Analysts: EU cap-and-trade is working

The European Union's flagship emissions trading scheme (ETS) is starting to inform the way energy firms make investment decisions, leading to increased spending on low-carbon generation technologies.

That is the conclusion of a major new report from analyst firm New Energy Finance (NEF) which surveyed 13 of Europe's largest power companies and found that while the price on carbon imposed through the cap-and-trade scheme is not high enough to drive a rapid transition to low-carbon energy sources, it has forced firms to alter their investment plans in favour of greener projects.

"With the EU ETS starting to affect not just operating schedules but the plant mix itself in the European power sector, we would expect carbon emissions to start to fall over the next five to 10 years," the report said.

All the companies surveyed – which together account for over 50 per cent of the emissions from Europe's emissions sector – said that they now into their investment planning scenarios with most running several scenarios.

In addition, the report found that the ETS had proven a major contributory factor in the increased rollout of biomass power plants, the closure of older fossil fuel-fired power plants and the growing interest in carbon capture and storage investments.

"We have known for some time that the EU ETS is having a real effect on operational decisions in European power companies, but this is the first time we have been able to show how it is affecting capital investment decisions," said Guy Turner, director of carbon market research at NEF. "The answer is clearly that European power generators see that the EU ETS is here to stay and that it is starting to affect how they make multi-billion Euro investments in new generation capacity."

He added that as a result of those decisions, by 2020 the European generating fleet will be "materially cleaner than it is today".

The findings will come as a major boost to the ETS, which has faced criticism over the past 18 months as falling industrial output resulted in a drop in demand for pollution permits, which in turn prompted a collapse in the price of carbon and accusations that the scheme was failing to deliver anticipated emission reductions.

The report's conclusions could also provide succour to US senators seeking to pass their own cap-and-trade bill in the face of staunch opposition from Republicans whose carbon trading model pioneered by the EU has not worked.