Analysts dismiss EU carbon price risks

A decision by a European court to overturn European Commission caps on the amount of carbon Poland and Estonia are permitted to emit between 2008 and 2012 will not lead to a fall in the price of carbon as first feared.

That is the conclusion of a report from analyst Point Carbon, which predicts that moves to change the emission caps for Poland, Estonia and six other countries also appealing against their emission caps could lead to tighter caps and a reduction in the number of carbon allowances in circulation.

Under the EU Emissions Trading System (ETS), governments must set national limits on the amount of carbon they can emit for the period from 2008 to 2012, which the commission approves.

Last month, Poland and Estonia successfully appealed a commission decision to tighten their caps and won, paving the way for similar decisions on the caps of Bulgaria, Czech Republic, Hungary, Latvia, Lithuania and Romania, all of which also appealed.

The decision prompted speculation that the ETS would be flooded with new EU carbon allowances (EUAs) as countries won the right to emit more.

But the decision means that any new caps would have to be reset using the best available and most recent emissions data, which shows that emissions have dropped across the EU because of the economic downturn.

As a result, Point Carbon predicts that the new caps would actually tighten the phase 2 cap for the eight countries that have appealed by 45Mt/year – a reduction in the cap of about 10 per cent on the previous level.

"Point Carbon maintains the view that the final outcome will be relatively close to the initial assessment done by the EC and a major increase in the supply of EUAs is not expected," the analyst said in a statement.

Anna Pearson, ETS campaigner for environmental charity Sandbag, told B usinessGreen.com last week that the countries were not actually seeking looser caps.

"This is more of a political move by those countries that are trying to undermine the commission's authority as a regulator for the scheme," she said.