Carbon traders demand EU action to restore ebbing market confidence

The sense of drift that has dogged the European carbon market since the turn of the year has finally got too much for traders, who have today called on the EU to act now to inject some much needed confidence into the market.

The International Emissions Trading Association (IETA) lobby group has issued an open letter to EU climate change commissioner Connie Hedegaard demanding that Brussels acts urgently to clarify how the cap-and-trade scheme will operate during the next phase of its operation, which runs from 2013 to 2020.

In particular, the letter calls on the EU to confirm how many UN-approved carbon offsets can be used during the next phase of the scheme to help European businesses meet the carbon caps imposed through the EU emissions trading scheme (ETS).

Describing confidence in the UN offset market as being at a "very low ebb", IETA president and chief executive Henry Derwent warned that uncertainty over the rules governing the ETS post-2013 was undermining confidence across the carbon market and impacting planned investment in emission reduction projects.

"A vital principle of private financing appears to have been lost: the need to guarantee regulatory certainty and business continuity for investors," he said.

The EU is currently considering major reforms to the third phase of the ETS, including proposals to increase the bloc's 2020 emission reduction target from 20 per cent to 30 per cent.

Officials are also looking at restricting the number of carbon offsets from the UN-backed Clean Development Mechanism (CDM), known as Certified Emission Reductions, which can be used by EU firms.

Green groups have repeatedly criticised the CDM, warning that many of the projects approved under the scheme fail to deliver the deep cuts in greenhouse gas emissions that are promised.

However, experts are now warning that a failure to clarify the level of future demand for CERs is undermining investment in legitimate emission reduction projects in developing countries.

"The only existing mechanism to incentivise private sector low-carbon investment in developing countries is the CDM," Derwent said in the letter to Hedegaard. "The EU has been key for the development of the CDM. Yet largely as a result of decisions taken or expected by the EU, market confidence in the CDM is at very low ebb."