EU plots strategy for tackling "abnormally low" carbon prices

Market watchers have today downplayed speculation that the EU could drive up the price of carbon in its emissions trading scheme, after leaked documents revealed plans to cancel the auction of emission allowances during the next phase of the scheme if prices reach "abnormally low" levels.

Two documents leaked to Reuters last week showed that officials are working on plans for how emission allowances (EUAs) for the third phase of the scheme, which comes into effect in 2013, should be auctioned.

Currently, the vast majority of EUAs are distributed free to participating firms, a practice that has led to windfall profits for some companies and prompted accusations that the scheme is failing to provide sufficient incentives for businesses to cut their carbon emissions.

However, from 2013 around 50 per cent of EUAs in the scheme will be auctioned, with energy firms having to buy all their allowances at auction. The emissions cap will then fall each year while the proportion of allowances sold at auction will rise, effectively increasing the cost of carbon across the Emissions Trading Scheme (ETS).

The leaked documents revealed that the EU is planning to begin auctioning EUAs for phase three from next year using centralised auction platforms. They also said that the EU could reserve the right to cancel auctions if prices fell too low.

"In case the auction clearing price is abnormally low, the auction shall be cancelled forthwith and the auctioned volume shall be distributed evenly over the next four scheduled auctions," the draft document said.

The proposals sparked speculation that the EU could use auction cancellations to effectively impose a floor price on the market, withholding the supply of allowances to drive up prices when necessary.

Growing numbers of firms have called for the introduction of a floor price, arguing that it would provide them with long-term certainty over prices and make it easier to justify investments in low carbon technologies.

However, Stig Scholset, senior analyst at research firm Point Carbon, told BusinessGreen.com that the proposed regulation would prove ineffective at artificially inflating prices.

"The article that says auctions may be cancelled is a mechanism that will be triggered if there are technical problems with the auction," he said.

"It is by no means an attempt to set a floor price for the ETS. Most of the people pushing the rumour that it could result in a floor price have not looked at the legal detail in the text."