Friday, 9 November 2007

The Price of Change

A few weeks ago, the European Environment Agency announced tighter carbon dioxide emissions quotas for the 2008-2012 time period.

This means the price of carbon will rise, and we will see faster action to address the threat of climate change.

Most EU nations have signed the Kyoto Protocol and agreed to legally binding greenhouse gas reductions. Each country, in turn, has set annual emissions targets for power plants, factories, and other large sources of greenhouse gas pollution. Their maximum pollution allowance is gradually reduced each year, and companies have to pay a hefty fine if they exceed their cap.

Policymakers recognise that some emissions reductions will be easier than others, so to help organisations meet their targets cost-effectively, the European Environment Agency has set up the Emissions Trading System (ETS). This is basically a carbon offsetting programme. Under the ETS, a power plant that reduces emissions more than is required can claim credits for the extra savings, and sell those carbon credits onto the market. A factory that exceeds its targets must pay for credits to balance out its extra greenhouse gas pollution or pay the fine.

Of course, if everyone exceeds their target you get lots of carbon credit sellers and no buyers. This is exactly what happened in 2007. The national targets were so generous that firms had to enact few new measures to reduce emissions. The market was floodded with carbon credits, and the price deopped from around Euro 20 in 2006 to just 30 cents a few weeks ago. It's hard to know whether the reductions that produced those credits would have happened anyway, and therefore how much the ETS actually helped the environment beyond business as usual.

The new emissions targets are good news because the European Environment Agency has gone out of its way to make the quotas as tight as possible. Overall, European nations had requested much higher limits for their power plants and factories. Bulgaria, for example, wanted permission to release 67 million tonnes of CO2, but received a target of only 42.3 million tonnes. Overall, the EU Environment Agency cut those requests by an average of 10%, setting an emissions cap of 2.1 billion tonnes of CO2.

As a result, the anticipated price of carbon credits in 2008 immediately started climbing. That means that a lot of more expensive and tougher greenhouse gas reduction measures are cost effective. And that's good news because it means faster action towards a low-carbon future.

(Carbon Clear homepage)