. The Irish Presidency negotiated agreement between member states and the Parliament on the matter last month.

EU Commissioner for climate action Connie Hedegaard said the she regretted the outcome of the vote.

"Europe needs a robust carbon market to meet our climate targets and spur innovation," she said

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