EU plans fail to spark carbon price rally

The price of carbon credits in the European Emissions Trading Scheme (ETS) failed to rally yesterday, despite the European Commissions' announcement that the market would form the centrepiece of its climate change strategy.

Instead the price continued its downward trend of recent days, dipping below €20 a tonne from a high earlier this month of €23.60 a tonne.

Experts said fears of a global recession were outweighing the positive signals from the Commission, which announced a raft of measures designed to push up the price of carbon credits in the scheme from 2013.

The price of carbon is usually linked to the price of oil and gas, with high prices typically resulting in energy companies using more carbon intensive coal, which in turn requires them to buy in more carbon credits to cover their increased levels of pollution.

However, the market is also impacted by broader economic concerns with the recent fall in prices being sparked by the turmoil in the global financial markets.

"The carbon market is separate [to the financial markets] but if there is an economic downturn that would mean less emissions and less demand for credits," explained Henrik Hasselknippe, director of emissions trading analysis at research firm Point Carbon. "The reaction of the market [in the past few days] seems a bit extreme when the European Commission announcement is more important to the market's long term health, but it is understandable that it will be affected by external economic factors."

Under the Commissions' proposals, the cap on emissions for firms in the scheme will be lowered annually to a point 21 per cent below 2005 levels by 2020. The Commission said that this would create increased demand for credits and push the price up to between €30 and €40 a tonne creating a financial incentive for them to invest in low carbon technologies.

The Commission also moved to crackdown on the practice of firms that exceed their emission caps buying in extra credits from outside the EU. The limit on the number of UN-backed credits firms can buy in for the 2008 to 2012 period has been extended to apply for the entire period through to 2020. Point Carbon analysts said that the tighter limit would mean firms would be able to cover just over five per cent of their emissions using UN credits, forcing them to deliver genuine emission cuts within the EU's borders.