European CO2 market could be critical by 2015: McKinsey

European CO2 market could be critical by 2015: McKinsey

Budapest (Platts)--26May2005


The shortfall between CO2 emissions reductions targets in Europe and forecast
actual emissions in 2005-2007 is around 80-mil mt/yr, said Ron Bloemers,
consultant at McKinsey & Company, at Synergy's Energy Trading in Central &
Eastern Europe conference in Budapest Wednesday. 

According to McKinsey calculations, this corresponds to a price of some Eur
16/mt in the period--roughly in line with current market prices. McKinsey
believes that emission quota prices could rise to Eur 20/mt by 2010, assuming
oil at $40/bbl and a relatively tight emissions target of 1,185-mil mt for the
EU's power sector. But by 2015, maintaining constant emissions could become
prohibitively expensive. "In a tight scenario, the price goes off the scale at
Eur 50," said Bloemers, even assuming oil at $30/bbl. A relatively lax target
of 1,265-mil mt could mean a quota price of Eur 30/mt. Europe will therefore
have to find "relief valves" if it wants its economy to still grow while not
softening Kyoto targets, according to Bloemers.

A key move could be maintaining high levels of nuclear generation in Germany.
"If the nuclear phase-out goes away, you have a lot of emissions-free
terawatt-hours on the market," he said. 

Other choices include shutting down emitting industries are not a feasible
option, he noted. McKinsey predicts "massive replacement" of coal-fired with
gas-fired capacity after 2010, as European generators scramble to meet
emissions targets. As a result, coal-fired generation could drop off by as
much as 50% in 2010-2015, said Bloemers.

This story was originally published in Platts European Power Alert
http://www.europeanpoweralert.platts.com

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