BRUSSELS (AP) -- Europe's main weapon in the
battle against climate change is now fighting for its own survival.
In early January, investors in the continent's
cap-and-trade system still had to pay some euro14 ($18.30) for the
right to emit one ton of carbon dioxide into the air. By last week,
the price of one emission allowance had tumbled to a meager euro6.41
- making it much cheaper to pollute and slashing the financial
incentives for companies to invest in low-carbon technologies.
Analysts warn that the prospect of another
recession in the debt-ridden continent, and the accompanying decline
in emissions, could push prices below euro2 by the end of next
month.
The troubles in the carbon market, a system
being watched closely from California to China, is linked to the
struggles of Europe' other ambitious project, the euro. And just as
financial investors have looked to the European Central Bank to save
the currency through massive intervention in the bond markets,
analysts say the emissions market may need similar centralized help.
Last week, 19 companies, including oil giant
Royal Dutch Shell PLC, Philips Electronics NV and supermarket chain
Tesco PLC, sent a letter to the European Commission urging it to
reduce the number of emission allowances in the system and figure
out how to protect the market from future economic shocks. The
commission and national governments jointly manage the cap-and-trade
system.
"The lower price is really undermining the
development of technologies that will be needed in the decades to
come," said David Hone, Shell's climate change adviser.
Shell, which is mostly known for selling oil
and gas, has been one of the pioneers of carbon capture and storage,
projects in which CO2 emissions are stored underground so they don't
get released into the atmosphere and contribute to global warming.
But investing in new technologies like carbon capture and storage
only becomes commercially viable at a carbon price of between euro25
and euro30, Hone said.
"Over the last few months, we have seen some
of these projects disappear," he added.
In October, the U.K. government shut down the
carbon capture project in Longannet in eastern Scotland in which
Shell was one of the partners.
While the prospect of another recession is the
main reason for the recent drop in carbon prices, experts say that -
just like with the euro - serious flaws in the system are
exacerbating the problems and could lead to its failure if they
can't be fixed.
The economic crisis has lowered emissions and
thus hit the price of carbon allowances. But the drop has been so
dramatic because there were too many allowances in the system to
begin with.
To get industry and skeptical governments on
board, the Commission set a very high cap for emissions when it
launched the carbon market in 2005.
Since then, most allowances have been given
out for free to the 11,000 power stations and factories covered by
the system based on their historical emissions. Companies that emit
less carbon dioxide than they are allowed can sell their spare
permits to firms that exceed their limit. As of next year, airlines
will also be included in the system.
But the big test for Europe's carbon market -
and whether it can provide the financial incentives for cutting
emissions - will come in 2013, when governments start selling a
growing number of allowances at auctions.
It is before then that the Commission has to
intervene, say the companies that wrote last week's letters.
There are signs that their calls are being
heard.
On Tuesday, the environment committee of the
European Parliament voted to withdraw some 1.4 billion allowances,
about 15 percent of the total, from the carbon market between 2013
and 2020. At the same time, the committee said, the annual cap
should be cut by 2.25 percent per year, rather than the 1.74 percent
currently planned.
While the committee vote is the first step in
a long process of changing the system and few industry watchers
expect the figures to survive negotiations among EU states trying to
protect their national industries, it caused carbon prices to jump
more than 18 percent.
"It opens up a much deeper discussion about
what does the intervention look like and when is it going to
happen," says Sanjeev Kumar, an expert on carbon trading at
environmental watchdog E3G in Brussels.
"Without intervention," warned Kumar, "not
only the ETS is over, but Europe's climate policy is over. It will
put Europe back into the dark ages."
Apart from failing to encourage the necessary
cuts in emissions and technological innovation, the collapse in the
carbon price could also worsen Europe's debt crisis.
Between 2013 and 2020, when companies have to
pay for more and more of their allowances, the cap-and-tade system
could raise as much as euro190 billion for governments across the EU
if prices recover.
"This is a pretty important revenue stream for
most member states," says Rob Elsworth, of climate campaign group
Sandbag in London. "And they are watching revenues just disappear."
Experts like Kumar and Elsworth are hopeful
that states will garner the political will to save the carbon
trading system, which has pioneered the market-based approach to
saving the environment.
"If you take away this green-economy
narrative," asked Elsworth, "what's really left of Europe?"