Carbon price raises fears of renewables lag

The price of carbon has fallen by nearly 70 per cent

Concerns emerged this week over the effectiveness of carbon trading in encouraging alternative energy development after a tumbling carbon price made investment in projects more expensive.

The price of carbon has fallen by nearly 70 per cent since reaching a high of €32.90 in April 2006 to a new low of €10.81 last week, although it recovered this week to just under €12.

The recession means energy, cement and construction companies have less demand for their polluting products. Thus they produce less and no longer need emissions permits, causing the market to be flooded after millions of permits are sold off – and leading to a fall in the price of carbon.

Though it is difficult to tell exactly who is selling credits, some analysts estimate power-hungry industries have been selling excess credits at the rate of some €150m per week over the last two months.

Many projects to reduce carbon in the UK and the developing world – which are partly funded by being awarded carbon credits which can be sold on carbon markets – now face financial trouble because these credits are worth less on the carbon market.

Paul Golby, the chief executive of E.ON told the financial times earlier in the week that the finances of the London Array, a planned 1,000MW wind farm in the Thames estuary, are "on a knife edge" , partly because of the falling price of CO2 emissions permits.

Meanwhile, EDF chief executive Vincent de Rivaz warned in an interview with the Guardian that companies need a certainty in carbon price if they are going to commit to projects and warned that speculators risked turning carbon into a new type of " sub-prime investment."

The EU has voted that more permits will be auctioned after 2013 rather than being given away for free, meaning that the carbon price is likely to be higher and more stable after that date.

But until then applications for renewables projects could lag if the financial incentives are not there.

The UN says it has not yet seen any slack in applications for projects registration under the clean development mechanism, but it has a two-month pipeline for project approval.

"We'll have to wait and see if the affect on the number of project applications filters through," said a source close to the CDM approval process.