Cost of carbon to hit €38 a tonne

The cost of energy is set to increase as the price of carbon continues to rise between now and 2012, creating a further incentive for firms to invest in energy efficiency measures.

That is the prediction of analyst firm New Carbon Finance, which last week upgraded its expectations for the price of EUA (EU Emission Allowance) carbon credits traded through the European Union's emissions trading scheme (ETS), claiming prices could reach €38 per tonne between now and 2012.

In March 2008 the company predicted that average prices for phase II of the scheme, running from 2008 to 2012, would stand at €28 a tonne, but since then prices have spiked to over €26 a tonne, prompting the company to revise its projections upwards.

Jonathan Malsbury, head of European analysis at New Carbon Finance, said that the increase in prices were being driven higher gas prices and a bottleneck in the issuance of certified emission reduction (CER) credits through the UN's Clean Development Mechanism (CDM).

He explained that higher gas prices relative to coal were encouraging energy suppliers to switch to carbon intensive coal power, a move that required them to buy in extra carbon credits.

Analysts had originally expected this shortfall to be partly covered by CERs, which under the ETS firms are allowed to buy to cover their extra emissions, however a bottleneck in the approval of CDM projects by the UN has meant that the supply of CERs has been lower than expected.

"The carbon price still looks pretty low compared to the fundamentals in the market," said Malsbury. "With the bottleneck likely to continue for some time, we'd expect the price of carbon to reach as high as €38 per tonne."

He added that such an increase in the cost of carbon should encourage firms to curb carbon emissions. "In terms of their profit and loss, firms in the scheme are pretty immune as the bulk of the credits are allocated for free," he observed. "But a higher price does increase the incentive for them to cut emissions as it would allow them to sell excess credits."

He also warned that the increased price of carbon could lead to higher energy bills for many firms. "With electricity suppliers, they tend to pass through any cost increases straight onto customers," he said. "So there will be a greater incentive for firms to invest in energy efficiency."

In related news, carbon trading specialist Ecosecurities has today insisted that the bottleneck in the approval of CDM projects that has had a knock on impact on the ETS is being fast addressed.

Speaking at the company's annual general meeting, chairman Mark Nicholls said that the company now had 119 projects registered with the CDM Executive Board, up from 101 projects at the end of February. A spokeswoman for the company said that the pace of registration was accelerating as communication in the wake of an improvement in the level of communication between the CDM board and project operators regarding what is required from CDM projects.

She added that while some issues still remained the imminent publication of a new monitoring and verification manual for CDM project operators should help speed up the approval process further.

"There is still a huge number of projects that need to be officially assessed," she said. "But the process is moving in the right direction and the CDM is in a more positive position than it was six months ago."