EU cap-and-trade fails to curb emissions again, but analysts remain upbeat

Emissions from firms covered by the European Emissions Trading Scheme actually climbed last year, but experts claim outlook is far more positive for 2008

Analysts are standing by predictions that the price of carbon in the European Emissions Trading Scheme (ETS) will climb significantly over the next three years after the European Commission today released figures showing emissions from installations covered by the scheme rose fractionally last year.

According to the new data, installations covered by the ETS have so far reported carbon emissions of 1.914bn tonnes, up from 1.894bn tonnes of reported emissions in 2006.

The figures for both years are incomplete with some installations having failed to disclose their emissions data, but according to forecasts by analyst firm Point Carbon based on extrapolations from the disclosed data, overall emissions from ETS installations rose around one per cent in 2007 to 2.05bn.

The figures provide further confirmation that the first phase of the ETS failed in its goal of curbing carbon emissions after the Commission set emission caps for the heavy industrial and energy firms in the scheme too high. This resulted in a glut of unused carbon allowances that led to the price of a tonne of carbon in the scheme collapsing to less than one Euro.

Henrik Hasselknippe, director of EU emissions trading analysis at Point Carbon, said that the increased in emissions during 2007 confirmed that the first phase of the scheme had completely failed to cut emissions. But he added that the data also provided evidence to support analysts' positive outlook for the second phase of the scheme, which began at the start of this year and has seen the price of carbon recover after the Commission set far more demanding emissions caps.

"If we had seen an unexpected fall in emissions in 2007 that would reflect that firms had already invested to cut emissions, which would mean they would have to buy in fewer credits to cover their emissions during phase II," he explained.

Currently, the price of carbon in phase II of the scheme stands at over €22 and Point Carbon predicts the will climb to over €30 a tonne over the next two years.

"The figures show emissions haven't fallen as a result of the scheme up to this point, but the Commission has really turned things around this year." said Hasselknippe. "The figures for 2008 and 2009 will be really interesting as we will begin to see if the higher price of carbon we are experiencing now, and the expectation it will climb further from 2013 when the third phase of the scheme, are encouraging installations to invest in cutting emissions."